Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us about Economics and Life by Alan B. Krueger
Book by an economist describing the financial realities of the music industry. Relative to how much value it provides to our lives, music is extremely cheap. The majority of Americans listen to music for over 2 hours every day, but the music industry makes up less than 0.1% of the GDP. It is also a superstar economy, with the vast majority of artists struggling to get by, while a few at the very top making almost all of the money. During the period of widespread music piracy in the 2000s, CD sales plummeted; recently, streaming platforms like Spotify has mostly replaced the revenue from CD sales. But for most artists, streaming does not generate a lot of income; most of their income comes from touring, producing songs for others, giving lessons, etc. It’s a somewhat unusual situation that most of the money in the industry does not come from the usual way people experience music (i.e., recorded songs), but rather from relatively niche markets like live shows.
Despite being highly educated, the median income of a musician is only $20,000 USD, well below the average income in the US. Musicians make so little money because there is a nearly infinite supply of them – many musicians experience a “high” while performing so they are willing to perform for free. Gigs are hard to come by, and bands must carefully manage their finances to stay alive, especially because earnings must be distributed across several band members.
In the olden days, the audience of an opera singer was physically limited by the number of people who could fit in a concert hall. Now, with the infinite storage and distribution capacity of the Internet, superstar effects have risen dramatically: the top 1% of artists make more than the other 99% combined. Meanwhile, the long tail of artists remain in obscurity. Thousands of new songs uploaded every day to the streaming platforms, and minor differences in initial conditions determine how much the sound will be recommended in the future, leading to snowball effects, where songs are heavily dependent on luck to succeed. Many artists recall a completely random and lucky event that propelled them to success, and most successful artists are unable to replicate their success a second time, highlighting the importance of luck.
Concert tickets are one of the few scarce resources in the music industry, leading to high market values. However, many artists don’t want to charge exorbitant fees for concert tickets and risk alienating their fans, so they price them below market value. This has led to the emergence of secondary markets of ticket resellers and scalpers, capture a large portion of the economic value and makes it hard for legitimate fans to buy tickets. Recently, artists have gotten better at strategies such as discriminative pricing of seats, VIP tickets, slowly releasing tickets until the concert date while increasing price, etc, to capture more of the value instead of letting it go to scalpers.
Since there are so few winners in the music industry, not even record labels or able to predict who will be the next superstar. Thus, record labels sign new promising artists using a financial model similar to venture capital: they expect 9 of 10 artists to fail, while the profits from the one success covers the costs of the failures. Artists are focused on improving their craft, and generally know little about accounting, business, or law, so they are often exploited by contracts with the record labels (especially because they are young when the label first signs them). Musicians often also overspend and mismanage their finances, leading to an early bankruptcy.
Copyright is a contentious issue in the music industry — it is arguably essential for the industry’s existence, since without the ability to make money from copyright, artists cannot afford to create music. This is what happened in China: for a long time, there were lax copyright laws, and consequently little domestic music production. On the other hand, allowing copyright for decades after the artist’s death does nothing to incentivize music creation, while being a form of rent-seeking. After a long period of isolation, Chinese people are warming up to Western music, although the government likes to keep control of the spread of culture.
Overall, this is a well-written book about the financials of all aspects of the music industry, supported by lots of statistics as well as examples from musicians. The state of the industry is definitely not great for artists: superstar effects create a level of inequality as high as can be found anywhere, and the vast majority struggle to eke out a living. On the other hand, music is a great deal for listeners. Listening to music increases our well-being, no matter what activity we are doing, and in a post-scarcity industry, we pay almost nothing for this benefit.