econlife - A Closer Look at the Digitization in Our Lives by Elaine Schwartz

Recorded music used to start with a label and an artist. The production process was expensive because of the skilled technicians and the sophisticated equipment. Add to that a music video, the physical album, the distribution process, and what do you get? For a new artist, the tab is $1 million and the success, unlikely.

But then came digitization…and The Piano Guys:

 For this one video, so far, there have been 62.5 million views.

And a considerable shift in market behavior.

The Digital Impact

Looking at music, movies and books, we can see a seismic shift because of digitization.

McKinsey concluded that the media were the digitization leaders:

Summarizing a huge body of digitization research, we can say that supply side costs are down–with marginal costs as low as zero. And on the consumer side, we have an increase in welfare as choice and potential quality skyrocket.

Some of the changes relate to sinking production costs. As a musician, an artist or a writer, you once needed an agent just to sign a contract. No more. Now, do-it-yourself lets you bypass the gatekeepers.

We have also seen the distribution revolution as online media supply what we used to buy exclusively from record and book stores, and movie theaters. In 2012, there were 550 films released through movie theaters. By the next year, Netflix alone had 1058.

For the media, you can see the whopping increase:

Our Bottom Line: Market Structures

Let’s just conclude with a look at our market structure continuum. On the left, we have smaller less powerful firms that can easily enter and exit markets. Meanwhile, moving rightward, pricing power and firm size increase.

Digitization is upsetting our traditional market structure order. In some markets we have more competitors. Because of easy entry and exit, digitization is adding more of the characteristics of monopolistic competition. Also though, thinking of Amazon, some firms have much more pricing power, taking us to the right side of the scale.

Maybe though we should remove our economic lenses and simply enjoy the Piano Guys.

My sources and more: Always selecting interesting topics, economist Joel Waldfogel now has a paper on digitization in the Journal of Economic Perspectives. Also, I discovered  this NBER paper that complemented his analysis. Finally, you might enjoy looking at McKinsey (as did I) here and here, with its real life examples.

Ideal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Why Albums Are Longer by Elaine Schwartz

We are streaming more of our music with the newest albums having as many as 45 tracks.

Where are we going? To some marginal thinking.

But first, a bit of history…

Music Industry Revenue

Does anyone remember LP records?

In 1980, the music industry was dominated by LP/EP. With LP standing for long play and EP, extended play vinyl records, both represented almost 60% of the revenue generated by different musical formats. Next, we had cassettes at 19.1%.

By 1992 CDs had ascended to that 60% position and by 2002, were at a whopping 95.5% of all revenue. Fast forward to 2012 though and all began to change. You can see that CDs had moved way down as downloaded singles and albums became more popular:

But this graph says it all:

New Incentives

With streaming becoming increasingly dominant, the incentives in the industry have changed. Musicians have always coveted a higher ranking from Billboard. But now that they count streaming, Billboard has made downloads ever more crucial.

This how The Washington Post explains their criteria:  

You can see that it’s the length that lets you “climb the charts” because longer albums maximize the chance for more downloads.

Examples? Here I again quote The Washington Post since I know little about the 22 tracks in Drake’s “More Life” and the 20 in Ty Dolla $ign’s “Beach House 3.″ The “record” right now though goes to Chris Brown’s “Heartbreak on a Full Moon” with its 45 tracks.

Our Bottom Line: Thinking at the Margin

Thinking about extras, we should thank British economist Alfred Marshall (1842-1924) for his insight. Marshall was the first scholar to suggest we keep an eye on the margin if we truly want to understand supply and demand. Because the margin is where we decide if we want something extra, the cost of that extra item shapes our behavior. At the margin, sellers decide whether to produce something extra and consumers calculate the quantities they are willing and able to buy at different prices. Their decisions depend on the extra item’s marginal utility–its value at the margin.

So, those extra tracks are no longer an artistic decision. As revenue generators, they have considerable marginal utility.

My sources and more: Making yesterday’s walk a pleasure, Tim Harford’s More or Less podcast alerted me to the longer album phenomenon. From there, I discovered more facts in The Guardian and Forbes. But The Washington Post had the best article.

Ideal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.