Category: Music

CD sales are up again

OK, Tower Records is bankrupt but demand for new CDs has been booming:

…a turnaround that began quietly last fall has become unmistakable with the success of Norah Jones’s new album, “Feels Like Home.” The CD, which recently sold more than a million copies in its first week in stores, helped extend a nearly consistent five-month string of industry growth, as measured by weekly sales compared with year-earlier periods.

There is more:

First-week sales of Ms. Jones’s new album were only part of the industry’s good news for seven-day period that ended Feb. 15. Through that period, the most recent for which data are available, album sales for the beginning of 2004 were up 13 percent from the comparable period of 2003, according to Nielsen SoundScan, which tracks music sales.

It was the biggest Valentine’s Day sales week since SoundScan began operating in 1991. And it was also the first week ever in which downloaded song sales topped two million.

Are illegal downloads really falling? I don’t trust any of the current numbers, but consider the following:

Even as download sales through Web stores like as iTunes are increasing, so is the number of people who illegally share music files, according to BigChampagne, which tracks file swapping. At the end of 2003, the most popular services for unauthorized file sharing had 5.6 million users, compared with 3.93 million a year earlier, a spokesman for BigChampagne, Eric Garland, said. Those users are now illegally trading about 250 million songs each week.

Here is the story.

My take: The baby boomers, with high disposable income, and fear of the law, are ascendant in the world of music. They are more likely to support a higher average quality of music, but less likely to support the next astonishing breakthrough. For that you need the younger kids in the market. Go Nirvana.

The real threat to the music industry?

I am a bit late getting MR up today because last night I took Yana to her first rock concert. We saw Fountains of Wayne, a nerdy New Jersey pop group that has numerous excellent hooks.

After they played “Stacey’s Mom,” their best known song, the band leader stopped and made an announcement. “The real problem in the music industry isn’t illegal downloads. It’s all of you who use your cell phones to broadcast the concert to your friends at home who aren’t paying for tickets.”

He made as if he was joking, but the crowd took him quite seriously.

CDs as loss leaders

An increasing percentage of compact discs are sold in mega-chains, such as Best Buy or Wal-Mart, as loss leaders. Offer the CD at a very cheap price, and hope that the buyers also take home a television set. This practice is the central reason why Tower Records recently went bankrupt.

Loss leader CDs push music in a more mainstream direction. The impulse buy is for the TV, the musical purchase is planned, which favors established stars with new releases. Sudden impulse buys of unknown musical products, by definition, do not bring people into the store. In essence consumers have decided they would rather bundle hit musical releases with TV sets and computers (the Best Buy model), than with more obscure musical releases (the Tower model).

Consumers with mainstream musical tastes are better off, but how about consumers who prefer the niche products? On the downside, hit CDs are cross-subsidizing obscure CDs to a lesser degree than before.

Nonetheless not all hope is lost for buyers with indie tastes. and other Internet services offer a wide variety of releases and lessen the need for such a cross-subsidy. And keep in mind that the cross-subsidy went two ways. The customers who prefer music from Madagascar no longer have to cross-subsidize the Eminem displays in Tower. The CDs are held in Amazon-linked warehouses, which is cheaper, even once you take shipping into account. Furthermore the desire to build up the Amazon brand name cross-subsidizes obscure products of all kinds, many of which Amazon makes little or no money from.

The other key musical trend of our time is illegal downloading, which hurts the top artists most of all. Indie releases use the Internet for publicity, and world music artists learned to live without copyright protection a long time ago. Legal downloading, through iPod, subsidizes music of all kinds. None of the iTunes songs make money for Apple, rather music of your choice (if they can get the rights) is a loss leader for hardware. Most people buy iTunes, not for the latest hits, but to hold a diverse mix of their past and yet-to-be-known future favorites. And most satellite radio channels do not play hits but rather serve niche tastes. XM offers a wide variety of channels, in part to make its brand name well-known and focal.

The bottom line: Don’t worry about music as a loss leader. Cross-subsidies all over the place, and point in many differing directions. But at the end of the day, both the demand and supply for musical diversity are alive and well.

Why Ed Sullivan is important

This coming Sunday marks the fortieth anniversary of the Beatles on The Ed Sullivan Show. We look back on Sullivan as an antiquated, somewhat quaint relic of a bygone era. In reality he was a daring market entrepreneur who promoted important music and broke down racial barriers.

Sullivan was especially important for his advocacy of African-American music and entertainment. He helped Bill “Bojangles” Robinson, Ethel Waters, Nat “King” Cole, Leontine Price, Louis Armstrong, George Kirby, Duke Ellington, Richie Havens, Mahalia Jackson, Louis Armstrong, Diana Ross and the Supremes, and Marvin Gaye, among others. At the time the major networks typically shied away from carrying such performers, primarily for racial reasons. Sullivan consistently fought with his conservative sponsors and insisted on booking these individuals.

Sullivan was a musical visionary more generally. In addition to the Beatles, he promoted The Rolling Stones, Elvis Presley, and Barbra Streisand. In comedy he showcased Woody Allen, Richard Pryor, and Jerry Lewis, among many others. In each case the performers had not yet established their later significance.

Sullivan’s show, of course, was an institution. At its peak it regularly commanded an audience of over 50 million Americans and it ran for 23 years. Here’s a hat tip to Sullivan, who exemplified the best of entrepreneurship and cosmopolitan vision.

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.

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.

Why can’t you find your favorite song?

… fans who venture onto any of the pay music sites will not find the most popular band ever, the Beatles. They will not find other top-selling acts, such as the Dave Mathews Band, Garth Brooks, the Grateful Dead, AC/DC and the Cars.

They will find that top-selling acts Madonna and Red Hot Chili Peppers sell their songs by the album, but not as singles.

They will find some musicians on one service, but not on others. They will find puzzling choices: Led Zeppelin fans can buy a 47-minute spoken-word biography of the band online, but no Zeppelin songs because the band has not licensed them for sale on the Internet.

Why are these potential gains from trade not being exploited?

1. Some artists are holding out for a higher price or better terms. This can mean either a better cut for the artist, or the artist does not like the “all songs for 99 cents” model of iTunes.

2. Many artists feel that selling songs on an individual basis takes them out of proper context or cannibalizes sales for the album.

3. Pre-1998 contracts do not specify Internet rights to the songs. Assignment of Internet rights can require the underlying contract to be renegotiated.

4. Renegotiations must involve both the performer and the songwriter.

5. Often the relevant parties cannot be found or are otherwise difficult to deal with. One executive said: “You can be sure the heirs are a son and daughter who aren’t talking to each other and one of those two is getting divorced.”

Here is the full account. You will find stories of high transaction costs, poorly defined property rights, and stubborn holdouts, all the classic predictions of institutional failure theories.

The bottom line: Selection, not just price, remains a big advantage for non-legal downloading. If iTunes and related services are to make it in the long run, they will need to offer near-universal choice of music.

Is music file-swapping down?

Maybe not, according to Business Week, from the issue of 16 January. Some sources will tell you the practice is plummeting:

Two widely cited surveys seemed to show that legal action, which began in September, was chilling file-sharing activity. In December, a phone survey by the Pew Internet Project of 1,358 U.S. Net users found music downloading had dropped by half since May. And in November, comScore Media Metrix, monitoring 120,000 U.S. users, saw big yearly declines at four popular file-sharing services — KaZaA, Grokster, BearShare, and WinMX.

But the reality is more complex:

…those surveys provide a relatively narrow view of the file-swapping universe. BayTSP, a Silicon Valley watchdog that works for three of the major record labels, tracks the number of songs available for download worldwide. It sees just a 10% drop since July and also notes steady migration from older, virus-ridden programs like KaZaA to hipper peer-to-peer networks such as eDonkey and Bit Torrent — which were absent from comScore’s tally.

And Los Angeles-based researcher BigChampagne, which monitors millions of global file swappers, actually sees a 35% increase in illegal traffic from 2002 to 2003. Given BayTSP’s and BigChampagne’s broader sample sizes, says John Palfrey, of Harvard Law School’s Berkman Center for Internet & Society, “They’re going to have more accurate empirical data.”

Note that the Pew study simply calls adults and asks them if they break the law. It underrepresents children and of course the respondent might think he is talking to the RIAA instead of a researcher. And much of the current growth in file-sharing is coming at the international level, not in the United States.

My predictions: Within two years Congress will revisit the 1998 Digital Act and give the music companies some extra legal weapons. It still won’t work, as downloaders will move to anonymous networks, possibly emanating from outside the United States.

Why Europe is no longer world leader: one illustration

The New York Times writes of:

…a new regulation imposed by the European Union that reduces the allowable sound exposure in the European orchestral workplace from the present 90 decibels to 85. The problem is, a symphony orchestra playing full-out can easily reach 96 to 98 decibels, and certain brass and percussion instruments have registered 130 to 140 at close range.

The directive – issued last February and intended to protect all workers, orchestral musicians included – specifies a daily “upper exposure action value” of 85 decibels, amid a welter of other provisions. It acknowledges “the particular characteristics of the music and entertainment sectors.” It allows discretion to member states to use averaging, specifying a weekly exposure limit of 87 decibels, and to allow a transition period for implementation.

For me this article had a “jaw hits floor” quality. How about legislation saying that no composer can lose blood, sweat, and tears over a masterwork? Bach, after all, wrote the equivalent of twenty pages of music a day. He likely had some form of carpal tunnel syndrome.

Note that private solutions can alleviate the noise problem. Some orchestras increase the spacing between players. Some musicians use earplugs. Sometimes an orchestra will put plexiglass screens in front of the trombones. Or you don’t have to join an orchestra in the first place.

By the way, the trombones are not the only problem. The piccolo also has a negative effect on hearing.

And what about the United States?

In this country, the Occupational Safety and Health Administration takes a more hands-off attitude toward orchestras than the European Union. “We don’t basically get involved with them,” Francis Meilinger, an OSHA spokesman said. Here, too, orchestras fall under the agency’s general guidelines for the workplace, which allow a 90 decibel level over an eight-hour day, and a 97 decibel limit over three hours. Since American orchestras work relatively short days, and the peaks of sound are merely intermittent, they don’t represent a particular concern in this regard.

Imagine that, the EU having less sense than our OSHA. In any case, it remains to be seen how the measure will be implemented and enforced. Many musicians have announced that they plan to continue playing Wagner, Mahler, and Strauss, regardless of regulatory directives.

The commissar vanishes, Beatles style

[Yoko] Ono’s weirdest piece of video trickery comes on the recently released DVD “Lennon Legend: The Very Best of John Lennon.” On one film, for the classic song “#9 Dream,” Ono has edited herself into the original video. There you will find her mouthing the backup vocals that were sung on the original hit recording by Lennon’s girlfriend at that time, May Pang.

In addition:

Ono has dropped [Paul McCartney’s] name from the songwriting credit on “Give Peace a Chance.” The song was written by Lennon only, but at the time the songwriting duo was still putting their two names on everything.

Here is the full story. McCartney, on his side, removed Lennon’s songs “Maggie Mae” and “Dig It” from the re-release of the Beatles’s Let It Be album. He never thought much of these songs, so he added another Lennon composition, “Don’t Let Me Down,” in their place. He also has sought to have many of the Beatles songs switched from the universal “Lennon-McCartney” tag to “McCartney-Lennon.”

Adam Smith suggested that people become more insecure about reputation, the more reputation they have. The theme of vanity as an addiction dates back to the early Christian writers, such as Boethius. But my query is simpler: don’t these people have anything better to do? Oh yes, if the title of the post interests you see here.

Ths secret of Stradivarius?

I have long wondered why the modern world has never been able to equal Stradivarius and Amati violins. After all, it wasn’t too many years ago that we were using computer punch cards and bulky machines, instead of laptops. Most other goods have improved in quality since the 17th century, and more than just a bit. Why should violins be so resistant to technological advance?

We may now know the answer as to why Stradivarius violins are so special. In addition to first-rate craftsmanship, the wood from that time had a special quality. Why? Longer winters, due to a mini-Ice Age. The cold weather yielded denser Alpine spruces: “narrow tree rings would not only strengthen the violin but would increase the wood’s density.” In other words, the greenhouse effect will raise the prices of good Stradivarius violins, by making it harder for us to match that achievement.

What is the fair use doctrine? offers this very brief and useful summary, thanks to for the pointer. This is the best simple statement I have seen of what “fair use” is all about. Note that the fair use doctrine will increase in importance, as companies put up tougher gates around their intellectual property. Bloggers must know about fair use as well, lest they quote too freely from copyrighted material and incur legal penalties.

For this economist, the courts aren’t nearly liberal enough in interpreting fair use. I think, for instance, that rappers should be able to sample songs without clearing copyright, at least provided they are doing more than simply copying large blocks of the song verbatim. Read Robert Christgau’s account of the famous Gilbert O’Sullivan case; O’Sullivan objected when rapper Biz Markie sampled his “Alone Again, Naturally,” a transformative use if I ever heard one. Will more sampling make rap better and cheaper? Yes. Will it diminish the supply of sample-ready material? Unlikely. So why not interpret fair use more liberally in this regard?

Are web tunes profitable?

Apple Computer has been selling songs for 99 cents apiece through its new iPod technology, Napster is selling music at the same price. But will anyone make money?

The November 19 Wall Street Journal, “With the Web Shaking Up Music, A Free-for-All in Online Songs,” suggests maybe not. It is estimated that for each song, 65 to 79 cents must be paid in wholesale costs to music companies and various intermediaries. Then add credit card processing fees, bandwidth charges, and customer service costs. Not much is left over in terms of profit.

Apple hopes to make back the money by selling iPod players, Steve Jobs admitted as such publicly. But what will happen once competitors copy iPod, pushing down its price? Many of Apple’s rivals hope to make money, not on individual songs, but rather by selling music subscriptions. The subscriptions, however, typically let consumers hear the songs but not own or transfer them, a model which has yet to prove popular. It is hard to ignore that shares of Roxio, the company that owns Napster, have lost half their value in the last month or so.

Wal-Mart plans to enter the business, it will sell songs and hope to draw listeners to its web-site, where they can view and buy offerings of electronic goods.

My conclusion: None of these ideas is a proven winner. I still expect free file-sharing, whether legal or not, to serve as the industry norm.

Addendum: Winterspeak offers some interesting observations on the market.