THE LEFSETZ LETTER: Freakonomics

So I'm sitting in the urologist's office reading "Freakonomics" about conventional wisdom.

First the authors start off with the concept of asking questions. It is said those questions that have not been asked are not going to yield interesting answers. That all the GOOD questions have been pondered again and again. The goal is to ask a question that people REALLY care about and come up with answers they don't expect, if, that is, you can battle the conventional wisdom.

Turns out the term "conventional wisdom" was coined by John Kenneth Galbraith. He said "We associate truth with convenience, with what most closely accords with self-interest and personal well-being or promises best to avoid awkward effort or unwelcome dislocation of life." And where does the conventional wisdom come from?? Self-declared experts. Who are interested in burnishing their reputations. And journalists feed on the words of these experts, needing to fill pages.


But it turns out conventional wisdom is often wrong. Hell, that's almost the ENTIRE point of "Freakonomics". Conventional wisdom said that crime dissipated in New York because of Giuliani, who got rid of the squeegee men, who cleaned up the subways, who took the streets back from the criminals. Oh, a million reasons have been posited about the crime decline. But Steven Levitt has the answer. Proven with statistics, not pulled out of his ass. It's abortion. Legalized abortion. It's the unwanted children of single parents who commit crime. Not quite twenty years after abortion was legalized in New York, crime dropped precipitously. And this correlation can be proven because other states legalized abortion LATER than New York, and their crime rates dropped too, but only after the difference in time between the passage of abortion laws had run.

This got me to thinking. What exactly is going on in the music business. Is the media, touting the words of so-called experts, putting forth conventional wisdom that is just plain WRONG???

Essentially everything being sold in record stores today is available for free to those with computers. Well, maybe you really need a high speed connection to take advantage of free wares, but still, in excess of fifty percent of the public has ready access to these fat pipes. Shouldn't the sale of CDs be off FIFTY PERCENT?? Think about it. No matter how low you drop the price of CDs, no matter HOW many extras you offer, can you really compete with FREE? Think about it this way. If a supermarket that charged was side by side with a store that gave it away for free, would the pay supermarket stay in business?

Now business in the pay market wouldn't go down to zero. Because one can envision long lines to get free food. There are always SOME people willing to pay for convenience. So, is this what is going on in the record business, are a certain number of people paying for CONVENIENCE?? The lack of viruses, artwork, improved sound quality? We can debate this, but the more interesting question is the one stated above, HOW COME CD BUSINESS HASN'T TANKED COMPLETELY??

It hardly matters why people ARE buying CDs. It certainly isn't about the extras, most CDs come sans extras. If business is off less than twenty percent in the last five years, could it be that downloading has NO IMPACT ON CD SALES???

Really, think about it. For every person trotted out in the media who says he'll never buy a CD again, there are people trekking to the store, to BUY discs. Could it be that these people downloading were NEVER really buying CDs? And that really, it's not an issue of a declining market, of eating away at CD sales, rather this is an EXTRA MARKET THAT SHOULD BE TAPPED?

Does suing people for trading files P2P really benefit the labels? After a brief bump, CD sales are off a few percentage points again. There seems to be no cause and effect. If suits really worked, wouldn't CD sales GO UP?? Never mind that trading, contrary to what so-called experts have been saying is actually WAY UP, isn't the major labels' focus on the problem JUST PLAIN WRONG??? Shouldn't they be worried about MONETIZING trading instead of eliminating it??

Oh, don't tell me about Snocap, don't tell me about expiring trades, don't tell me about trades at ninety nine cents a track, that's not what P2P IS!! P2P is a giant smorgasbord, where you can check out new stuff, even acquire stuff YOU'RE NEVER GOING TO LISTEN TO! It doesn't resemble the conventional CD model WHATSOEVER! As a matter of fact, people DELETE a lot of what they acquire through trading. Most people don't throw out CDs they paid fifteen plus bucks for.

Well, you can say that Yahoo Music Unlimited and Napster and Rhapsody are equivalent to trading. But you'd be wrong. Because it misses a key element of human reality, of the nature of P2P, people want to OWN! Think about it, if Yahoo Music Unlimited was SUCH a good deal, and it certainly is CHEAP, wouldn't MILLIONS of people have already signed up for it?? All the music you can eat for fewer than ten dollars a month? SOME people want this. They want the convenience, they want the security, but it turns out most people don't. And, it's not only about the price, P2P delivers music that is NOT AVAILABLE on the so-called legitimate subscription sites. There's no plethora of live tracks, no out of print items, no rarities, and these DRIVE P2P. At least keep people addicted.

But what about the iTunes Music Store??

Well, look at EMI's just-released financials. With all those iPods in circulation, if the iTMS was so good, wouldn't it represent TWENTY percent of EMI's revenues instead of the low single digits??

The key is not to focus on enhancing the disc product. This has no impact on the people who ARE buying discs. They've already made the decision to buy CDs. The bonuses are like…McDonald's Value Meals. More for your money. But, for those who don't like Quarter Pounders, who don't like McNuggets, who don't like Big Macs, IT MAKES ABSOLUTELY NO DIFFERENCE! Furthermore, if these extras were so enticing, wouldn't business be going UP??

At some point in the future, disc business will decline because of computer music. Almost everybody will have an iPod, almost everybody will have a high speed connection, discs will seem antiquated, like vinyl. Oops! The labels, RETAILERS killed vinyl to drive everybody to the more profitable CD. Make no mistake, if the INDUSTRY didn't kill vinyl, CD acceptance would have been MUCH slower. No, that might not be true. But, what WOULD be true is that vinyl would have sold in quantity for MUCH LONGER! Not everybody had a CD player at first. Some were driven to purchase them because of the extinction of the vinyl configuration, but would they have done this if vinyl were still available?? And, even today, vinyl is STILL being sold. Which makes one wonder if as long as companies still produce discs, there will be SOME market for them. Then again, once labels move on to selling files, which require no shipping, no inventorying, fewer COSTS, won't business principles tell them to stop manufacturing discs, moving the rest of the market to FILES, just like they moved to CDs??

The file-trader is a different customer. Acquiring and using music in a different way. The key is to monetize his behavior, not try to change it. The file-trader obviously doesn't want CDs, and doesn't want to rent music and doesn't want to buy AACs from the iTunes Music Store. As stated above, he wants to graze and take a cornucopia of stuff, utilizing it completely differently than conventional CD buyers. Hell, look at their libraries. Kids have THOUSAND of MP3s. Divide by ten, for there are usually ten tracks on an album, does a vast quantity of kids have HUNDREDS of CDs?? I mean hard core music buyers do, but the magic of P2P is it makes a VAST SWATH of the public music junkies. Isn't this a GOOD THING? Expanding the MARKET?

The conventional wisdom is wrong. If P2P is affecting CD sales, it's relatively marginal. Lawsuits are not driving people into the stores to buy CDs, nor are they driving people to so-called legitimate online music sites. Rather, P2P is a whole new marketplace, which, if shut down, will stunt the overall music business for no good reason other than to fit the paradigm employed by ancient record men afraid of change.

It's not about the Supreme Court. And it's not even about illegality. It's about economics. Wake up and smell the coffee.

Contact Bob Lefsetz | View Lefsetz Letter Archives

NOTE: The views expressed in this editorial do not necessarily reflect the opinion of CelebrityAccess, Encore or its employees.

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