Be Careful With Economics

Posted by Faza on June 11, 2009 under Commentary, Economics, Music business |

It sometimes seems to me that the argument about copyrights and downloads is being mostly conducted between musicians and technologists. No prizes for guessing who’s on which side. Occasionally, the economics of the matter are brought into consideration and since the subject isn’t the forte of either party, it tends to be wielded like a blunt implement rather than a precise instrument.

The case I’d like to examine isn’t quite as bad as that, but it does show several flaws of reasoning, that I’ll try to point out.

Let’s look at a post from the Guardian’s technology blog: Are downloads really killing the music industry? Or is it something else? Have a read of it. I don’t know about you, but I’ve seen this before: the argument that the reason for the decline of music sales isn’t illegal downloads, but the shift in consumer spending to other things, in this case games and DVD’s. It is an economic argument, so let’s consider its merits in this light.

The key concept here is the amount of discretionary spending available to the consumers. Obviously, you only have so much money in your wallet, so you have to make some choices about what you’ll be spending it on. Let’s take a cue from the article and focus only on entertainment spending and limit ourselves to considering only three possible choices: games, music and DVDs (sale and rental). The article shows that since 1999 the spending on music has decreased (as we know), the DVD market grew steadily and games just went through the roof.

What the article’s author, Charles Arthur, would have us make of this is that consumer spending has switched from music to games, because the games offer more value for money. He also takes this as demonstrating the fallacy of the music industry’s lost sale argument. I’ll comment on that towards the end, but first let’s look at the spending switch.

The easy target is the volume of spending. It’s no news that the price of music has gone down drastically in recent years. Digital downloads are a lot cheaper than CDs used to be. Music obtained through subscription services is even cheaper. Even with an equivalent quantity of music sold, digital downloads will result in less spending than CDs. The format shift itself will take out a large chunk of music spending, assuming that people only have a limited amount of time to listen to music. By comparison, games and DVDs remain costly and have no cheaper legal alternative.

The hard target is the reason for the spending shift. What the numbers provided by Mr. Arthur don’t tell us is how much time is spent enjoying these various forms of entertainment and through that, what is their perceived relative value. If we could demonstrate that there is in fact a tendency to listen to less music and devote the time to playing games, say, then the argument has merit. However, there is a plausible explanation for the data provided within the context of entertainment habits remaining pretty much the same.

You guessed it: illegal downloading. The consumer tries to obtain the most value possible within the limits of his spending power. If everything he wants has a price tag, then his spending will reflect his preferences fairly accurately. If, however, certain things can be obtained for free, then we will see an increase of spending in a different area at the cost of this sector, just as in the example we are examining. In short, consumers save their entertainment dollars by downloading music for free illegaly and then spend it in other areas where the free alternative isn’t easily accessible.

Let me make it perfectly clear that I do not subscribe to the notion that every illegal download is a lost sale. I do understand why the music industry presents it that way, though: it’s a way to steer clear of testing fine points, such as “what percentage does constitute lost sales”, to which there is no testable answer. I also believe that a fair number of illegal downloads are lost sales, with the additional harm of clouding the market, which gives rise to analyses like that of Mr. Arthur.

In conclusion, if by some miracle illegal downloading were to stop overnight, all those downloaders wouldn’t suddenly start buying music in the same quantities as they had been downloading - this would probably be impossible for most of them. However, we would probably see music sales rise with a corresponding decrease of spending in other entertainment sectors. At worst, we’d at least have a healthy evaluation of the market for music instead of economic conjurations of the kind I’ve discussed.

Be careful with economics.