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The Economics of Musical

Music is expertly attuned to the reasons copyright laws exist, or not.

Michele Boldrin & David K. Levine
JANUARY 13, 2016
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

Taylor Swift. Strangely enough I can make copies of my Armani’s suit. .) Now after 15 years. but I cannot do the same with my CDs … the correct solution to the problem of “intellectual property” is not to protect it. and Robert Schumann. (I shouldn’t be allowed to claim that I created it. However much one of us might prefer ’60s rock and the other classical Italian opera to the modern stuff. The evidence from our quantitative comparison of honoraria received by Beethoven. it seems that modern consumers of music are getting what they want. If I buy music I should be free to listen to it. or play it during a gigantic party. Katy Perry. 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. The economist F. apparently. As a result we have. sell it or give it away. Some History They say that those that do not remember history are doomed to repeat it. it is clear that copyright could make a substantial difference. who was the first important composer to experience the new Italian copyright regime and devise strategies to derive maximum advantage. which is fraud. Apple will be surprised to learn that the iPod was a huge failure on account of the lack of new music production since 1999. both against redistribution networks and even individual downloaders. benefitting from nearly universal European copyright. we can ask: “Who was right?” Certainly the music industry has had great success in court. In the case of Verdi. 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. greater remuneration through full exploitation of the copyright system led perceptibly to a lessening of composing effort. The limit. Lady Gaga. 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. either virtual or not. 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. Rihanna. provides at best questionable support for the hypothesis that copyright fundamentally changed composers’ fortunes. Scherer studied the impact of the introduction of copyright on the creation of classical music in that century and the next. but rather to force competition in the reproduction. with no copyright law in his territory. 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 fact that we were right and the music industry wrong will not be a surprise to those who remember history. record it. M.take it to the office and make it available to my colleagues. From the qualitative evidence on Giuseppe Verdi. distribution and circulation of music (and literature. Yet as we predicted 15 years ago piracy is even more rampant today than it was then. Fortunately it seems that they were wrong and we were right: Eminem. is reached when I start making copies of it. as long as I do not put an Armani label on it. in fact.

putting the police in charge of enforcing . that in Britain alone about twenty million copies were printed annually. Boldrin and Levine. The core source of revenue was the sale of printed sheet music. Not a small difference. The firms carrying out this business were not large multinationals as today. and as we know the Internet and the phenomena of piracy are new. which.” 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. Pirated copies were sold at two pence each. enforcement costs were high and the demand for cheap music books was large and hard to monitor. the music industry was different from the one we are familiar with today. the 18th century was a long time ago. no mass concerts and no TV rights. in 1902. Then piracy arrived. for example. which was carried out worldwide and on a very large scale. and the spread of “piano mania. but family owned companies. About piracy we. 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. such as Ricordi in Milano. Naturally the “authorized publishers” had a hard time defending their monopoly power against the pirates. nevertheless. which made violation of copyrights a matter for the penal code. This lead. discuss the situation at the beginning of the 20th century: At the turn of the previous century. Well certainly the internet is new. This started a systematic and illegal “hit and destroy” private war. to the approval of a new copyright law. We learn.The lessening of Verdi’s productivity is of course not what the music companies advertise as the benefit of copyright. The records show that the average script sold for about a shilling and two pence. Music publishers reacted by organizing raids on pirate houses aimed at seizing and destroying the pirated copies.” which increased the demand for musical scripts by orders of magnitude. Apparently these “majors” managed to collude quite efficiently among themselves. managed to reach also foreign countries. No CDs. Still. as a consequence of two changes: the development of photolithography. but we would actually have to write new stuff.

James Frederick Willett. Eventually. I want to start with a story about rock bands and record companies. What is piracy? Piracy is the act of stealing an artist’s work without any intention of paying for it. was protected only by the civil code. For the non-superstar musician it was and still is the case—the recording money. with “regular” music producers keen on defending their monopoly and restricted sales strategy. where they can scratch out a living. launched the Francis. So their profit is $6. is how it works for the ordinary musician: Today I want to talk about piracy and music. so audiences will pony up a few bucks to see them perform live at the local bar or pub. in 1905. and if copyright seems to have a limited impact on the productivity of musicians. to build an audience. Here. and “pirates” printing and distributing cheap music at low prices and very large quantities. the police itself stopped enforcing the copyright law. 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. police stations were filled with tons of paper on which various musical pieces were printed. the radio money and. Would they stop scraping by if their music is pirated? Not really. … 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 ….000 per person … to live on for a year until the record gets released. courtesy of Courtney Love. Can you say “Gangam Style”? Which is why you hear the studios whining about piracy. … [after various expenses] That leaves … $45. For the little guy the Internet and piracy is a huge opportunity—to become known. I’m not talking about Napster-type software. and the man who had invented the raids. James Frederick Willett it appears was the Kim Dotcom of his time even as Kim Dotcom was the Shawn Fanning of his time. or whining. The record is a big hit and sells a million copies. the act of recording is just advertising. until then. But expensive sheet music never returned.6 million? the band may as well be working at a 7-Eleven. the streaming money—these go to the big studios. 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. Being unable to bring to court what was a de-facto army of “illegal” music reproducers. But this did not work either. For the big-time groups the picture is rather different—and you may have heard them testifying. today. to make a living—and to do it without the big studios. After a few months. The fight nevertheless continued for a while. For the work-a-day musician. If nothing is new under the sign. but not the man or woman playing original music down at the pub. This is the fact—except for the big superstars—musicians just scrape by. but on behalf of their . I’m talking about major label recording contracts. was convicted for conspiracy. 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.what.4 million. Day & Hunter’s new sixpenny music series. Add it up and the record company has spent about $4. because they do not make money from their recording contracts anyway. The eventual outcome? The very same leader of one of the music publishers associations. the king of the pirates.

no matter what the cost to the rest of us. And most of Metallica’s track download earnings came from its 1991 hit “Enter Sandman. In short the financial distress or lack of distress of musicians—or recording studios—has nothing to do with the purpose of copyright. then decided they wanted more information. So copyright now creates a small part of their income. or who came to my shows. The majority of those sales came from its Rick Rubin-produced 2008 release. The Republican Study . And that doesn’t include the ones who bought the CDs in stores. Here is what the big time groups are really all about. it is clearly worth it to Lars Ulrich. we received about 100 hits a month from people who’d downloaded “Society’s Child” or “At Seventeen” for free. We note in passing that Lars Ulrich. 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.S. now a multi-millionaire. which is a lot of money in my book. But … that translates into $2. We wild copyright theorists have now been joined by many sober practitioners in our analysis that points out the issues. Let’s take it from my personal experience. but “to promote the progress of science and useful art. Indeed they were leaders if not in the production of great music. The rock band Metallica and. Not huge sales.” To this end.000 hits a year.700.6 million. right? No record company is interested in 180 extra sales a year. It is the means by which copyright advances the progress of science and art. Death Magnetic (297.000 albums in 2009. 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.000. has benefited greatly from the current regime: he worked as a gas station attendant before becoming a rock star.6 million a year. copyright assures authors the right to their original expression. My site gets an average of 75. According to Billboard magazine: Along with touring revenue—the band [Metallica] pulled in $22. Here is what Justice Sandra Day O’Conner had to say about copyright and the Constitution in her 1991 (488 US 340. Constitution. This result is neither unfair nor unfortunate. at least in the legal fight against Napster. if someone else bears the cost of enforcing laws that bring them $1.349) Supreme Court opinion: The primary objective of copyright is not to reward the labor of authors. Here is what one of those colleagues. Album sales revenue totaled $1. are very vocal in support of draconian copyright enforcement. Still.000).poorer less well-known colleagues. especially their drummer Lars Ulrich. Of those 100 people (and these are only the ones who let us know how they’d found the site). but encourages others to build freely upon the ideas and information conveyed by a work.” which sold 450. Nonsense. When the original Napster was running full-tilt. Not bad for someone whose last hit record was in 1975.000 fans—Metallica sold 694.8 million from 55 arena shows reported to Boxscore that drew more than 968. 15 bought CDs.

We will firewall Napster at source—we will block it at your cable company. no matter what… Sony is going to take aggressive steps to stop this. 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. Myth 3: copyright promotes innovation and productivity. We will block it at your ISP. 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. 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. 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. Look above at the authorization from the U.Commission of the U. This is antithetical to the free market. 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. Nevertheless—as we have seen— . But the law. We will block it at your phone company.S. Not altogether surprisingly. Myth 2: that copyright is free market capitalism. it is the useful arts and sciences that copyright is meant to promote. suppresses innovation and consequently has a negative effective on creativity. We will firewall it at your PC … These strategies are being aggressively pursued because there is simply too much at stake.” … the financial distress or lack of distress of musicians—or recording studios—has nothing to do with the purpose of copyright. Constitution—compensating creators is not the primary objective. That Sony should be concerned with their bottom line and not the law or the public good is not terribly surprising. the view from the entertainment industry has been rather different. We will develop technology that transcends the individual user. economics.S. 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. We wild copyright theorists have now been joined by many sober practitioners in our analysis that points out the issues. In fact copyright is a monopoly right—the exclusive right not to compete with one’s own customers.

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. These incentives. 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. Boldrin and Levine are co-authors of the book Against Intellectual Monopoly (Cambridge University Press. and copyright in music. legal or illegal. are plentiful and more than sufficient to fulfill the constitutional mandate of encouraging progress. 2008). Biggs Distinguished Professor of Economics at Washington University in St. avarice. To be sure. with research specialties in game theory and general equilibrium theory. Apple cheerfully acquiesced to this. the story is this: As we have seen the music companies were convinced the sky was falling and willing to take any action.” Once you buy an iPod and put a lot of music on it. Roughly. with research specialties in economic growth and economic theory. Michele Boldrin & David K. No. 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. . A suitable ending we think for our saga of greed. We see the greed—the willingness to do great harm for a very modest private benefit. to be greedy is not always to be smart. Copyright and “anti-piracy” are about rich individuals and organizations grabbing a few extra bucks at the enormous expense of everyone else.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. to protect their comfortable monopolies. Levine Michele Boldrin is Joseph Gibson Hoyt Distinguished Professor in Arts & Sciences and Professor of Economics at Washington University in St. Levine is John H. Louis. but rather the testimony from the technicians who designed the thing. as we have seen. Conclusion The key point is this: copyright and “anti-piracy” in music is not about incentives for artists to produce great music. David K. They demanded—stupidly as it turns out —that if Apple was to redistribute music on the iPod it would have to be copy protected. Not so much the testimony of Steven Jobs from beyond the grave. Louis. 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. as well as a certain amount of stupidity—in the testimony in the recent lawsuit over the Apple iPod. Not because of any great interest in supporting the music companies or any concern that piracy would destroy music production.