The Economics of Musical Copyright Music is expertly attuned to the reasons copyright laws exist, or not.

We all enjoy music, and probably have come across the fierce debate about the role of copyright and piracy. What is it all about? Are musicians in financial distress because their work is being stolen? Do we have access to less quantity and quality of music as a result? Can two economists say anything useful on the subject?

The modern saga of piracy began 15 years ago, when a number of music companies sued an online music distributor—Napster. People would “rip” music off their CDs, then put it online through the Napster service, where it could be freely downloaded by anybody. Fifteen years ago we wrote:

 

Basically, the music industry argues that giving away copyrighted music for free violates its “intellectual property,” and indeed, compares the downloading of copyrighted music to “piracy” or “theft.” Permitting such “theft,” music producers argue, is socially very damaging. No one would have an incentive to produce music were Napster and similar organizations allowed to operate. This argument has two parts: the first says that downloading music is theft, and the second says that if downloading is permitted the incentive to produce good music would disappear and we would all be living in a grey and sad world, instead of joying at the lyrics of the Iglesias family.

 

We went on to argue that the music industry has little chance—whatever its success in court—in stopping piracy and that, anyway, it does not matter because there is no need for copyright in music—the world of music without copyright is not a sad cold place without great music. As we said:

 

… it does not require a Ph.D. in economics to see that downloading music, copyrighted or not, is quite different from theft in the ordinary sense of the word. Theft, as we ordinarily mean it, amounts to depriving the owner of the use of the object of his property or, at least, greatly reducing his access to it. If you steal my MP3 player, I can no longer use it. Whether you use it, resell it, or just throw it away, it is theft. In this sense “intellectual property” is quite different than property of material objects. Indeed, the argument is not over the right of the music industry to sell its product, nobody is stealing CDs via Napster, but rather over their ability to regulate the future use of their products by those who purchase them. As far as we know, no one has accused people who make available music from their CDs on the Internet of having stolen the CDs. Rather the question is, having purchased the CDs, the music industry would like to prevent us from further distributing the music. But is there a valid economic rationale for this? If I purchase a car, I can resell it in direct competition with the manufacturer of the car. In fact, also if I purchase a CD I can resell it. I can also let other people listen to it in my home or backyard, or take it to the office and make it available to my colleagues, or play it during a gigantic party. The limit, apparently, is reached when I start making copies of it, either virtual or not. Strangely enough I can make copies of my Armani’s suit, as long as I do not put an Armani label on it, but I cannot do the same with my CDs … the correct solution to the problem of “intellectual property” is not to protect it, but rather to force competition in the reproduction, distribution and circulation of music (and literature, movies and other artistic products that can make people’s life better and be easily reproduced) by requiring that any purchaser of “intellectual property” have complete freedom to use it as she sees fit. If I buy music I should be free to listen to it, record it, sell it or give it away. (I shouldn’t be allowed to claim that I created it, which is fraud.)

 

Now after 15 years, we can ask: “Who was right?” Certainly the music industry has had great success in court, both against redistribution networks and even individual downloaders. Yet as we predicted 15 years ago piracy is even more rampant today than it was then. As a result we have, in fact, not had copyright for 15 years and so we can look to see if the music producers are right in predicting that we have been without great new music for at least a decade now. Fortunately it seems that they were wrong and we were right: Eminem, Rihanna, Taylor Swift, Katy Perry, Lady Gaga, the Black Eyed Peas and Beyonce—all of whom collectively have sold at least 75 million recordings since 1999—will all be surprised to learn that they were unable to pursue their career in music on account of piracy. Apple will be surprised to learn that the iPod was a huge failure on account of the lack of new music production since 1999. However much one of us might prefer ’60s rock and the other classical Italian opera to the modern stuff, it seems that modern consumers of music are getting what they want.

 

Some History

They say that those that do not remember history are doomed to repeat it. The fact that we were right and the music industry wrong will not be a surprise to those who remember history. Let us roll the clock back to the 18th Century when a wave of brilliant classical musicians produced beautiful music that (some of us at least) listen to and buy even today. The economist F. M. Scherer studied the impact of the introduction of copyright on the creation of classical music in that century and the next, and here is what he has to say:

 

The evolution of copyright from an occasional grant of royal privilege to a formal and eventually widespread system of law should in principle have enhanced composers’ income from publication. The evidence from our quantitative comparison of honoraria received by Beethoven, with no copyright law in his territory, and Robert Schumann, benefitting from nearly universal European copyright, provides at best questionable support for the hypothesis that copyright fundamentally changed composers’ fortunes. From the qualitative evidence on Giuseppe Verdi, who was the first important composer to experience the new Italian copyright regime and devise strategies to derive maximum advantage, it is clear that copyright could make a substantial difference. In the case of Verdi, greater remuneration through full exploitation of the copyright system led perceptibly to a lessening of composing effort.

 

giuseppe-verdiThe lessening of Verdi’s productivity is of course not what the music companies advertise as the benefit of copyright. As far as we know nobody from the industry has ever testified before Congress—however true it might be—that “we need a big copyright extension and a lot of government enforcement of copyright because without copyright we could not live off the old music we produced years ago, but we would actually have to write new stuff.”

To understand the music industry it is necessary to understand that the economics of being an ordinary musician is rather different than the economics of being a superstar.

Still, the 18th century was a long time ago, and as we know the Internet and the phenomena of piracy are new. Well certainly the internet is new. About piracy we, Boldrin and Levine, discuss the situation at the beginning of the 20th century:

 

At the turn of the previous century, the music industry was different from the one we are familiar with today. No CDs, no mass concerts and no TV rights. The core source of revenue was the sale of printed sheet music, which was carried out worldwide and on a very large scale. We learn, for example, that in Britain alone about twenty million copies were printed annually. The firms carrying out this business were not large multinationals as today, but family owned companies, such as Ricordi in Milano, which, nevertheless, managed to reach also foreign countries. Apparently these “majors” managed to collude quite efficiently among themselves. The records show that the average script sold for about a shilling and two pence. Then piracy arrived, as a consequence of two changes: the development of photolithography, and the spread of “piano mania,” which increased the demand for musical scripts by orders of magnitude. Pirated copies were sold at two pence each. Not a small difference.

Naturally the “authorized publishers” had a hard time defending their monopoly power against the pirates, enforcement costs were high and the demand for cheap music books was large and hard to monitor. Music publishers reacted by organizing raids on pirate houses aimed at seizing and destroying the pirated copies. This started a systematic and illegal “hit and destroy” private war. This lead, in 1902, to the approval of a new copyright law, which made violation of copyrights a matter for the penal code, putting the police in charge of enforcing what, until then, was protected only by the civil code. But this did not work either. After a few months, police stations were filled with tons of paper on which various musical pieces were printed. Being unable to bring to court what was a de-facto army of “illegal” music reproducers, the police itself stopped enforcing the copyright law.

The eventual outcome? The very same leader of one of the music publishers associations, and the man who had invented the raids, launched the Francis, Day & Hunter’s new sixpenny music series. The fight nevertheless continued for a while, with “regular” music producers keen on defending their monopoly and restricted sales strategy, and “pirates” printing and distributing cheap music at low prices and very large quantities. Eventually, in 1905, the king of the pirates, James Frederick Willett, was convicted for conspiracy. But expensive sheet music never returned.

 

James Frederick Willett it appears was the Kim Dotcom of his time even as Kim Dotcom was the Shawn Fanning of his time.

If nothing is new under the sign, and if copyright seems to have a limited impact on the productivity of musicians, how is it that the industry functions? Where does the money come from when everybody is just handing the stuff around for free? To understand the music industry it is necessary to understand that the economics of being an ordinary musician is rather different than the economics of being a superstar. Here, courtesy of Courtney Love, is how it works for the ordinary musician:

 

Today I want to talk about piracy and music. What is piracy? Piracy is the act of stealing an artist’s work without any intention of paying for it. I’m not talking about Napster-type software. I’m talking about major label recording contracts. I want to start with a story about rock bands and record companies, and do some recording-contract math: This story is about a bidding-war band that gets a huge deal with a 20 percent royalty rate and a million-dollar advance. … [after various expenses] That leaves … $45,000 per person … to live on for a year until the record gets released. The record is a big hit and sells a million copies. … the band earns $2 million in royalties … minus $2 million in recoupable expenses … [making a total profit for the band of] zero! How much does the record company make? They grossed $11 million …. Add it up and the record company has spent about $4.4 million. So their profit is $6.6 million? the band may as well be working at a 7-Eleven.

 

This is the fact—except for the big superstars—musicians just scrape by. Would they stop scraping by if their music is pirated? Not really, because they do not make money from their recording contracts anyway. For the non-superstar musician it was and still is the case—the recording money, the radio money and, today, the streaming money—these go to the big studios. For the work-a-day musician, the act of recording is just advertising, so audiences will pony up a few bucks to see them perform live at the local bar or pub, where they can scratch out a living. For the little guy the Internet and piracy is a huge opportunity—to become known, to build an audience, to make a living—and to do it without the big studios. Can you say “Gangam Style”? Which is why you hear the studios whining about piracy, but not the man or woman playing original music down at the pub.

For the big-time groups the picture is rather different—and you may have heard them testifying, or whining, before Congress—not so much explaining that they need stricter copyright enforcement so that they can buy a second or third gold-plated shark tank, but on behalf of their poorer less well-known colleagues. Here is what one of those colleagues, Janis Ian has to say about piracy:

 

The premise of all this ballyhoo is that the industry (and its artists) are being harmed by free downloading. Nonsense. Let’s take it from my personal experience. My site gets an average of 75,000 hits a year. Not bad for someone whose last hit record was in 1975. When the original Napster was running full-tilt, we received about 100 hits a month from people who’d downloaded “Society’s Child” or “At Seventeen” for free, then decided they wanted more information. Of those 100 people (and these are only the ones who let us know how they’d found the site), 15 bought CDs. Not huge sales, right? No record company is interested in 180 extra sales a year. But … that translates into $2,700, which is a lot of money in my book. And that doesn’t include the ones who bought the CDs in stores, or who came to my shows.

 

Here is what the big time groups are really all about. The rock band Metallica and, especially their drummer Lars Ulrich, are very vocal in support of draconian copyright enforcement. Indeed they were leaders if not in the production of great music, at least in the legal fight against Napster. We note in passing that Lars Ulrich, now a multi-millionaire, has benefited greatly from the current regime: he worked as a gas station attendant before becoming a rock star. According to Billboard magazine:

Along with touring revenue—the band [Metallica] pulled in $22.8 million from 55 arena shows reported to Boxscore that drew more than 968,000 fans—Metallica sold 694,000 albums in 2009. The majority of those sales came from its Rick Rubin-produced 2008 release, Death Magnetic (297,000). Album sales revenue totaled $1.6 million. And most of Metallica’s track download earnings came from its 1991 hit “Enter Sandman,” which sold 450,000.

 

So copyright now creates a small part of their income. Still, if someone else bears the cost of enforcing laws that bring them $1.6 million a year, no matter what the cost to the rest of us, it is clearly worth it to Lars Ulrich.

 

The Purpose and Consequence of Copyright

To understand what copyright is supposed to be about—rather different than industry propaganda says—a good starting point is the U.S. Constitution. Here is what Justice Sandra Day O’Conner had to say about copyright and the Constitution in her 1991 (488 US 340,349) Supreme Court opinion:

 

The primary objective of copyright is not to reward the labor of authors, but “to promote the progress of science and useful art.” To this end, copyright assures authors the right to their original expression, but encourages others to build freely upon the ideas and information conveyed by a work. This result is neither unfair nor unfortunate. It is the means by which copyright advances the progress of science and art.

 

In short the financial distress or lack of distress of musicians—or recording studios—has nothing to do with the purpose of copyright. We wild copyright theorists have now been joined by many sober practitioners in our analysis that points out the issues. The Republican Study Commission of the U.S. Congress also weighed in on the subject in 2012 in a document entitled “Three Myths About Copyright Law and Where to Start to Fix it”:

 

Myth 1: that copyright is meant to compensate the creators of the content. Look above at the authorization from the U.S. Constitution—compensating creators is not the primary objective, it is the useful arts and sciences that copyright is meant to promote.

Myth 2: that copyright is free market capitalism. In fact copyright is a monopoly right—the exclusive right not to compete with one’s own customers. This is antithetical to the free market.

Myth 3: copyright promotes innovation and productivity. Simply put – all the available empirical evidence suggests that copyright by tying up innovators in legal tangles and giving existing monopolists a legal tool by which to attack up—and—coming rivals, suppresses innovation and consequently has a negative effective on creativity.

 

Not altogether surprisingly, the view from the entertainment industry has been rather different. Sony Pictures Entertainment US senior VP Steve Hecklerat said rather candidly at the Americas Conference on Information Systems in August 2000:

 

The industry will take whatever steps it needs to protect itself and protect its revenue streams … It will not lose that revenue stream, no matter what… Sony is going to take aggressive steps to stop this. We will develop technology that transcends the individual user. We will firewall Napster at source—we will block it at your cable company. We will block it at your phone company. We will block it at your ISP. We will firewall it at your PC … These strategies are being aggressively pursued because there is simply too much at stake.

 

This rather lawless approach was in fact adopted by Sony with consequences that were not altogether good for them: they were subsequently sued by the state of Texas and class action lawsuits were brought against them in New York and California. The eventual settlement reached with the FTC included an offer of $150 to users whose computers Sony damaged by surreptitiously installing malicious software in their effort to “transcend the individual user.”

… the financial distress or lack of distress of musicians—or recording studios—has nothing to do with the purpose of copyright. We wild copyright theorists have now been joined by many sober practitioners in our analysis that points out the issues.

That Sony should be concerned with their bottom line and not the law or the public good is not terribly surprising. But the law, economics, and common sense does allow that they may also have a legitimate complaint—copyright and strong enforcement of copyright might indeed be necessary to promote the useful art of producing music. Nevertheless—as we have seen—absent copyright entirely and we would not at all live in a sad and unhappy world in which it was not worth it for anyone to produce music.

 

Conclusion

The key point is this: copyright and “anti-piracy” in music is not about incentives for artists to produce great music. These incentives, as we have seen, are plentiful and more than sufficient to fulfill the constitutional mandate of encouraging progress. Copyright and “anti-piracy” are about rich individuals and organizations grabbing a few extra bucks at the enormous expense of everyone else. To be sure, to be greedy is not always to be smart. We see the greed—the willingness to do great harm for a very modest private benefit, as well as a certain amount of stupidity—in the testimony in the recent lawsuit over the Apple iPod. Not so much the testimony of Steven Jobs from beyond the grave, but rather the testimony from the technicians who designed the thing.

Roughly, the story is this: As we have seen the music companies were convinced the sky was falling and willing to take any action, legal or illegal, to protect their comfortable monopolies. They demanded—stupidly as it turns out —that if Apple was to redistribute music on the iPod it would have to be copy protected. Apple cheerfully acquiesced to this. Not because of any great interest in supporting the music companies or any concern that piracy would destroy music production. No, Apple was happy to build copy protection into their iPod because by doing so they could make sure that the music once purchased could never be played on anything other than an iPod! The technical term is “platform lock-in.” Once you buy an iPod and put a lot of music on it, you cannot afford to buy a non-Apple product to play your music because if you do you will have to buy your music all over again.

So the stupidity that came with the avarice? The music companies by allowing—actually demanding—that Apple create platform lock-in through copy protection gave (for a time) Apple a near monopoly over music distribution, something they discovered to their sorrow when Apple insisted on paying them low prices for their product and they suddenly woke up to see that they had nowhere else to turn. A suitable ending we think for our saga of greed, avarice, and copyright in music.

  • flip the frog

    The economist F. M. Scherer that you quote appears to know very little about music history. Comparing Beethoven and Schumann to make a case that copyright didn’t make any difference, is pointless. Beethoven was a super star in his day, while Schumann was a comparatively obscure composer of much less accessible music. Of course in this case, “copyright (didnt) fundamentally change composers’ fortunes” – he wasn’t being performed much in the first place. The main source of income in the Schumann household would be from his much more famous wife – the pianist Clara Schumann.

    As for Verdi – “greater remuneration through full exploitation of the copyright system led perceptibly to a lessening of composing effort” – seriously, does this guy know anything about Verdi? Of course he wrote less over the years – the man was getting old and his works got more ambitious and complex, and so took a lot longer to write (just as Beethoven spent several years on his 9th symphony). He was 70 when he did Othello and 80 when he finished Falstaff. Those may be his two greatest masterpieces.

    Wagner spent 26 years on the Niebelungen Ring (1848-74) – does anyone seriously think that was because he was getting fat and lazy from all those royalties?

    What copyright meant for these two men – along with patronage – was ensuring the economic freedom to spend the time they needed on pushing their art way beyond the existing boundaries of opera, without having to write more popular music – or touring Europe twice a year, conducting the same pieces over and over again – to pay the rent.