Benefits of piracy

I know it comes too late to add to parliament’s lengthy and rigorous discussion of the Digital Economy Bill, but this recent paper by Francisco Alcala provides a nice argument for the economic advantages of piracy.
These arise from two features of the conventional music market  - that it is expensive and time-consuming to spot the next superstar; and that superstars (or their record labels) spend a fortune on promoting their albums.
In a world without piracy, these features mean that record companies under-invest in promoting new artists  for fear of not getting their money back.  The result is an under-supply of new bands - or at least an under-marketing of them - and excessively high payments to known quantities who aren’t especially great, as Marko Tervio has shown.
Piracy, however, changes this, argues Mr Alacala. If record companies fear that people will copy, say, U2’s new album, they will invest less in promoting it as such expenditure won’t be so profitable. At the margin this means that some people who would have bought the U2 album instead buy an one by a smaller band. And this increases the chances of that smaller band getting sufficient attention and acclaim to become superstars themselves.
The effect of this is that piracy increases the diversity of music in the short run, and increases the supply of superstars in the longer run. In this sense, piracy is efficient, as it corrects a market imperfection.
What’s striking about this result is that it comes even though Mr Alcala has biased his argument against it in two ways.
First, he’s not using the point that piracy is a form of promotion for lesser-known artists. File-sharing allows people to more easily introduce obscure bands to their friends. 
Secondly, he’s assumed that best selling artists owe their success to being (marginally) more talented than others - that they are Rosen (pdf) superstars. In the real world, however, this is not the case; does anyone really think (say) Sting is more talented than Tom Russell? Instead, better-selling artists are in fact Adler superstars. They owe their success not to their talent but to their fame. Their sales could therefore fall quite sharply without the benefit of promotion spending and its correlates such as TV appearances. If so, then piracy - insofar as it does reduce such spending - does even more to increase market diversity.
This raises the possibility that opposition to file-sharing is strongest amongst those performers whose success depends upon their fame more than their ability.

Comments

[alastair harris]

OR, piracy reduces the effectiveness of the top stars ability to exploit their monopoly supply position.

The counter argument is about property rights

[Mike Woodhouse]

Sumner vs Russell. I would suggest that many people would genuinely assert that the former is at least as well-endowed with innate ability as the latter. Me included, if I'm honest, and I'm no great fan of either. Apart from musical ability, one clearly has a significant talent for self-promotion and the other does not (or does not care to use it, which would be a waste).

But that's beside the point. The paper may be sound or it may be bollocks and is most likely somewhere in between. The reality is that the world has changed forever and the DEB is but a finger in the dyke as the entities with too much investment to change cling on (as they obviously would) to their income for as long as they can.

Long-term, better-adapted mechanisms will appear to replace the moribund ones and the world will move on. Short-term, it's the usual mess. In the meantime, I'm off to buy some TV21 tickets.

[Prateekbuch]

Piracy may well benefit record sales - or at the very least does not appear to hinder all that much - according to the music industry lobby the BPI. Their own figures show that sales of singles (digital and hard-copy) were at record levels last year...

record companies that railed against the DEB strike me as being in denial over the massive potential that online file-sharing has in terms of artist discovery - the 'market' created by file-sharing does the sorting-of-wheat-from-chaff for them and throws up web-phenomena that they could capitalise on, if only their business models were flexible enough!

[John Terry's Mum]

"At the margin this means that some people who would have bought the U2 album instead buy an one by a smaller band"

Strange assumption here; that the punter would have bought the U2 album, but for lack of marketing had to buy a lesser known alternative.

I doubt most people buy an pre-alloted amount of msuic per day, weeke, month etc.

[Andrew Russell]

If record companies can't make money from existing global superstars because of piracy, how are they better off investing in making new global superstars from unknowns? The incentive to pirate is unchanged.

[chris]

@ Andrew - they don't have to spend more marketing unknowns. Merely spending less marketing (say) U2 reduces the barriers to entry faced by unknowns - and this barrier to entry helps give the likes of U2 a monopoly position, as Alastair says.
@ JT's mum - I don't think the assumption is that strange. Sure, U2 fans will buy their albums whatever. But there are people who might only do so after widespread marketing, to see what the fuss is about. Less marketing means less spending by these. And although these won't all automatically buy another album, some will.

[Kevin Carson]

I think the fact that the proprietary content companies have to compete with Free really does benefit lesser-known artists, in all fields.

It's probably true that blockbuster artists like Stephen King, Lady Gaga, or whoever, have somewhat lower profits than they otherwise would thanks to file-sharing. But for every conventional artist in the stable of a big publishing house or record company who faces that situation, there's probably ten or a hundred people like me (or some garage musician) who can market their work directly over the Net for a few thousand extra dollars a year. People like us would probably never have found a conventional publisher twenty years ago, and would have spent our entire lives mute except for writing letters to the editor.

It's a lot harder for the big guys to make a huge pile of money, but it's a lot easier for a whole lot of little guys like me to make a nice little pile of money.

And at mid-range, I suspect that the reduced revenues from selling "Freemium" (i.e. excludable secondary services piggybacked on free content) and marketing one's work directly online, are offset to a considerable extent by the benefits of network culture in freeing them from reliance on the record companies' studios and marketing machines.