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Rockonomics

Page 2

by Alan B Krueger


  Costs can kill. Making money, even a lot of money, is not a guarantee of success. Successful bands and businesses have to monitor and minimize their costs to maximize their profits. They invest wisely but not excessively, and negotiate to cut costs when they can. The days of Emerson, Lake & Palmer touring with a fifty-eight-piece orchestra are long gone. As Keith Emerson said, “We had our manager with a shotgun behind us saying, ‘Look, if you don’t play as a three piece, forget it, you’ll be bankrupt.’ ”4 At a macroeconomic level, a sector with stagnant productivity will face rising costs and see intense pressure to economize, an ailment known as Baumol’s cost disease, after the late Princeton economist William Baumol. To illustrate this idea, Baumol used the example of a Schubert string quartet, which takes the same amount of time and labor to perform today as it did two hundred years ago.

  Money isn’t everything. Too many people confuse the underlying motivation of economic life with greed and the blind pursuit of money. At its best, economics recognizes that people are motivated by much more than money. The great joys of life come from pursuing one’s passions, spending time with friends and family, and enjoying experiences. As John Eastman, lawyer to Paul McCartney and Billy Joel, told me, “Music is wonder.”5 Music, more than money, is the tonic of happiness. Music helps to create moments and social occasions, memories and emotions. This is the secret of music, and it is the reason that, as Neil Young famously sang, “rock and roll will never die.”6

  Don’t fret if these lessons are not entirely clear yet. They are the chorus that repeats throughout the book. The force of these economic ideas can be seen in the pricing of concert tickets, the supply of musical talent to the industry, the way bands and record labels are organized, the nature of collaborations among artists, the structure of streaming contracts, and nearly every other aspect of the industry. The music business also reveals the pervasive role of emotions in decision-making and economic outcomes, a field that economists call behavioral economics. Music is inherently the art of eliciting emotions in listeners, the ultimate consumers. Performers pour their emotions into their work. As Lady Gaga has said, “You have to go to that broken place of your heart to write songs.”7

  Economists have a great deal to learn from observing how musicians strive to develop an emotional bond with their audiences, often at the expense of short-term profits, and how emotions guide their work and shape their economic decisions. Because emotions play such an outsized and explicit role in the music business, the industry reveals behaviors that are often hidden, but just as prevalent and consequential, in other industries and walks of life.

  In addition, economists have slowly become aware that individuals’ tastes and preferences are not immutable features of their personalities, as is commonly assumed in introductory economics courses. Instead, they are partly determined by social pressures, and subject to change based on experience. This is nowhere more evident than in music. Research shows that the more you listen to a song, the more you tend to like it, and the more likely you are to buy the singer’s records.8 This path-dependent process can explain why payola—the now illegal practice of paying radio DJs to play particular songs on the radio—was so popular and effective, and why new forms of payola are emerging in streaming.

  In other words, economics and music are a two-way street. The music industry can help to explain how the economy works and how economic forces are changing our lives. And economists can learn new insights about the economy and human behavior from studying the music industry. That’s rockonomics to me.

  The Disconnect in the Music Market

  There is a fundamental disconnect at the heart of the music business today: the way artists earn most of their money differs dramatically from the way most fans enjoy the music artists create. You can’t walk down a city street, ride in a subway car, fly on a plane, or travel by train without noticing people with earbuds or headsets listening to music. The most common content aired on the radio? Music.9 It is ubiquitous in elevators, doctors’ waiting rooms, gyms, bars, and restaurants. The next time you watch television or go to the movies, notice how often music is playing in the background of your favorite TV show or movie. And we spend a great deal of our time listening to recorded music, which, thanks to our smartphones, is accessible anywhere and anytime.

  Yet most musicians earn most of their income from live performances, not from sales of recorded music. Even Sir Paul McCartney, who has written and recorded more number-one hits than anyone in music history, earns most of his income from playing live concerts.10 File sharing and music piracy have widened the gap between the amount of income musicians earn from recorded music and live performances. But even in the pre-Napster days, live performances were a critical source of musicians’ incomes. In Chapter 2, I follow the money in music and explain how music manages to punch well above its economic weight.

  The advent of paid streaming—the latest in a long line of disruptive technologies—is beginning to cause artists’ revenue from recorded music to rebound. Nevertheless, the fundamental divide between how consumers consume music and how artists earn a living will almost surely persist.

  Steely Dan’s Donald Fagen, at age sixty-nine, gave a simple explanation for why he went back on tour in 2017: “For me, touring is the only way to make a living.”11 Established artists such as James Taylor, the Eagles, and Billy Joel, who used to tour to promote record albums, now tour without having new music to hawk. Popular music concerts today devote far more resources to costly pyrotechnics, video displays, dancing, and other stage theatrics to entertain and engage fans. No longer is the focus just on the music. Concerts and festivals sell experiences.

  A Star Is Born; a Superstar Is Super Lucky and Talented

  There would be no music without the songwriters, composers, and musicians who create and perform it—at least until machine-learning algorithms and artificial intelligence (AI) advance to the point that computers can compose popular music and write lyrics. You may laugh, but AI is already being used in a growing number of applications to compose melodies for commercial purposes and to train musicians. In the future, musicians may be replaced by computer programmers.

  In the meantime, it is important to ask, “What draws musicians to the risky business of music? How have the backgrounds of musicians changed over time? How, and how much, are musicians compensated?” These are among the questions I raise in Chapter 3, as I examine musicians from garage bands to mega-stars.

  Most working musicians are unknown performers who labor away at their craft in relative obscurity, barely earning subsistence pay. Only a select few become superstars. Why do some performers ascend to superstardom while other, equally talented musicians remain anonymous and impoverished? Economists start by asking a more basic question: why are some industries prone to superstars in the first place? There are no superstar retail clerks, insurance salesmen, or nurses. What makes music and a small but growing number of other fields susceptible to the superstar phenomenon?

  With the music industry as a guide, economists have developed a time-tested model of superstars that has repercussions for the wider economy. As I explain in Chapter 4, two essential features of a market are necessary for a sector to be dominated by a small number of stars. First, there must be scale economies, meaning that someone can apply his or her talents to a large audience with little additional cost per audience member. Second, the players need to be imperfect substitutes, meaning that their work is differentiated and unique. Both elements are present in music. Every successful singer, band, and orchestra has a unique sound. And recorded music can reach billions of listeners at little additional cost once a recording is made. By contrast, in medicine, for example, some surgeons are much better than others, but they are limited by the number of, say, hip replacements they can perform in a day. The top surgeons do well, but they do not do nearly as well compared to lesser surgeons as top musicians do compared to every othe
r recording artist.

  The importance of scalability in producing superstars in a given field was first highlighted by the great economist Alfred Marshall some 125 years ago. Marshall’s work highlighted the career of Elizabeth Billington, a leading opera singer of her day. Ironically, he used a musician as an example of a profession that was limited by the scale of the market. Long before the creation of digital recordings, microphones, and music videos, Marshall pointed out that Mrs. Billington was highly constrained in reaching a large audience because the “number of persons who could be reached by a human voice is strictly limited.”12 Today, digital technology enables artists to reach an unlimited audience at virtually zero incremental cost, which in turn has led to the enormous success of a select few superstars.

  This ability to create superstars in music is amplified by another feature, one that increasingly applies to other industries: the popularity of a song or artist grows geometrically rather than linearly. This is often called a power law. The popularity of the top performer is a multiple of the second-most-popular performer, which in turn is a multiple of the third-most-popular performer, and so on. Scientists have documented power laws in all kinds of outcomes, from the frequency of use of various words to the size of cities and the number of hurricanes in a year.

  Networks help to create power laws. Popularity ricochets through networks of friends and acquaintances, creating power law relationships where a small number of performers garner almost all the attention. In the music industry, this can be seen in the extremely skewed distributions of concert income, music downloads, Shazam requests, Facebook and Twitter followers, and artists’ merchandise sales. In his bestselling book The Long Tail, Chris Anderson, then a Wired editor, predicted that the Internet will lead to greater opportunity for those in what he called the long tail of sales, because smaller producers will be able to find niche markets.13 This has yet to materialize in the music business. Instead, the middle has dropped out of music, as more consumers gravitate to a smaller number of superstars.

  Over the past thirty years, the share of concert revenue taken home by the top 1 percent of performers has more than doubled, from 26 percent in 1982 to 60 percent today.14 The top 5 percent take home 85 percent of all concert revenues. The same pattern holds for recorded music. The long tail remains long and lonely; all of the action is in the head of the tail.

  This is an extreme version of what has happened to the U.S. income distribution as a whole. The top 1 percent of families doubled their share of income from 1979 to 2017.15 In 1979, the top 1 percent took home 10 percent of national income; in 2017 they took home 22 percent. By this measure, incomes in the U.S. economy today are almost as skewed as they were in the rock and roll industry when Bruce Springsteen cut “Born in the U.S.A.”

  One reason the entire economy has veered toward a superstar, winner-take-all affair is the rise of digital technology. Successful entrepreneurs can turn apps and digital technology into fortunes worth billions of dollars. Five of the six wealthiest Americans (Bill Gates, Mark Zuckerberg, Larry Ellison, Michael Bloomberg, and Jeff Bezos)—whose combined wealth equals nearly that of half of the world’s population—made their fortunes because of digital technology.16 Digital technology is scalable. One day soon the top surgeons may be able to operate on a great many more patients due to improvements in digital technology.

  This technological revolution has brought many other profound economic and social changes, all of which are readily apparent in the music industry. Small, often imperceptible differences in quality separate the best from the rest. As a result, luck matters for success more than ever. Releasing the right record at the right moment matters critically for success or failure. The same is true in the economy writ large. Bill Gates might have been Bill What’s-his-name if Gary Kildall and Digital Research had agreed to the terms IBM first offered them for developing the operating system for the new personal computer in 1980, before turning to Bill Gates’s fledgling company.17

  Success is hard to judge ahead of time, and in no way guaranteed, even for the best performers. Consumer tastes are fickle, and herd behavior often takes over when an artist begins to become popular. One-hit wonders are common in the music industry because a great deal of luck goes into achieving a hit song, and, like lightning, luck rarely strikes more than once. Even the industry experts, with much at stake, have difficulty picking winners. In Chapter 5, I chronicle how good luck and bad luck play outsized roles in the rock and roll industry, much as in life in general.

  Steve Ferrone: Heartbreaker and Session Musician

  Steve Ferrone grew up in Brighton, England, and has played drums with almost every major star, from George Harrison, David Bowie, and Eric Clapton to Chakah Kahn, Stevie Nicks, and, of course, Tom Petty for twenty-five years. Ferrone backed Prince during his epic performance of “While My Guitar Gently Weeps” at the Rock and Roll Hall of Fame. Steve Ferrone is both a session musician and a touring musician. I interviewed him in his modest home in Van Nuys, California, on March 15, 2018.

  What were the highs and lows of playing at the Super Bowl halftime show with Tom Petty?

  We traveled to Phoenix on a private jet. We stayed at a hotel on Camelback Mountain, and it was just gorgeous. The plan was that we were going to blow up the show, go to the airport, sit on the plane—because they weren’t letting anyone fly private until the game was over—and then fly back to Los Angeles. I got a phone call the day of the show, and they said, “We’re not leaving tonight.” The plans had changed. Tom’s wife wanted to go to the after parties.

  I had a 9 AM flight to Japan the next day. The Heartbreakers never travel before noon, and I had to get back. It turned out that the wife of one of the guys in the band had flown commercial and had a return flight. Through the power of the NFL, they get in touch and change her ticket to my name. We finished the halftime show, waved goodbye, and I went back into my world.

  I went from super first class to…at the airport and they tell me, “You can’t take that cigar cutter on the plane.” They throw it away at security. I was drenched after the show because it’s hot up on stage. I took a shirt out of my bag and put it on. I arrive at the gate, and there’s a little guy from Oklahoma watching the game on TV. He didn’t like the teams. He didn’t like the referees. He didn’t like the ads. He didn’t like anything and he was really loud. Then there was a lull, and I could see him looking around with the crosshairs for someone to have a go with. I hadn’t realized it, but I had grabbed a T-shirt out of my bag that said “Super Bowl Halftime Show.” He saw me and said, “Is that shirt real, or is it bull?” I asked if he saw the halftime show. He said, “Yeah, I didn’t think it was much.” And, I said, yeah, it wasn’t that good.

  In just hours I came crashing back to earth, to my musician area.

  How did you become a musician?

  My parents had started me tap dancing when I was three. Because I used to sit in my highchair with my spoon and listen to the radio, and tap the spoon in time. So, they sent me to tap-dancing lessons. I was always sort of being geared for show business, and they used to take me to see people perform. When I was twelve, I joined a band with older kids because…they had a drummer who had appendicitis and had to have surgery, and they were looking for someone to fill in for that weekend.

  When I was fourteen, the school started to ask my career plans. Fifteen was the school leaving age. I came from a working-class family. I had no intention of staying in school. They asked, “What do you want to do when you leave school?” I said, I want to be a drummer. And, they said, “You can’t do that. It’s not a real job.” I said, Ringo Starr does it. I can hang with Ringo Starr. And, they said, “What do you know?” So they started to mock me by calling me Ringo.

  What was work as a studio musician like in LA twenty years ago? How does it compare to today?

  In those times, there was so much work. The
studios were working around the clock. Now, they’re closing in droves.

  Double-scale work is not as prevalent as it used to be and a lot of people today don’t want to do it through the union, which is actually what paid for my retirement.

  In those days record companies used to invest in artists. They would spot somebody with talent, and they would recognize the talent. But, talent doesn’t always hit the first time. Now, they want guaranteed product done, finished.

  They used to finance an artist to do demos. I played on Luther Vandross’s first demos, and they were turned down. Luther was known back then as a studio musician. He was a session singer. He sang “Be All You Can Be” in the ad for the army. It was kind of difficult to get him to move from being thought of as a great background singer, or jingle guy, to being Luther Vandross the superstar.

  Have you come across any musicians who you considered phenomenally talented but were never able to really break through?

  Yes, a lot of them, and for varying reasons. For some of them it is about attitude. Probably has to do with drugs and alcohol. And, some of them, I can’t figure it out. It’s just bad luck.

  What was the best-paying gig you ever had?

  George Harrison once paid me for what could be the world’s most expensive session ever. He called me and said, “Steve I really need you to come over because we’re missing some drums on one of the tracks that we recorded. I need you to replace them.” He booked me a flight on the Concord. A big limousine was waiting for me when I landed. I get to George’s mansion in Henley and say, “What’s the problem?” We go into the studio and we’re listening to his song and all of a sudden there’s no downbeat to the drum. Everything is there, except the bass drum is missing. He said, “Did you hear that?” I said, “It’s just one bass drum beat that’s missing. You could take one of the other ones and copy it in there.” He said, “No no no, I need you to play it.” So I hit the bass drum once and that was it. Then we went to eat.

 

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