The Music Industry Was Never The Record-Manufacturing Industry

Moneybox
A blog about business and economics.
Nov. 15 2012 10:55 AM

The Music Industry Was Never The Record-Manufacturing Industry

A very interesting Damon Krukowski piece about how nobody's making money off Spotify and Pandora which pay artists peanuts and still can't turn a profit is unfortunately marred by a very naive account of what the Good Old Days of the industry looked like:

When I started making records, the model of economic exchange was exceedingly simple: make something, price it for more than it costs to manufacture, and sell it if you can. It was industrial capitalism, on a 7" scale. The model now seems closer to financial speculation. Pandora and Spotify are not selling goods; they are selling access, a piece of the action. Sign on, and we'll all benefit.
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That makes it sound like the music industry was the record manufacturing industry. That's like confusing the role of a movie studio with the role of Eastman Kodak or Fujifilm in the manufacture of 35 mm film. A band selling a record isn't really selling goods either, it's selling intellectual property. If anyone who owned a record factory was allowed to produce a copy of whichever album he wanted, then obviously bands wouldn't be able to make any money selling records. They'd have to make music as a loss leader for touring or t-shirts or just do it for fun. 

Which is basically the exact same issue that you have with the digital streaming services. The way this got resolved in the factory setting is that you'd have exlusive deals. Only one record company was allowed to produce copies of your record. That creates monopoly pricing power. What we have on Internet streaming is lots of competition. The stuff you can hear on Pandora is largely what you can hear on Spotify or Rdio or whatever else. The upshot is exactly what you'd expect from a competitive market—very little profit for producers. On the flipside, you get huge returns to consumers (I'm an Rdio user and it's both amazing and amazingly cheap) and big profits for the people who are in an uncompetitive market—Comcast, Verizon, AT&T, and the other firms that own the Internet pipes.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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