April 13, 2004

Fred: The Tale of Two Countries

by Guest Contributor

Mediocre Fred does not aspire to be a lawyer but will become a politician if you promise to vote for him. He writes a Mediocre Blog - Ed.

Earlier this month, I saw a couple pieces of news on the subject of online music file-sharing. First, a judge rules that file-sharing is, for all practical purposes, legal in Canada. Second, the U.S. House passed a bill that would subject file-sharers to jail. Why the different attitudes? Legally speaking, Canadian copyright law has a large personal-use exemption, and that's the basis for the ruling. But I'm more interested in the cultural attitudes. Why is the Canadian government, which by most accounts applauds the judge's ruling, so friendly to file-sharing, and America so unfriendly?

Some will probably point to things like the looser attitude toward drugs and gay marriage in Canada, and conclude that our neighbor to the north is just more progressive and with it than we are. And there's something to that. But I think the more instructive example in this case is to look at prescription drugs.

The Canadian government imposes strict price controls on prescription medications, leading to prices that are significantly lower than in good old free-market America. That's why people like Illinois Governor Rod Blagojevich are pushing for the re-importation of drugs from Canada; the savings are very significant. Canada argues that a lot of people need these prescriptions to live, and therefore need to be able to afford them.

Those in favor of America's current policy argue that drug companies need to be able to make money in order to afford research and development of new drugs. If price caps are imposed, drug companies will go bankrupt and then no one will have the pills they need to live. America also has a longer period of patent protection on new drugs, on the theory that companies need to be able to recoup their investment in the drug's development.

The difference in attitude comes down to differing perceptions of the drug companies: Canada believes that drug companies, in an open market, are profiting unfairly from customers who are literally dependent on the drugs for survival. After all, if the price of your favorite soda goes up, you can always switch brands or stop drinking soda. If the price of your patent-protected blood-pressure medication goes up, you don't have these options. America believes that drug companies are doing what they need to do to stay in business. In short, Canada looks out for its citizens first, while America looks out for the companies first.

Both sides have a point. If every market were as tightly price-controlled as Canada's, drug companies probably would have to cut back significantly on R&D, which is bad for everyone long-term, since it means that fewer new drugs come to market. On the other hand, without price caps (and without national health insurance to pick up the tab), there are plenty of people who can't afford the drugs they need, and that's not good, either.

But this isn't a discussion about prescription drugs. We're talking about music. The same attitudes, though, apply. Canada feels that recording companies are overcharging for music, and America feels that companies are doing what they need to stay in business.

The difference in this debate is that you don't need CDs to live. But there are still similarities: Each album is sold by one, and only one, recording company. If you want that album, you have to buy that company's copy, because they have a monopoly and there is no market competition in pricing.

And as with drugs, there's a limited substitution ability: If a particular company is charging too much for Melissa Etheridge's latest album, buying the Chaka Khan album from the discount bin isn't a valid substitute. There's no "store brand" of Melissa Etheridge music that you can buy instead. So if the price of the album is inflated, you either grumble and pay or don't buy it at all.

Or at least those were your options before file-sharing came along. Now you can get all the songs of the album for free! Download them onto your computer, arrange them in the proper order, and it's just as good as having a CD. Any rational person, given this option, is likely to head straight for Napster or Kazaa.

But there's a problem, of course. If too many people stop buying CDs altogether, recording companies go bankrupt, and artists have no incentive to create new music. While the latter proposition might not be a bad thing in the case of, say, Britney Spears, it would be a shame if someone like Etheridge or Eric Clapton had to hang up his or her guitar because there's no money in it any more.

It's a classic economic dilemma: One producer has an established production and sales model and a stable price plan. A competitor comes along, offering the same good only better, more cheaply, or both. The original producer has two options: Modify the old business plan to level the playing field, or crush the competitor.

The recording industry has clearly chosen Plan B, and it strikes me as a mistake. Music consumers are already inclined to see recording companies as evil and greedy. And with that CD price-fixing lawsuit, who can blame them? Leaning on Congress and the courts to let them attack their own consumers only adds fuel to the fire. The recording industry needs to collaborate with customers to find a new way to do business, rather than trying to crush them.

On the other hand, if file sharing really does cause a huge drop in CD sales, then we have a problem. However, some studies dispute the negative effect, as Nick at De Novo and Ryan at Dead Parrots Society have noted. If people are abandoning CDs in large numbers and downloading music for free, artists are going to suffer.

Apple's iTunes service suggests a way out of this; they let you download songs individually for a small fee. This is good in two ways; one, it gets around the CD price-gouging issue, and two, most people only want two or three songs from any particular CD anyway, so this gives them the opportunity to just get what they want.

The recording industry should look at incorporating this model into their business plan. Better still would be if the artists could do it themselves. Music fans may hate the recording industry, but they don't hate the aritsts, and would like to see them compensated for their work. That's the thing most file-sharers don't think about; they see downloading as taking money out of the pocket of some slick-haired recording-industry exec, not from the artist. The Internet allows people to make more direct connections, and if artists were able to reach out directly to the fans, it would only strengthen the connection.

What do you think? Who's right on the file-sharing issue, Canada or America? Recording companies or downloaders? Is there a way to create a new model that takes care of everyone? Post your suggestions in the comments section, and let's discuss it.

April 13, 2004 12:00 AM | TrackBack

Now that the artist can distribute their own CDs and music, circumventing the industry, the only thing that the Music Industry is good for is marketing. While crap like NíSync and Jessica Simpson need this marketing monster to force them selves into pop culture many bands do not. Several bands have done this already, Dave Mathews and REM both got popular at the college level before the marketing monster gobbled them up. With out the Music industry I feel it really levels the playing feel to a world where only those with good music that people like can survive.

Artist make little money of CDs, mainly because the industry takes a large cut, and if they produced the CDs on their own they would make the same amount of profit of a smaller number of CDs. On top of this Artist make most of their money from touring, not through CD sales currently. If you like their MP3s you are much more likely to go see them in concert but not buy their CD.

I have never been able to see the logic of why everyone does not want to circumvent the bloated unnecessary middle man the Music Industry is. Itís not like Wal-Mart is angry that the music industry is selling directly to the public online. Like the music industry, Iím just trying to cut out the middle man.

Posted by: Stefan Hayden at April 13, 2004 11:35 AM

Hi Stephan,

Thanks for the comments. As for why more artists don't bypass the recording-industry middleman, I can think of at least three reasons:

1. Going the independent route is a pretty big risk, and some artists may prefer the "safety" of the recording-industry world. (Notwithstanding the slanted terms of most recording contracts.)

2. Some artists just don't have the talent or inclination to deal with distribution, marketing, and other incidental issues. Those things can be a huge headache, and plenty of artists would probably rather just concentrate on making music and let recording companies handle the business end.

3. I think you underestimate the value of a good marketing campaign. I share your outlook regarding talentless market-created hacks like N'Sync and Ms. Simpson, but just because you're good doesn't mean you'll become famous. Think about all the things that a recording company can do for an artist: take out advertising in all media, distribute new albums and songs to radio stations, sell a new artist to friendly reporters, arrange concert tours, and more.

There's a reason that Dave Matthews and REM didn't turn down recording deals when they were offered. If you're talented and win a following, you can survive as an artist. But the only way to become a national presence, and to become really rich, is to get yourself in the pop-culture whirl. And it's damn hard to make a national name for yourself without someone behind you.

In summary, I think going the direct-distribution route is mostly feasible at this point for bands that already have a national reputation and don't need the marketing machine, or bands that are still obscure and can't attract the attention of recording companies. For those in the middle -- artists and groups which are no longer obscure, but not yet stars -- going it alone is a damn hard and complicated road.

On the bright side, the faster technology improves, the easier it will be for an artist to distribute and market his own work. That, I think, is the most exciting promise of the new techology.

Posted by: Mediocre Fred at April 16, 2004 04:29 PM
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