Human decency as an economic motivator
If you’ve ever had Economics 101, and even if you haven’t, you’ve probably heard about this ‘puzzle’ of sorts:
You and a stranger are offered 10 dollars. In order to receive it, you must propose a way to divide up this 10 dollars between you and the stranger. If the stranger rejects your division proposal, neither of you gets anything, otherwise it is divided as you directed. You won’t meet this stranger again and this game is only played once. What division do you propose?
Economists use this to explain the concept of economic rationality. Rationally speaking, the economically correct division is 9.99 for you, and 0.01 for the stranger. The stranger, if economically rational, will accept, because 1 cent is more than 0 cents. And thus, as you are also economically rational, you want to maximize your gains, so that’s what you propose.
These same economists will call Radiohead’s offering of their new album, In Rainbows, for ‘free’ (pay whatever you think it’s worth, including nothing), a sucker’s proposal. Clearly everyone would pay nothing — you get the same album regardless of how much you pay. And yet Radiohead is reported to have made to the tune of 10 million USD inside of a month. This wasn’t even expected; Radiohead’s bold move to release the album in this way was designed primarily to sell out concerts (which it has, all 21 of them). One might claim listeners are paying to ensure Radiohead will continue to make music, but Radiohead is not the kind of group that is pressed for cash, and I think they’ll keep making music even if they had to pay to do so. Thus, a rational economic human being truly has absolutely no reason to pay for this album.
So, how’s it work then? Are there are 10 million USD’s worth of idiots on this planet?
No. Human decency is simply an effective motivator. These album sales aren’t the first time the economists were wrong about humanity’s willingness to pay money just to be fair, instead of to optimize personal gain.
Reports that record labels are reconsidering this model abound, but I don’t think the record industry can afford it: This distribution model doesn’t NEED a record label. You can just record your complete song someplace, and pay some serious hosting provider to take care of distribution, and that’s all you need to do. Costs of renting studio time and bandwidth bills don’t amount to enough to require the vast pockets of a record label. The record industry’s clout with the radio can still help launch a successful music career. However, I don’t know about you, but I never listen to radio anymore. I might have a look at the iTunes top 100 from time to time, and I check Last.fm for song suggestions.
And thus we’ve come full circle, because in a world where music is distributed on a ‘pay what you think is fair’ model, with distributed recommendation engines, is economically far more efficient. It cuts out large swathes of middle men. Giving radiohead 10 million dollars was a smart move after all!
Tristan Bethe http://imageafter.com
October 20th, 2007Nice article Reinier. I am wondering, would this still work when a) it’s not new anymore and lots of bands would embrace this model? b) Would this model work better or worse for small band/artist as opposed to known bands like Radiohead?
It’s a smart move nonetheless. Paying what you think its worth is also a way for hardcore fans to express their devotion. I bet they will pay much more than a visitor who is exposed to the music for the first time.
Also the difference with the ‘old’ model is that people new to the artist/band are far more likely to try their album and perhaps become fans as well.
And you are right I also almost never listen to radio anymore. Even in the car i listen to my ipod. For me radio is far to repetitive music wise and just to much dj bullshit in between. New music I exclusively discovery via web services now i think about it: pandora, last.fm etc
I do like the unexpected part of radio and for that i use the musicip program: http://www.musicip.com/
It scans you own music collection. You select a song and it smartly creates a playlist with matching songs based on their ‘music DNA’
But it will probably take a while before most people are comfortable with all or just not care enough to take the extra effort so the record labels are probably here to stay for a little while longer.
Reinier http://zwitserloot.com
October 20th, 2007That’s the million dollar question isn’t it? Will people continue to donate if the novelty wears off?
I and my company (http://tipit.to/ ) are assuming people will. But, honestly, I doubt there’s a way to be sure without trying it.
One major motivator for smaller bands is that, unlike for Radiohead, the money donated will likely result in more and/or better quality music.
I didn’t know about musicIP yet. I’ll definitely check it out. Thanks!
Cristiano Betta http://cristianobetta.com/
October 20th, 2007One of the things the old media is constantly complaining about in the RadioHead story is that their album is also being pirated, and they see this as a “hahaha, your scheme didn’t work”-thing.
Now let me tell you:
a) RadioHead offered the album for pay what you want, so if you decide to pay nothing, it is economically more interesting for them when you don’t use their bandwidth. Distribution models like bit-torrent are far more efficient for them, hell, I don’t even get why they didn’t distribute via torrent anyway as an options/
b) The MAIN reason why people went for a pirated version of the album was because the legal offer was only encoded at 160kbps, and I know a LOT of people for who that isn’t enough. The pirated version was available at 256kpbs and even higher.
Tristan Bethe http://imageafter.com
October 21st, 2007Seth Godin also has some good points on his blog today about radioheads move:
http://sethgodin.typepad.com/seths_blog/2007/10/the-truth-about.html