January 28th Assignment

The New Economics of Music:
File-Sharing and Double Moral Hazard

This article seemed the most interesting to me because I am a musician. Besides that, I just plain love music. I keep up with what's going on with several bands, and I have seen many popular bands (whose music I personally love) "drop" their record labels in favor of creating a record label of their own through which they can release their music, normally backed by a larger record label for widespread distribution purposes. Jon Foreman, the singer of Switchfoot, is quoted as saying, "I think for us, the reason why we signed with Columbia was because of the people that were there. So it’s very understandable when all those people are gone, you don’t hold any real bad feelings or good feelings towards a company name. I think that’s part of the problem with the corporate entity as a whole is that there’s no true responsibility." He, along with the other members of the band, started Lowercase People Records in order to release their music on their own terms. Their new release is set to be released by Lowercase People Records in conjunction with Dave Matthews' record label, ATO Records, for wider distribution purposes. In this case, it's musicians working with musicians to release music. In this case, the people are actually musicians trying to sell their music banking on the fact that they actually have talent. Too often, record labels diverge from the interests of the listener, because they don't know what the listener wants, due to a lack of caring, in light of the more appealing aspect--getting what they want themselves... money.

The scary thing about this article is that, in a few cases, it is spot-on. The article claims that "the moral hazard is that the record industry, because listeners can't monitor or influence it, can effectively shirk, and choose artists not based on listeners' preferences, but based on business efficiencies." I have seen this. I have seen artists "dropped" from their record labels, because they aren't selling as much as their label would like them to. Many times, in these cases, the reason they aren't selling as much as their label would like them to is because their label isn't promoting their releases, and (especially in the cases of relatively new artists) these artists thus don't have a chance to sell their product. Jet's 2006 album Shine On was underpromoted by their record label, and after the wildly successful Get Born, Shine On was nearly forgotten by the general public.

Recently, an album came out whose name you might recognize. Chinese Democracy hit the shelves on November 23rd, 2008, after literally 15 years of writing, recording, and built up anticipation. Best Buy, the sole distributor of the album, referred to it as "the most anticipated album of all time" in all of its promotional materials, and yet, very few of the stores released it in an easily accessible, or even an easily noticeable fashion. Rolling Stone Magazine even claims that the release began "with a shrug." With this lack of promotion, this album that had been anticipated since 1993's The Spaghetti Incident only sold 261,000 copies in its first week. Now, while I would be proud to say an album of mine sold that many in its first week, that album has been anticipated for almost my entire life, and thus, should have sold many more copies than it did.


In essence, the article tells us that "labels are agents hired by music listeners - principals - to perform a function they don't have the time to do - find interesting and entertaining musical artists . . . the net offers listeners insurance against the music industry itself. File-sharing isn't simply theft. Rather, file-sharing is risk-sharing - against an industry with the freedom to undertake hidden action in the extreme, and not live up to the contract it has written. Remember, the contract said that labels would assume the risk in exchange for dollars from listeners - so when moral hazard lets labels try and push risk to listeners, is it any surprise that listeners try and minimize it by parceling it out? In fact, we could go even further - saying that file-sharing is a way for principals to punish agents operating under extreme moral hazard, with the hope of bringing the agents incentives into line" [sic], and its main point is that the Record Labels of our day have actually created their own problems through what they call a "massive double moral hazard."