Month: January 2004

Frequent flyers and the new world of music

Recently I suggested that the on-line music world had yet to settle on a workable business model. Now Gary Leff reports the following new arrangement, whereby you use frequent flyer miles to buy music:

Sony has partnered with United Airlines to introduce another business model
for downloadable music — paying for songs with alternative currency
(frequent flyer miles) rather than money.

Details are still being worked on, I understand, and the website is still a
few months from launch, but it looks like Sony and United will offer
consumers both
* the ability to buy songs while earning United Mileage Plus miles, making
United’s loyalty currency a reason for consumers to pick the Sony site over
rivals (and tapping a 37 million member marketing database on top of Sony’s
own lists).
* the ability to pay in miles rather than money, which will be perfect for
infrequent flyers with a small unused stash of miles (a free ticket starts
at 25,000 miles – a song may cost 100 or 250 or 500 miles, price has yet to
be set).

Keep in mind, the recorded music market is a mere $12 billion or so a year. For purposes of comparison, Kraft sold for $13 billion. Southwest has had a capitalization comparable as well. Tobacco advertising for one year is about $11.5 billion. Now I don’t expect the whole music market to be driven by frequent flyer miles. But neither is it obvious that the best way to proceed is to first sue people and then get them to fork over $12 billion into your coffers. The music industry is small relative to the economy as a whole, and relative to advertising as a whole. Here’s hoping for some new and creative solutions to the property rights problem.

The continuing rise of the DVD

In 2003 a new DVD issue was released every 57 minutes, giving us over 9000 titles for the year (Entertainment Weekly, Jan.23-30).

The film industry is changing accordingly. Hollywood now has greater incentives to issue movies for male taste. DVDs are often impulse buys, and men are bigger impulse buyers than are women, at least in the DVD market. Movies for children are favored as well, since children love repeat viewings. Note that in 2002 DVD sales and rentals accounted for 62 percent of moviemaking income. At least four-fifths of this sum came from DVD sales.

Fear of losses from piracy is causing accelerated DVD releases. If you wait too long with your DVD, illegal competitors will fill the market. Pirates of the Caribbean, for instance, was released on DVD only four months after the film’s release. Video releases, in contrast, used to come after six to twelve months. Some European films have been released simultaneously on DVD and in theatres, despite the protests of rental chains. Some insiders expect simultaneous or near-simultaneous release to be common practice in the future. Simultaneous release, of course, raises fears that one market will cannibalize the other. But one commentator noted: “I’m one of those who believes that ultimately everything will be available at a price. So, if you want to see it at home when it is at the theatres you can, but it will be a premium price.”

The bottom line: I’m psyched. DVDs are a wonderful medium for foreign films, subtitled films, complex films requiring explanation and accompanying disks, historical classics, and action movies. All of these I love. DVDs have opened up the entire world of Bollywood cinema — usually in Hindi — to easy subtitling and thus to American viewers. If these movies are too long for your taste, just flick to your favorite songs and dances, much easier than trying to do the same with a VCR. As the DVD rises in popularity, the quality of the best scene in a movie may become increasingly important.

The universe on a T-shirt? Not yet.

Here is an update on the quest for a Theory of Everything. It is written by Lee Smolin, of inflation theory fame, and recommended to me by Robin Hanson. In pdf format it is over sixty pages long but makes for fascinating albeit difficult reading. Smolin defends “loop gravity” theories over string theory. He claims that within ten years we may have real experimental evidence to resolve the dispute.

Does monogamy resemble addiction?

Recent research suggests the following:

The reward mechanism involved in addiction appears to regulate lifelong social or pair bonds between monogamous mating animals, according to a Center for Behavioral Neuroscience (CBN) study of prairie voles published in the January 19 edition of the Journal of Comparative Neurology. The finding could have implications for understanding the basis of romantic love and disorders of the ability to form social attachments, such as autism and schizophrenia.

In other words, if you are monogamous, your feelings toward your partner bear some resemblances to other addictions.

Supporting MR

An easy, indeed costless, way to support Marginal Revolution is to buy goods from Amazon after first clicking on a link from our page. The link at the bottom of the right sidebar will take you to the Amazon homepage. Book links will take you to a particular book but any goods you buy in a session orginating here will benefit MR. And men, don’t forget Valentines is coming soon – take a look at this beautiful engagement ring! We shall not be retiring on our earnings but so far we are covering our hosting costs. Thanks!

Whither Haiti?

Protests have been growing in Haiti, check out this link for some compelling visuals. It is becoming ever clearer than Aristide is simply another Haitian mafia. Our previous support for him represents one of the more gullible episodes in American foreign policy. Most Haitians are turning against him as well, most of all because living standards have continued to deteriorate.

How might Haiti recover? It is hard to see a case for optimism. In many ways the country was richer in 1840 than it was today. One huge problem has been unchecked environmental degradation, brought on by poorly-defined property rights and a tragedy of the commons. The destruction of trees and the erosion of soil are continuing unchecked. Haitians commonly cut down trees for firewood but the collective impact of this practice has taken the life out of the soil. The country, which already is a net importer of food, is on the verge of not being able to feed itself at all. It will struggle to maintain its current per capita income of $400, noting that some estimates run closer to $250. Many Haitians are now asking for reparations.

Add on a totally corrupt port, dishonest politicians, no good roads, hardly any infrastructure, the Duvaliers’ destruction of intermediate civil society institutions, a rampant brain drain, few protections for foreign investors, and the complete absence of rule of law, and you have some real problems. The question is not so much how to improve policy, since policy does not reach most Haitians. Previous policies have destroyed so much value that it would be hard to find an institutional framework for current reforms, if Haiti’s politicians were ever so inclined. Most Haitians live in something approximating the state of nature. They are ruled, if that word can be used, by local mafias rather than by the national government.

By the way, did I mention that 85 percent of the population is illiterate and 99.9 percent carry malaria?

Public safety is breaking down as well. I used to visit yearly, but the number of carjackings, many carried out in broad daylight, have scared me off for the time being.

As Daniel Drezner would say, “Continuing…”

Risk Regulation

The Economist has a nice survey on risk. Here’s one chart on the cost per life saved of various regulations. Bottom line: the cost per life saved of many regulations is absurdly high and we are often required to buy more safety than we want. John Morrall, whose study the Economist bases its figures on finds that almost half of the regulations that he studied do not pass a cost-benefit test.

Thanks to Zev Safran for the pointer.


Why 99 cents per song?

Apple’s iTunes charges 99 cents for every song downloaded. Why? Is Outkast’s “Hey Ya” really worth no more than a creaky Pat Boone ballad?

Some artists object to this “one price fits all” model. A star may feel it cheapens the value of her wares, or that she simply deserves a higher return.

An alternative business model asks users to donate to the artist, depending how much they like the song. For one service, you can pay as little as $5 but it is suggested that you pay more. The average payment is running at $8.93, though this is a small and self-selected group using the service. In any case not all songs go for the same final price. The service is called Magnatune: We Are Not Evil, check out their web site.

Yet another idea would use an auction system. Listeners could bid for song downloads, with the price determined periodically by supply and demand. We would then expect the songs in highest demand to bring the highest price. Note also that when bands sell their concert recordings on-line, they don’t generally all charge the same prices.

Alternatively, songs may be like books. You charge a low price at first, to stimulate a snowball of fan demand. Bestsellers sell for less, per page, than academic books. (Imagine a professor boasting “Stephen King’s books sell for a mere $6.99; my books sell for a royal $75 a piece.”) In this case the supplier would flood the downloads market with copies, so that the price of the more popular song would be less, not more, despite higher demand.

Different movies sell for the same prices. Either Return of the King or the latest bomb both go for $8.50 at the same theater. This practice has long puzzled me. Perhaps the low price satisfies a fairness constraint, and also helps generate a snowball of fan demand, as with books. It might make more sense to expand the number of screens for the movie rather than raise the price. And hit movies pull people into movie theaters more generally, which spills over into demand for other movies.

The big change may come when downloads are used as advertising. Pepsi is expected to give away up to one million downloaded songs, through iTunes, in connection with the Super Bowl. Coca-Cola may be entering the market as well. Keep in mind that the recorded music industry is small in size relative to corporate advertising budgets. Perhaps corporations will become patrons of music, giving away songs wrapped in an advertisement.

The bottom line: iTunes is just one business model, and it has yet to prove itself. Apple is making money off the hardware, not the songs. Returns will plummet once the hardware business becomes more competitive. It remains to be seen how the downloads market will evolve, but do not expect a mere extrapolation of current trends.

The organ shortage is worse than you think

In 2002, 6609 people died while on the waiting list for an organ transplant. This figure, widely quoted in the media, is an underestimate of the number of deaths due to the shortage because it only counts those who die while literally on the waiting list. In 2002, however, 1844 patients were removed from the list before they died because they became too sick to undergo a transplant. It’s likely that most of these patients die soon after being removed from the list so adding these patients to the tally increases the number of deaths caused by the shortage by some 28 percent. In addition, many people who could benefit from an organ transplant are never placed on the waiting list in the first place and when these people die their deaths are not counted as a cost of the shortage but they surely are.

For some solutions to the shortage see my earlier post, Dollars for Donors.

It’s simple

Atrios writes:

I’m basically a “free trader,” but it’s time we stop pretending it’s that simple.

Try this highly complex story on for size:

The US Commerce Department has said it may impose tariffs of up to 123% on Chinese, Malaysian, and Thai plastic shopping bag producers.

The Commerce Department said it would continue its investigation and reach a final decision in June.

The US imported about 100 billion plastic bags in 2002, worth more than $127m, and China supplied about 30%.

The list of items causing trade tensions between the US and Asian countries already includes Vietnamese cat fish and Chinese-made bras and colour TVs.

The Commerce Department issued its preliminary ruling after complaints from US packaging firms, including Sonoco Products and Interplast Group.

They say unfairly cheap Asian plastic bags are losing them $300m in sales a year.

Strain your mind, can you figure this one out? And I am a free trader, not a “free trader.” Thanks to Don Boudreaux for the link.

How does high fashion turn a profit?

The most expensive dresses can sell from anywhere from $15,000 to $100,000. They are popular for weddings in the United States and the Middle East, but otherwise do not garner large numbers of orders. Note also that the sector is highly regulated and in typical French fashion:

The Chambre Syndicale de la Haute Couture, the governing body that oversees the couture business in France, enforces archaic and unyielding regulations–defending tradition and, in the process, driving most practitioners out of business. To receive official designation as haute couture from the Chambre Syndicale, a fashion house must employ 20 or more full-time skilled technicians in France and produce a minimum of 50 new designs for day and evening wear in each of the two fashion seasons, although the conditions are somewhat looser for new houses that wish to start producing couture.

How then do the designers make money?

…couture…serves two other purposes for the houses that produce it. One is that couture represents what the designer John Galliano called the “laboratory of ideas,” where the act of creation is given free rein. Many who watch the coverage of the couture shows marvel that anyone could be possibly expected to wear the extravagant and seemingly uncomfortable designs on display, but couture is not really designed to be worn; rather, it affords an opportunity to try out cuts and styles that can then be incorporated, in more modest form, into wearable prêt-à-porter.

Couture also serves to create a brand identity that rubs off on the perfume, cosmetics, and leather goods–few of them high-design products in themselves–where the profit margins are fat and the real money is to be made. Ironically, many people will buy a $150 bottle of perfume to participate in the lifestyle suggested by the $15,000 couture dress they cannot afford, while in reality the dress was produced in large part to seduce them into paying too much for the perfume.

Here is a list of papers on the economics of fashion, but the topic remains underexplored. So much of economic activity is about buying dreams, and we don’t yet have to analytical tools to analyze this kind of problem.

The forward march of culinary diversity

OK, this is interesting: Chicago may soon be home to the first haggis factory in the US:

“There are lots of Scots living in the States, and Scottish food is becoming increasingly popular, so I think the market is definitely big enough to make haggis a success in the U.S.,” Ken Stahly, owner of Stahly Quality Foods told the Evening Telegraph and Post in Scotland. “Chicago is an ideal base, because its geographical location is an ideal gateway to the U.S. and Canadian marketplace.”

Not to mention our extensive set of folkways that involve eating various and sundry pieces of meat and offal ground into bit and stuffed into organs, yum. Actually, I love bratwurst, don’t get me wrong, but … even on Burns Day and even in Scotland I can’t bring myself to eat haggis. I’ll stick with Lagavulin, thank you very much.

Interestingly, the company says that they will market a vegetarian haggis in the US market (!).

The material is from Lynne Kiesling, here is the original article. I’ll bet against the commercial success of the idea, in part because I suspect that high quality haggis is not made in a “factory.” Nonetheless American dining options continue to increase, the northern Virginia suburbs now have real Szechuan restaurants, fried duck’s blood and that sort of thing. As for the haggis I will pass.