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Thursday
Nov042010

Why is Music Cheaper Now? It's as Simple as Supply and Demand

About a month ago a blog post titled “Why Your Art is Cheaper Than a Latte” appeared on the Digital Music News blog.  In it, the post focused on the singer/songwriter Sufjan Stevens, and the reaction he and his label had to the declining price of music (CD or digital).  I’ll talk about Mr Stevens’ reaction later on here, but first discus why music has gotten cheaper these days.

Remember that economics 101 class you took back in college and the whole supply and demand graph?  I know, it was boring, but it can explain this reality.  If you never took economics, I’ll explain what I mean (I used to teach the class).  To refresh any memory, I put what the supply and demand graph looks like below.

Here’s your economics 101 review.  I’ll make this as simple as possible.  The supply and demand graph represents what’s going on in any type of market–we’re talking about the market for recorded music.  The demand curve represents music lovers, the ones buying music.  And the supply curve represents the companies and artists putting music out there.  And then you have quantity on the bottom and price on the left.

As the theory goes, a price for a product is determined by how much in quantity is being demanded and supplied over time.  So for example, when there’s a lot of demand for something, people will pay more to get it (think about the housing market a few years ago) especially if there’s not a lot of it around.  And the opposite is true from people supplying a product, the more of something you make, the less demand there is for it and people don’t want to pay a lot for it since they can probably find it cheaper elsewhere or wait out the market until the supplier has no choice but to drop its price to get rid of it.

How has the consumption of music been effected by this?  Well, let’s go back 20 years or so to when everybody was buying CDs and the Internet was fairly new.  Where could you buy your music in 1990?  Not on the Internet.  Most often your local music store or a chain retailer, sold music.  Your choices where to go were limited.   And depending on what music you liked, the store may or may not have had what you wanted to hear.  And so people were willing to pay more for music, and we did–paying up to $18 for an album.  I also think when the CD came out, there was a bit of a fad to it because it was the highest music quality one could hear, and so people bought into paying more for that benefit of the music.

Fast forward now to the last 10 years.  The mp3 file was introduced, people could share music more easily with each other, smaller portable devices were able to store more music than ever before, and the Internet became a key hub for anyone wanting music or trying to distribute recorded music.  Let’s quickly talk about each of these events and the impact on supply and demand:

  • File sharing:  Whether you admit doing it or not, millions of people have used and continue to use file sharing to download there music.  When I was in college it started with a little piece of software called Napster.  We all know what’s happened since then, Napster was shut down as a file sharing space, more of them showed up anyway, so the RIAA has gone after people for copyright infringement.  But the logic from the music lover was: why pay the $18 for Hanson’s album when you could get it for free through some other means? This proved one thing and one thing only, people wanted to consume a lot of music.  Lots of demand.
  • Technology: From the consumer standpoint, if you didn’t have a computer, you couldn’t download music.  And if you didn’t have access to the Internet, you couldn’t find it easily.  More and more people have a personal computer and Internet access than they did in 1990 as they’ve become more affordable.  Computers have replaced our CD storage units and the Internet is quickly replacing the local music store.  From the standpoint of anyone making music–be it a studio or just someone at home–you could record top of the line recordings more cheaply and more quickly.  Software like Apple’s Logic or Garage Band and plug-ins that emulate guitar sounds were at your fingertips.  More people started creating music and putting it out there.  This lead to more competition and a greater supply of music, so if you were selling your music, independently or not, you were more likely to sell it cheaper so it could get into people’s hands.
  • RIAA Price Gouging: There is now ample evidence that that Hanson CD you bought for $18 was not actually worth that.  The RIAA, who represents the now four major labels, was accused of price gouging/fixing consumers and had to settle in court.  Which means that where that supply and demand curve intersect was actually smoke in mirrors.  In other words, if the market determined the real price, you would have paid less than $18 during the CD-era.  Due to that, there has been some backlash and likely a correction in the market to where prices should be over the last 10 years.
  • Greater Access and more choices: iTunes came on the scene in 2003 and remains the largest catalog of songs to purchase for download.  Amazon now has a store and there are hundreds of other stores for any level of artist.  Musicians can sell their music off their website or use a widget to promote themselves that did not exist before.  All of these methods of putting music out there has saturated the entire recorded music market as a whole, leading to (again) a greater supply of music.  Which leads me to my last point.
  • No more mass music market, Increase in niche markets: The way just about everything was sold, through the mass market, is dying.  The mass market pretty much said, everyone needs to have product XYZ.  In the mass marketing days of music, you had less choice so people more or less listened to a lot of the same types of things within the genres of music they enjoyed.  Today there are niche markets for music and it’s not pumped out in a factory mindset for the masses to consume.  This phenomena has made it difficult to know what the price of a song is actually worth.  There may be 10,000 indie rock albums released in 2010 and 5,000 jazz albums.  Two different levels of supply.  But if you listen to indie rock, you may be willing to pay $1.50 per song because that’s how indie music lovers value music in that particular market.  In jazz, you may be willing to pay $0.75 per song.  The question has now become, is there still a standard price a song or album is worth?  Standards is the old mass marketing thinking and it’s starting to not apply anymore.

To close this out, I’d like to go back to the Sufjan Stevens reaction that got this all started.  He and his label’s comments pretty much say, it’s not fair that Amazon can offer his album for $3.99.  Although they make a point that it will help attract new fans, they all but say to boycott Amazon.  And he comes off as somewhat complaining that the album cost a good deal to make, so don’t short change him.  What Sufjan Stevens fails to recognize is that this is the market talking.  Sufjan Stevens does not entirely control even his own music market.  It’s a two way street, supply (Sufjan Stevens) and demand (his fans and potential fans).

Considering all the new factors I hashed out, it’s not a surprise music is as cheap as a latte.  And don’t think for a moment it’s going to go back to when albums were $18.

Reader Comments (11)

I confess, I disagree. The case you make is for increased supply and demand, so why the change in overall revenue? Answer: free music is everywhere and music is easier to copy than ever before.

With regard to supply, one thing you've overlooked that could bolster your case is cost of production. Making pro sounding music used to be all but impossible for cash-strapped independents. Now, of course, anyone with Garageband can make a decent sounding track. Even at the pro level, costs are way down. Food for thought...

November 4 | Unregistered CommenterJeff Shattuck

The market (or good and services) are completely uncontrolled and unregulated (ie people illegally uploading/ downloading music as they see fit with little obstruction) plus the moral code which previously existed in this market (as in most markets) has also broken down somewhat (it being socially acceptable to behave illegally) - that's why there's market failure. And tbh under these conditions, it's no surprise.

November 4 | Unregistered CommenterMickey Tee

I agree with Jeff to a point, one factor that clouds applying economic theory to music, is it's definition. Is it a good, service, common ... I think it is fair to analyze the 'recording' irrespective of the content simply as a good. What is the value of recored music, marginally zero. what is the cultural value of music? I suspect marginally greater that zero.

Enter (or better, exit) the notion of scarcity. As Jeff mentions the high production value of music has been replace with access to free or cheap software. As, a result you end up with more options driving price down further. As bleak as that maybe, it is important to remember what is being priced, it's the value of the recording not the intrinsic value of a given song.

At this point in the evolution of the 'product' my impression is that consumers are split (3) ways:

1) Feel that more music = better music.
2) Feel the quality, 'intrinsic' value does not fit the price = pirates.
3) The notion of the product is so blurred they are looking for alternative entertainment formats (better value) = eg. games

Where does this leave the artist? At a fork in the road, one path leads down the road of a new format that replaces the recording, the other road leads back to where they started in the 1920 (emerging radio) - more-less a labor of love or starving.

November 4 | Unregistered Commenterbelli

There are several problems with this analysis. Widespread availability of free, pirated music has distorted the supply and demand curves. It is difficult, if not impossible, to determine what the cost of music would be in the absence of illegal downloads.

Another problem is that music is not a commodity. It is a differentiated product. I would pay a lot more for a Bonnie Raitt cd than I would for a Gnarls Barkley cd because I like Bonnie, and I don't like Gnarls. Given this reality, it is harder to talk about the macro market accurately.

One final problem that is overlooked is not just the explosion of available music, but what that explosion means for the average consumer and artist. With so much music flooding the market, it is hard for an artist to stand out from thousands of others releasing music, and it is hard for consumers find the proverbial wheat amongst the chaff. I review CDs for musesmuse.com, and I listen to a lot of CDs. There is a lot of good music out there. There is not a lot of great music. Finding the great music is a challenge.

November 4 | Unregistered CommenterJJ Biener

I think the same thing applies to the live scene.

There is so many bands out there wanting to play live and not enough punters to support them. If someone can figure out how to make going to see live local bands cool again to boost demand then we'll all be ok as there will be more gigs and we can sell cd's and merch at shows.

When I was in high school in the nineties the biggest acts in the world were all bands now they seem to be acts playing quantized music.

Perhaps we should rally governments to ban quanization in music and therefore increase the demand for organic music and therefore work for musicians. haha.

November 4 | Unregistered CommenterNate

The real answer has to do with supply and demand curves as the author suggests. What he is missing is that the supply curve is no longer upward sloping in many digital/internet businesses - it's downward sloping. When the cost of producing and distributing a marginal product are negligible as in many internet businesses, the supply curve slopes downward. In other words, adding supply does not require bringing on the next most expensive steel smelting plant, it can be done for less cost than the previous unit.

The result is an equilibrium point that is much further out on the quantity scale and much lower on the price scale. There is tremendous pressure to drive the price to free when the marginal cost of adding a customer is ~zero. This is why you see so many asymetric business models cropping up on the web - you can get volume by giving away your product to a lot of one customer and then you have to find a way to monetize all that traffic with a different set of customers (see Google, Twitter, Facebook).

Crazy concept for those of us with just enough economics learning to be dangerous - downward sloping supply curves...

November 5 | Unregistered CommenterJosh

Thanks for all the comments so far! Greatly appreciated--I'm the author of this piece. I want to reply to each comment below:

1. @Jeff: supply and demand determines the price of music and I'm just talking about the price of an mp3, CD, whatever format consumers buy it in in this post. You get revenue by multiplying price times the quantity sold for the overall music market, so you are correct that revenue is up (especially digital sales) of late, which means people are generally buying music in greater quantities although it's a bit cheaper per unit (ie: an album on iTunes going for $10 vs a CD costing $15).

In terms of production/recording, that certainly goes into the pricing of mp3s and CDs. The price of recording is a separate market (and separate supply and demand curves). I agree with you that now that the prices in the market for recording are down that in turn lowers the price of the final product.

2. @Mickey & @JJ Yes, it's certainly a valid argument that illegal/free/file sharing--all that stuff--has distorted the market and therefore the price. Why pay for something when you can get it for free somewhere else? Pretty logical human behavior I'd say. As for it being regulated or not, the RIAA has sued many people and won, but they are doing this in a losing effort since it has not stopped people from downloading music for free.

3. @belli yes scarcity does not apply anymore to this market. And I agree with what you're saying (I think) about the price of the music vs its intrinsic value. Songs/albums are based on emotions. No one can really say the price of a sad song is $1, a happy song is $2, and so on. I mean that's just silly, but it ends up having a price anyway because that's how the market has ended up working. It's easier to just have one price. As for your point that "more music = better music"--I think it's that more music gives people access to a broader range of songs with different emotions attached to it than they had before. I could be wrong though.

4. @JJ On the Bonnie Riatt vs Gnarles Barkley argument---that's exactly what I mean on my point in the article about "niche markets" coming into play now. Currently a Bonnie Riatt song costs as much as a Gnarles Barkley song. The mass market says, there is one price, a song is a song, no matter who plays it. But I agree with you that I may want to pay more (higher price) for one artist versus another for my own reasons and different tastes in music. I think that's why the Radiohead experiment of paying what you wanted for an album was a brilliant test to see what a fan was able and willing to pay for that album.

And yes, I hear more and more that there's a lot of good music but not much great music out there. Bruce Sprinsteen has a great quote that albums he made like "Born To Run" were "built to last". Not sure much the case in this nano-second society and music industry.

5. @Nate I've read that prices for live shows are actually going up. Fans are willing to pay more for that experience. Here's a good overview article of that: http://bit.ly/bgbjDt As for quantized music, I don't know, it's here to stay I think. In my experience as a musician, people who just listen to music do not differentiate often enough between it being organic and being played by a machine. It's all music in the end.

November 5 | Unregistered CommenterBrian Franke

Illegal file sharing has distorted this, and it does need to be stopped (or greatly curtailed) in order to sustain a healthy market place. But the cost of music should still be going down. Digital delivery takes up no shelf space, and does not require any manufacturing costs. Digital music should be sold for less than physical music. If I could run the music industry I would look at digital delivery as an inexpensive entry way for consumers to experiement, try out new things and begin the process of becoming fans. Physical music is the next step in fandom and should include limited collectible packaing (to induce sales) during it's initial release, and then a more standard packaging for 2nd and 3rd pressings (and so on).

I review cd for Music Worth Buying.com And there is so much great music out there. The difficulty it getting it expossed to the pulic.

November 6 | Unregistered CommenterTJR

The market is always right. The market is the one who decides how much something is worth not the vendor or artist. This is true in terms the stock exchange, bonds, food and of music sales. I think its a little childish to be boycotting Amazon don't you? If it sells in high volume the price could then go up!

I would suggest that you're fans buying the cheaper alternative are not your hard core fans but those who enjoy the music and are willing to buy at a cheaper price. Therefore, you've sold a few more records than you might have otherwise to this group.

Conversely, your dedicated fans are willing to pay a higher price because they truly appreciate the music and the art. Not only will they pay the higher price but you'll probably find they're buying the various bundles you're selling at even higher prices.

The Supply/Demand equation definitely has an impact on today's market but so does connecting with those fans that really appreciate what you do.

November 8 | Unregistered CommenterGreg Brent

You have not addressed performance rights. Spotify pays .00065 cents per play. While radio, TV and film usage rates are reasonable, this is virtually giving the streaming companies music for free. Why did performing rights societies such as ASCAP, BMI, PRS agree to sell out its members and deprive them of their livelihood? Why do US and European governments allow this?

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