Why Free Music Was Inevitable

Posted on 04. Jun, 2009 by refe in INNOVATION

In the CD’s heyday the average price of a disc reached nearly $19. Record companies took in huge margins and saw unprecedented growth. Now, less than a decade later entire albums are being given away free of charge all across the Internet. Even superstars are giving their records away. So… what happened? How did the recording industry go from lucrative cash cow to staggering giant in such a short span of time?

Supply and Demand

There are a host of reasons for the declining price of recorded music, but at its heart is the issue of supply and demand. The more demand you have for a product that is limited in availability (generally known as a ’scarce good,’) the higher the price of the product will rise. Conversely, if the availability of the product exceeds demand, price will be driven lower in an attempt to increase demand and move excess units. It shouldn’t come as a surprise to anyone that at this point the supply of recorded music far exceeds demand. In fact, it just about obliterates it.

One reason for this is competition. As the production of recorded music becomes cheaper and easier, more and more bands are flooding the market with their tracks, hoping to get heard. The choices available to listeners have become nearly limitless. There are just too many artists vying for a finite number of fans. Bands are giving away their music in an effort to increase their share of the listener pie.

Infinity vs. The Recording Industry

There is more to the issue, though. The transition from physical CDs to digital downloads has introduced a new challenge into the industry. The model of supply and demand is built upon the concept of scarce goods – if there is no limit to the availability of a product, it is impossible for there to be enough demand to make it profitable. How can finite demand overtake infinite supply? This is exactly the challenge with monetizing digital music files. Digital files are infinite goods – they can be copied ad infinitum at no cost, and no significant investment of time. This is why the price of music has dropped, and this is why so much recorded music has been made available for free. The transition from physical to digital made free recorded music an inevitability.

Three Ways to Respond

Inevitable or not, this decline in value presents artists and rest of the music business with a real challenge. Strategies have to change. If digital music files themselves hold little value, value has to be added from somewhere else. The industry has three main options for accomplishing this, all of them related to adding scarcity to the infinite-ness of digital music.

1. Artificial Scarcity

Otherwise known as DRM. What Digital Rights Management is designed to do is place artificial limits on digital files that prevent them from being copied. I call this ‘artificial scarcity’ because while real scarcity has a direct, positive effect on value, DRM actually decreases the value of music. DRM has been proven time and time again to inhibit consumers from legitimate use. Even as a kid I remember being frustrated that I couldn’t bring a video game over to a friend’s house because it was only registered on my PC at home. I wasn’t going to copy it for him, we just wanted to play it while we were at his house! Regardless of their own personal experiences, most people can’t stand DRM. The consumer backlash has been so overwhelming that even Apple – notoriously IP centric – decided to get rid of DRM, and was even willing to raise prices past their trademark 99 cent/song in order to get the major labels to drop it. Consumers aren’t fooled by artificial scarcity, they just get irritated and take their business somewhere else.

2. Legislative Scarcity

Otherwise known as the RIAA. I’m referring here to the practice of issuing threats or actual legal action against individuals and institutions who engage in sharing digital music. This is by far the least sensible approach. First of all, it just isn’t practical. RIAA – you’re really going to go after individuals one by one until you have fined every single file-sharer or frightened the rest into compliance? How’s that going for you so far?

More importantly, though, these aggressive and costly lawsuits are a PR disaster. The record industry has never had the best image with consumers, but now they have taken whatever they had and dragged it through the gutter. The RIAA, with the blessing of the larger recording industry, has turned consumers and fans into crooks, thieves and pirates. Never mind that these same people have shown themselves to be the industry’s single largest group of paying customers. It’s just bad business!

3. Supplemental Scarcity

The idea here is simple: accept the fact that technology has decreased the value of digital music files and find something else to sell. It is sad to think of music in any form as being devalued, but the benefit of this approach is that it is the only one that embraces innovation rather than trying to suppress it.

So what do we sell? There are many ways to use this new market reality to the advantage of the independent artist. I will talk more about the different scarcities that can provide value along with recorded music in Part II, as well as how those different revenue streams can add up to a successful career for an independent artist. So stay tuned, and please feel free to add your comments below.

Share it if you like it: