Rockonomics

by Alan B Krueger

  More Praise for

  Rockonomics

  “If you like music (we learn here it would take six lifetimes just to listen to every song once) and going backstage to see how things work (touring, streaming, scalping) and the stories behind the stories (how Reginald Dwight met Bernie Taupin and became Elton John), then rock on! Or, in this case, RockOnOmics!”

  —Andrew Tobias, author of The Only Investment Guide You’ll Ever Need

  “Rockonomics is entertaining, educational, and enlightening. Alan Krueger gives us a backstage tour of the music industry—and in doing so, he creates a brilliant metaphor for our entire economy. Highly recommended.”

  —Harlan Coben, #1 New York Times bestselling author of Don’t Let Go

  “Read this book—whether you are a rock fan or, like me, think the Beatles and Stones were the last good groups. Read it because Alan Krueger makes the subject fun and demonstrates how the workings of this 0.1 percent of the US economy beautifully illustrate upcoming changes in the US and global economies.”

  —Daniel S. Hamermesh, Distinguished Scholar at Barnard College and author of Spending Time and Beauty Pays

  “I actually majored in economics in college. A few years later, I bumped into a former classmate who asked me what I was doing. I told him I was handling rock radio promotion for Mercury Records. He said, ‘What a waste of your education.’ I hope he reads Rockonomics so he’ll find out I didn’t end up as a total loser.”

  —Cliff Burnstein, cofounder of Q Prime with Peter Mensch, management firm for Metallica and the Red Hot Chili Peppers

  Copyright © 2019 by Alan B. Krueger

  All rights reserved.

  Published in the United States by Currency, an imprint of the Crown Publishing Group, a division of Penguin Random House LLC, New York.

  currencybooks.com

  CURRENCY and its colophon are trademarks of Penguin Random House LLC.

  Library of Congress Cataloging-in-Publication Data

  Names: Krueger, Alan B. author.

  Title: Rockonomics : a backstage tour of what the music industry can teach us about economics and life / Alan B. Krueger.

  Description: First edition. | New York : Currency, [2019] | Includes bibliographical references and index.

  Identifiers: LCCN 2018051993 | ISBN 9781524763718

  Subjects: LCSH: Music trade. | Music—Economic aspects.

  Classification: LCC ML3790 .K77 2019 | DDC 338.4/7780973—dc23

  LC record available at https://lccn.loc.gov/​2018051993

  ISBN 9781524763718

  Ebook ISBN 9781524763725

  Cover design by Lucas Heinrich

  Cover image: (guitar) i3alda/iStock/Getty Images

  v5.4

  ep

  FOR LISA, JUST THE WAY YOU ARE

  CONTENTS

  Chapter 1: Prelude

  Chapter 2: Follow the Money: The Music Economy

  Chapter 3: The Supply of Musicians

  Chapter 4: The Economics of Superstars

  Chapter 5: The Power of Luck

  Chapter 6: The Show Must Go on: The Economics of Live Music

  Photo Insert

  Chapter 7: Scams, Swindles, and the Music Business

  Chapter 8: Streaming Is Changing Everything

  Chapter 9: Blurred Lines: Intellectual Property in a Digital World

  Chapter 10: The Global Market for Music

  Chapter 11: Music and Well-Being

  Appendix: Evaluation of the Pollstar Boxoffice Database

  Acknowledgments

  Notes

  CHAPTER 1

  Prelude

  Somebody said to me, “But the Beatles were anti-materialistic.” That’s a huge myth. John and I literally used to sit down and say, “Now, let’s write a swimming pool.”

  —Paul McCartney

  “What walk-on music would you like?” It was a question I had never been asked before or since. I was about to give a speech at the Rock and Roll Hall of Fame, and my hosts wanted to know which songs to play before I took the stage.

  No, I wasn’t about to be inducted into the Hall of Fame. I’m not a musician and I can’t even carry a tune. I’m an economics professor at Princeton. I was then the chairman of the President’s Council of Economic Advisers. I had been invited to speak because I had the idea of using the music industry as a metaphor to draw parallels with the U.S. economy—in particular, the financial struggles of middle-class families and the growing gap between the wealthy and everyone else. The key theme was that the U.S. job market had become a superstar, winner-take-all affair, much like the music industry, where a small number of top performers did fabulously well, while almost everyone else struggled to make ends meet.

  The speech used the term rockonomics—meaning the economic study of the music business—to explain why this was happening, what it means for everyday Americans, and what should be done to bring about a fairer economy that works for everyone. I had a list of bold ideas to restore our national hopes and dreams. What better venue to give this speech than the Rock and Roll Hall of Fame in Cleveland?

  My boss at the time, President Obama, liked the idea. Even better, he liked the speech. I sent him a copy when he was flying on Air Force One, and he subsequently announced at a meeting that “everyone should read Alan’s speech.” Soon I was getting requests for a copy from the labor secretary and commerce secretary.

  This book expands on that original rockonomics metaphor to tell the story of how the whole U.S. economy has changed in recent years—and how each of us can prepare for the changes in store in the twenty-first century. In my career I’ve found, and psychological research supports, that we learn best not from abstract principles or equations but from stories. And music is all about telling stories.

  Economics is also about telling stories, although the field has acquired the unfortunate and misleading reputation as “the dismal science.” Economic models, statistics, and regression analyses are all tools used for the purpose of telling stories with rigor and precision. We economists just don’t tell the story very well or clearly. This is one of the reasons there was such strong rejection of expertise and basic economic concepts, including gains from trade and the value of impartial, objective economic statistics, during the 2016 U.S. presidential election. We need to find more convincing ways to share the lessons of economics. A broader audience might be willing—even eager—to listen if the story of the economic forces disrupting our world is told through the prism of the music industry. After all, music is one of the few endeavors that unites us, whatever our backgrounds or interests. Almost everyone has a connection to the music industry in one way or another. I call this a theory of “one degree of separation,” since we are intimately connected to music and the music industry in one way or another through friends, family, and associates.

  To investigate the economic forces shaping the music industry, I conducted dozens of interviews with musicians and music industry executives, from up-and-coming performers and struggling singers to legendary members of the Rock and Roll Hall of Fame, from executives at Spotify and Amazon to those at Universal Music Group, the largest music company in the world—as well as the owner of my local record shop. (Yes, the Princeton Record Exchange still exists and is thriving, despite a challenging environment for retail stores.)

  I’ve interviewed iconic figures who have helped shape the music industry, including Gloria Estefan, the most successful crossover artist of all time, and Quincy Jones, the famed music impresario and performer who produced records for virtually every star from Frank Sinatra to Donna Summer and Michael J
ackson. And I met often with Cliff Burnstein and Peter Mensch, the co-founders of Q Prime, which manages Metallica, Red Hot Chili Peppers, Cage the Elephant, Eric Church, and other successful bands. Marc Geiger, the swashbuckling head of music at William Morris Endeavor, shared his optimism for the future of the music biz with me, and top music industry lawyers Don Passman and John Eastman tutored me on music rights and record company contracts. To gain a bird’s-eye view of the work and effort involved in putting on a show, I tagged along with musicians and their crews to a number of gigs, and interviewed ushers, vendors, and executives at Live Nation and Ticketmaster.

  Answering questions about money and contractual arrangements is always difficult, especially for artists. A disagreement over money helped break up the Beatles.1 Money can be a treacherous topic. I am thus especially grateful that so many artists, executives, and industry participants were willing to share their experiences, financial data, and perspectives with me. In the pages that follow I have tried to faithfully reflect their stories to explain the economics of the music business. Most important, I try to convey their passion for creating and sharing music. Perhaps the most powerful lesson that I learned is that it is their love for creating music and entertaining audiences that drives most musicians, rather than expectations of earning a fortune (or even a living).

  As an empirical economist, I believe that theories, observations, and anecdotes must be evaluated in the cold light of objective, representative data. In researching this book, I analyzed data on hundreds of thousands of concerts collected by Pollstar magazine, which gave me unprecedented access to its Pollstar Boxoffice Database. I analyzed data on billions of music streams, millions of record sales and digital downloads, hundreds of thousands of concerts, and thousands of musicians. To fill the gaps, I conducted my own survey of 1,200 professional musicians.*1 By melding firsthand observations from those on the front lines of the music business with Big Data on the industry as a whole, I developed a richer, more reliable, and more representative picture of how economic forces shape the music industry.

  Fortunately, there is also a burgeoning research literature on the music industry by economists, sociologists, psychologists, and computer scientists. Other scholars, too, have found that the music industry provides fertile ground for research, and a scintillating way to inspire and engage students. To provide a forum for researchers to exchange ideas and to support research on the music business across disciplines, in 2016 I helped form a non-profit organization called the Music Industry Research Association (MIRA). This book draws on findings from the innovative social science and related research literature on the music industry.

  Although music listeners may not realize it, economics lies at the heart of the music that is created and produced. Economic forces profoundly affect the music that we listen to, the devices on which we hear it, the genres that are produced, and the amount we pay to attend a live performance, stream music, or buy a recording. When Dick Clark asked Sam Cooke on American Bandstand why he switched from gospel to pop music in the late 1950s, the singer smiled and replied earnestly, “My economic situation.” And Paul McCartney recently explained to Howard Stern that the Beatles were not trying to create a revolution. “We were just kids from a poor area in Liverpool who wanted to make some money.” Even if musicians do not personally feel that they are motivated by economic incentives, economic forces quietly orchestrate success and failure. In his book In Praise of Commercial Culture (Harvard University Press), Tyler Cowen has likewise argued that “economic effects have had stronger effects on culture than is commonly believed. The printing press paved the way for classical music, while electricity made rock and roll possible. For better or worse, artists are subject to economic constraints.”

  To truly understand and appreciate music, you need to understand economics. To take one example, you may have noticed that many more songs today involve collaborations between artists, often where a mega-star is featured with other artists trying to break in or cross over to reach a new audience. “Despacito,” the most-streamed song in 2017, is a good example: it is by Luis Fonsi and Daddy Yankee and features Justin Bieber. If you listen carefully to songs that feature other singers, you will notice that the star normally appears early in the song, within the first thirty seconds. This is logical because streaming services only pay royalties for music that is streamed for at least thirty seconds. In other words, economic incentives of streaming are directly affecting the way songs are written, composed, and performed.

  Careful economic study of the music industry can shed light on where music is headed, and why. Music and the music business will change over time, but a small number of timeless economic insights can be applied to understand the industry, as new genres and apps are created. More important, understanding the economics of the music industry can yield insights into how economic forces affect our daily lives, work, and society in a myriad of ways.

  Seven Keys to Rockonomics

  In many ways, the music industry is an ideal laboratory for witnessing economics. From the gramophone and phonograph to on-demand streaming, disruption caused by technological change typically occurs first in music. The music business serves as the canary in the coal mine for innovations. Creative destruction in music occurs in real time. Digitization has changed the way that music is produced, promoted, distributed, discovered, and consumed. Musicians, record labels, radio stations, device manufacturers, and fans all respond to the evolving economic incentives embedded in the music business. Businesses in many industries can learn essential lessons for survival and success from the music industry. Music fans, by reflecting on the economics of music, can learn how economic factors impact their own lives.

  In my behind-the-scenes tour of the music industry, seven key economic lessons constantly resonated, like notes in a scale. These seven lessons form the backbone of this book:

  Supply, demand, and all that jazz. The forces of supply and demand loom large in the music industry, as they do in the rest of the economy. The limited supply of tickets for a Rolling Stones concert, for example, combined with the tremendous demand by fans to see the Stones perform, drives their ticket prices to commanding heights. But other factors—what I refer to as “all that jazz”—matter deeply as well. For example, many musicians are fearful of being perceived as unfair to their fans. That can lead them to underprice their concert tickets relative to the price that supply and demand alone would dictate. This concern for fairness, which suppresses prices and creates a shortage, is the main reason there is a large and enduring secondary market for scalped tickets. You can’t understand markets or the economy without recognizing when and how the jazz of emotions, psychology, and social relations interfere with the invisible hands of supply and demand.

  Scale and non-substitutability: the two ingredients that create superstars. Music is the quintessential example of a superstar market, with a small number of players who attract most of the fanfare and earn most of the money. Economists have long understood what enables superstars to dominate certain markets. These markets have two critical characteristics. First, the top performers, professionals, or firms are able to reach a large audience or customer base; this is what we call scale. Second, the sound, service, or product sold in superstar markets must be unique, with distinct features. There is no substitute for it as far as consumers are concerned, and combining the second- and third-best performers in the market does not create a sound, service, or product that is as good as the best. The Internet, digitization, and social media are turning more and more markets into superstar markets, which in turn is causing the middle class to wither, with grave consequences for workers, consumers, politics, society, and the future.

  The power of luck. Talent and hard work are required ingredients for success, but they are not sufficient. Luck, the unpredictable, random spins of fortune that affect our lives in countless ways, is particularly important in the music industry, where tastes ar
e fickle, quality is subjective, and many talented would-be stars toil away but never get their shot. The right artist might arrive at the wrong time, or at the right time with the wrong song, or at the right time and with the right song but with the wrong manager or label. The impact of luck, for good or ill, is magnified in a superstar market.

  Bowie theory. The late David Bowie once remarked, “Music itself is going to become like running water or electricity….You’d better be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left.”2 His observation highlights the importance of having something unique to sell in addition to recorded music—what economists call complementarities. The list of complementarities in music is long: live performances, merchandise, books, music videos, Dylan and Metallica whiskey, Bon Jovi rosé, Questlove popcorn seasoning, Kiss Kaskets, and so on. Successful companies have figured out the importance of Bowie theory. For example, Apple makes money from selling iPhones, iPads, and computers, and runs Apple Music at a loss as a way to drive device sales.3

  Price discrimination is profitable. When a band or business has a unique product to sell, and if it can restrict the resale of that product, it can greatly increase its revenue and profit by charging a higher price to customers who are willing to pay more and a lower price to those who are willing to pay less. Economists use the term price discrimination to refer to any practice used to segment customers and charge a higher price to some than to others. Airlines figured this out long ago. Price discrimination is not immoral or illegal. It helps explain why Taylor Swift delays the release of her new records on streaming services until after she sells albums to her most devoted fans. Charging different prices for different seats at a concert is a way for musicians to price-discriminate and charge fans according to their willingness to pay. And bundling different products—such as twelve songs on an album, as opposed to selling them individually—can facilitate price discrimination.