Letter From the Recording Industry: Please Send Money

Have you ever been startled awake at your desk only to find a puddle of drool and one arm stinging as though it were being assaulted by a swarm of angry ants? Found your head oddly bobbing as your eyes involuntarily squeeze shut during a long distance drive? Watched last weekend’s cliff dweller between Pittsburgh and Nebraska? If you answered any of those questions in the affirmative you have a little insight on what the Apple Expo in Paris was like. Mutters of “L’Ambien” and “Je suis somnolent” were undoubtedly heard throughout the exposition arena. Yet for a show that featured all the excitement of cafeteria prepared vanilla pudding there was a moment of interest when Steve Jobs called the recording industry ”greedy."

Noting that the recording industry is greedy is a bit like calling the sky blue or fire hot, it really isn’t much of a revelation. Still it carries extra weight when Steve Jobs makes the proclamation, after all that guy has some experience making outrageous profits on the backs of others. In any event Steve is miffed, predictably, that the record companies are growing tired of charging a mere $.99 per song at the iTunes store and want to charge a bit more…where “a bit more” is as much as they can get. Steve is certain this will drive up piracy (likely) but of more interest to Steve is that a price increase will negatively impact the iTunes store and future growth of downloaded music. The record companies, of course, just want some extra cash.

The simplest way to look at this impasse is from the perspective of what the record company gains versus the effort they put forth. CD sales have not declined because of the introduction of the iTunes music store (in 2004 they actually increased).  Remembering that Apple covers the costs associated with running the iTunes music store it is an easy, though perhaps erroneous, conclusion to say that all the record companies really need worry about is carpal tunnel syndrome from signing all the checks they weren’t getting before iTunes came along. For the recording industry iTunes is seemingly the equivalent of your boss walking into your cubicle and asking if you’d like to make a ton of extra dough by just doing what you already do.

Taking that perspective the music industry does seem greedy, addle-brained and shortsighted for even considering raising prices. Yet if we view the issue from the perspective of the recording industry denizens the picture changes quite a bit. The recording industry is charged with maximizing investor profits, that is their raison d’être. It may seem like an odd or amoral goal but it carries the force of law. An example is in order. According to Jared Diamond, Henry Ford was once sued (the case made it to the Supreme Court) when he raised wages to five dollars per day. Investors argued that it was not in the best interest of maximizing investment returns and actually won the suit. I suspect the story is a bit more complex than that but the message is clear: if you’re an executive you have to make sure you are doing everything legally within your power to keep the investors rolling in the green stuff.

So the real question is how to keep investment returns high. One way to keep profits high is by selling more music without regard to the medium used to transmit the songs. Unfortunately the recording industry seems to prefer force feeding us talentless, prepackaged hacks rather than offering compelling new artists. So option number one is straight out. The second option is to keep costs low. Not being privy to the exact terms of music contracts it is difficult to say if the music industry is doing all it can do in this regard. It must be noted, however, that the general consensus is that every musician, save for the very very popular, gets a screw job of royal proportions. The third option, and seemingly the darling of the industry, is to simply to raise prices.

Usually one would expect the law of supply and demand to straighten the whole mess out. Unfortunately the law of supply and demand works most efficiently when there is a finite supply, a condition not found in the music industry. What we have instead is virtually unlimited supply and a negligible marginal cost for each new copy of a song produced. That leaves the door open for completely arbitrary pricing and as long as you are basically making prices up the recording executives will desire to price the song as high as possible while still ensuring a reasonable number of sales. Or, put differently, the music biz doesn’t care if a million people buy a song for a buck and no one pirates the thing or one person buys a song for a million dollars and 999,999 people pirate it. What they would like is to find the point on the graph where the maximum amount of money flows into the corporate coffers.

This is where the music magnates and Steve Jobs disagree. Steve feels strongly that an easy to understand pricing scheme will ensure continued growth of the digital model of music distribution. Or maybe he is just on a budget. Either way the music execs don’t care. They are not interested in expanding the digital market, presenting talented new performers or redefining the industry to the benefit of all involved. They are only interested in that point on the graph that puts the maximal amount of dough in their pockets in the immediate future. It is as if the executives in charge were actually three year olds and someone held up a lone candy bar and a bulging bag of sugary snacks an offered a choice: the candy bar now or the entire bag in two weeks.  Anyone with children can tell you the answer the toddlers will give.* In the end Steve Jobs’ role as a Marshall rolling into town to quell the unruly mob is undeserved he is, after all, simply acting in Apple’s best interest. On the other hand Apple’s best interests happen to coincide with the interests of music consumers all over the world (well mostly, sorry Australia) so it should be hoped this would be one battle he wins.

*It should be noted that while the toddlers will choose immediate gratification they also are a whiney lot and will badger you into giving them the entire bag later the same day.