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October 04, 2007

Economists, Radiohead, and Bob Mould
by David Harrell
Lots of folks have lots to say about the forthcoming "name your own price" digital album download from Radiohead. I was especially interested in seeing the reaction from some of the economics blogs I read:

Marginal Revolution - Pay what you want for the new Radiohead album

Greg Mankiw's Blog - No, really, it's up to you

Freakonomics - How Much Do You Think Paul Feldman Will Pay for the New Radiohead Album?

Asymmetrical Information - Radiohead goes free

While the economists (and other commentators) are mostly referring to the Radiohead experiment as "working for tips," I don't quite agree with the analogy. The tipping description would be more appropriate if Radiohead simply posted all of the mp3 files on its website, with an adjacent "donate" button for soliciting contributions from downloaders.

They haven't done this -- you have to order the album and pay SOMETHING, even if just the modest service charge for processing the credit card. While this distinction might seem slight, I'd argue that it is an extremely important one. The online ordering process requires you to open your wallet, and -- while you're still free to make a minimal payment -- it seems like this is THE crucial step. A donation approach requires the downloader to actively make an additional decision, perhaps at a later date, to enter a credit card number, etc.

On the other hand, if you insist on the tipping description, it's really not that much of a stretch to say that ALL music is purchased that way today. That is, given that free alternatives are readily available (P2P networks, ripping CDs from friends, swamping hard drives, etc.), any decision by a music fan to purchase music in any format, downloads or physical discs, represents a conscious decision to "tip" the musician and record label. (The Economist blog makes this point as well, referring to the current system an "honour system.") Though there's much less price flexibility with a standard purchase than there is with the Radiohead model.

While musician Bob Mould won't be heading down the Radiohead path for his next album (he's signed to Anti- and Beggers Banquet), he conducted an online survey on the topic, asking readers what they'd prefer to pay for direct downloads from the artist.

I was a little surprised by the price points that Mould used for his survey -- $1 or $2 for an individual song, $10 or $20 for a full album, as well as larger amounts for subscription model to receive all of an artist's work. In a follow-up post showing the poll results, he talks about the idea of some music fans being willing to pay more for a record because they know all the money is going to the artist (only a small percentage of responders indicated a willingness to do so). Yet if you're paying the artist directly, the standard download rates ($1 a song or $10 an album) is actually putting substantially more revenue into the hands of the artist as there's no record company keeping the bulk of the money. (And my personal contention is that a digital album -- because of the lack of artwork, the loss of resale value, and lower sound quality -- is worth substantially less than a physical CD. The eMusic album price of $2.50 to $3 seems just about right to me, especially if the majority of that amount goes directly to the artist. Though maybe I'm just exceptionally cheap!)

However, Mould's idea of higher music prices in certain cases makes more sense in the context of something that economist Tyler Cowen wrote in Good and Plenty and posted last week on Marginal Revolution. It was an observation that I don't think I've seen before about downloading and music sales:
In the past most people didn't much like or listen to most of the music they bought, or in any case most of the value came from their very favorites. A relatively small percentage of our music purchases accounted for most of our listening pleasure. So if people can sample music in advance, and know in advance what they will like, music sales will plummet. This will be a sign of market efficiency, not market failure.
Perhaps Cowen is right and people on average are just buying less music, as a smaller dollar amount now suffices for purchasing a sufficient amount of music they like. Yet if his "sampling" theory is correct, there are a couple of other possible results:
1. Music fans use the money they've saved by not making purchasing mistakes to buy a greater quantity/variety of music they actually like.

2. Music fans use the money they've saved to pay MORE for the music they really like.
Based on plummeting CD sales, if the two alternative scenarios are taking place, it's only among a minority of music buyers. Still, based on some of the amounts I've seen in blog comments over the past few days about the new Radiohead album, at least a few fans are readily paying up for the album (as are some of Jane Siberry's fans).

And maybe that's not illogical. After all, the music you really love, your personal collection of desert island discs, is a relative bargain at the standard prices. There are certainly albums and artists that I value far above the purchase price of the recorded music.

Whether a substantial number of fans are willing -- in practice, not theory -- to pay a premium price for an individual song or album is the unanswered question. It seems like the biggest fans are already "paying more" to artists via the purchase of tickets to live shows, merchandise, and a willingness to re-purchase music again and again in re-mastered and enhanced formats. Is also asking for (or expecting) a premium price from these buyers going too far? (BTW, just to be clear, I don't mean to suggest that Bob Mould expects a premium price from his audience.)

Anyway, in his Freakonomics post, Steven Levitt put out the call for someone to get him in contact with Radiohead to possibly analyze the actual sales data. I hope someone does -- it'd be fascinating to see his take on the real numbers.

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