Digital Diamonds: Where the Record Industry Went Wrong
[Editor’s Note: The following article is by a new EC contributor and provides insight on the state of affairs in the record industry. James will hopefully become a regular contributor and provide articles focused on the music industry and music technology. James studied business and operations management as an undergrad and love to talk about bottlenecks. Enjoy.]
Before the creation of the MP3, through the fall of Napster, to the recent Jaime Thomas’ trial the RIAA has relied heavily on copyright legislation to protect its precious business model. The survival and success of the record industry’s model is driven in large part by their ability to constrict supply by controlling the means (and technology) of distribution through copyright legislation. In simpler terms, the record industry only wants you to have music the way they want you to have music – whatever way makes them the most money. Now, for that simple fact you can’t blame them; I’m sure they’re not ideologically opposed to the idea of file sharing or burning CD’s, but protecting revenue is the RIAA’s reason for existence.
It’s just their job.
So, with the advent of file sharing led in large part by our good friend at Northeastern Shawn Fanning the record industry’s impenetrable business model was ripped to shreds. Because of the ability to rip/burn, upload/download and share music so efficiently the record industry’s stranglehold on the distribution of music was lost. The idea of directly paying for music has become so far fetched than when I pay 99 cents for a song on iTunes I feel a sense of moral superiority like I’m donating money to “Save the Whales”.
In simple economic terms, the pre-Napster era of the record industry’s marketplace functioned like any other marketplace with a physical product; there was demand, supply and a profit maximizing price somewhere in the range of $10 and $18 depending on how new the release was. As time passes and demand decreases you drop the price a few bucks to grab the more casual fans who think they’re getting a deal at $15 and subsequently in the bargain bin for $10.
The post-Napster era that we all know and love is far different. The price element is dropped to zero and the supply component is essentially infinite and is no longer in the control of the producers (Record labels), but the consumers due to a new technological breakthrough. Things change.
Now the record industry is scrambling to regain their grip on distribution through legislation, fear tactics and just a general disregard for the consumer. Maybe you believe that they have a right to fight and protect their precious copyrights. However, the free market has a “take no prisoners” tendency whether it is the consumer, laborers (outsourcing), competitors (Starbucks v. mom and pop shops), or the big bad record labels and just because the record industry is big, established and has a load of cash to throw at lawyers doesn’t mean we should change the rules of the game. In fact, their effort to legislate and reapply their stranglehold on the distribution of music would artificially constrict supply and allow them to charge higher prices for music.
The idea of artificially constricting supply to charge higher prices is by no means a new idea. It is actually a very well known concept that typically goes under such names as Collusion or Cartel; and for the record – it’s illegal in the US. However, there are some very famous examples of this behavior; while technically not collusion or a cartel my personal favorite is De Beers. A great deal of De Beers success comes from their ability to buy all the property in Africa with the valuable diamond mines and then constrict supply through their own Diamond Trading Company (DTC), which is a small fancy office in London. Through the DTC De Beers sells small amounts of diamonds to an exclusive list of people that then sell the uncut diamonds to jewelers. This little system they concocted is what allows them to perpetuate the idea of value and scarcity of diamonds, which I’m sorry to say ladies, just isn’t true. While “diamonds are forever” they certainly aren’t rare – thanks to breakthroughs in mining technology as well as GE’s ability to make them synthetically and indistinguishable from the real thing (also see this). This by the way is all made possible by De Beers being a privately owned company in the politically stable nation of South Africa (Note: South Africa is not in the United States).
Strangely, the story of the Diamond trade and the story of Music industry look very similar.
- Each has a powerful party that controls the way in which the product is disseminated and thus the ability to constrict the supply – DTC and RIAA.
- While at one time each product may have been actually worth what you paid for it, technological advances have made the true value of the products far less than previously perceived.
The only real differences in their stories are that De Beers is legally allowed to constrict their supply because of where they are incorporated and possibly more notably, the technological advance that made the product common was not owned and developed by the record industry, it was owned by the consumer. If people could copy and paste diamonds and share them with friends, De Beers would have very similar issues.The record industry’s fight is understandable, but could become quite controversial if any serious legislation ever passes.
I thought I should note other organizations that participate in collusion and cartels – OPEC. They constrict the oil supply and sell it at high prices to Americans, its run by terrorists. Ipso facto, RIAA are terrorists, or something like that.
- James
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