Rockonomics

by Alan B Krueger

  Are you making money from royalties from records you recorded?

  I get some royalties from when I was in the Average White Band. And some from work with Eric Clapton and Tom Petty. But royalties were much greater when I first started with Tom.

  Were you paid a fee to play with the Heartbreakers or did you get a split of the income?

  I was a hired drummer. The founding members were partners. I don’t know their splits. Ron Blair was actually a founding member who left the band for twenty years and then came back. He actually came back as a hired hand like me. Tom paid us all very well. He loved his band. And, he kept his band close, took really, really good care of us. I have no complaints about where I stood.

  I’ll tell you, it was an amazing band that will never be the same. It wasn’t just Tom Petty and the Heartbreakers. He was part of the Heartbreakers. He was in the band. This never will be the same again. Even though there are a lot of bands that continue, Tom was really something special, had a special presence.

  Cash and Concerts

  Digital technology has also led to major changes in the business model of music, with important implications outside the music industry as well. Advances over time, from amplification, radio, vinyl records, eight-track tapes, and cassettes to music videos, CDs, MP3 players, and streaming, have made it possible for performers to reach an ever wider audience. And the increasing globalization and interconnectedness of the world have vastly increased the reach and fame of the most popular performers. Musicians no longer need to rely on physical record stores to stock their albums in a particular city; their music can be streamed almost anywhere in the world, at any time.

  But advances in technology have also had an unexpected effect. Recorded music has become cheap to replicate and distribute, and it is difficult to police unauthorized reproductions. This has cut into the royalties of the most successful performers and caused them to raise their prices for live performances. My research suggests that this is the primary reason concert prices have risen so much since the late 1990s, about as fast as inflation in health care costs.

  An understanding of concert ticket pricing conveys lessons for understanding and optimally setting pricing for other events, services, and goods. Successful bands have learned how to navigate the trade-off between maximizing short-term revenue as opposed to long-term popularity and profitability. The social constraints on pricing of concert tickets, the ultimate “party good,” are quite apparent, and help to explain pricing in other industries and markets, where economists and businesses have come to rely too heavily on the overly simplistic supply-and-demand framework, the workhorse of economics.

  Many artists used to treat concerts and touring as a loss leader, a way to gain popularity and hone their skills while promoting record sales. Their goal had been to sell enough records to score another, more lucrative record contract. Concert ticket prices were kept artificially low, below what fans were willing to pay, to gain a loyal fan base and promote album sales. As I document in Chapter 6, this has now flipped. The price of the average concert ticket has increased by more than 400 percent from 1981 to 2018, much faster than the 160 percent rise in overall consumer price inflation.18 And prices for the best seats for the best performers have increased even more.

  The reason for this is that file sharing has greatly cut into the royalties that musicians earn from album sales. Consolidation in the recording industry, after several lean years, further threatens artists’ recording income. Concerts are now viewed as a primary profit center, and digital recordings are a means of promoting concerts. Again, rockstar and economic pioneer David Bowie foresaw this development years ago when he said, “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. It’s terribly exciting.” Sounding like an economist looking at the powerful forces governing the world, Bowie added, “But on the other hand it doesn’t matter if you think it’s exciting or not; it’s what’s going to happen.”

  What I call Bowie theory applies increasingly outside of music as well, to newspapers, books, magazines, and other industries. The Wall Street Journal, the New York Times, Bloomberg, and the Economist all increasingly rely on live events for revenue. News is available from countless online sources, often for free. Soon newspapers and magazines could be loss leaders for live conferences and lectures.

  Navigating these new economic shoals is difficult, not least because norms of behavior constrain economic activity. Artists cannot be seen as gouging their fans or being too greedy. They risk weakening their bond with their audience, not to mention threatening their record sales and royalties, concert revenue, and merchandise sales. Fans and artists are still people, motivated by passions and emotions, even in an era of artificial intelligence and the digital economy.

  Rockonomics

  Marie Connolly of the University of Quebec and I first used the term rockonomics in the title of an article we wrote in 2005. USA Today later mistakenly credited me with coining the term.19 Although we did think of the neologism independently—around the same time as my friends Steve Levitt and Stephen Dubner wrote Freakonomics—I subsequently discovered earlier uses.

  In October 1984 Bill Steigerwald wrote an article in the Los Angeles Times arguing that Bruce Springsteen was economically naive for charging the same price for all his concert tickets, selling out in forty-five minutes, and then complaining about ticket scalping.*2 The headline of Steigerwald’s article was “Supply-Side Rockonomics.” As far as I can tell, that is the earliest use of the term (although Chapter 6 explains that Bruce is not really economically naive).

  Marc Eliot’s 1989 book Rockonomics: The Money Behind the Music chronicled the sordid details of music contracts. There are many examples of artists being treated unfairly and fraudulently by their labels and managers, but in most cases musicians face disappointing financial results because of the unfavorable economics of the music industry, not malevolence. In Chapter 7, I place music contracts, which can seem unfair to most artists—and recording contracts are unfair to superstars—in an economic context. For example, because only one or two of every ten albums actually pays off for a record label, contracts for records that become successful subsidize recording costs for all those that don’t make money, and provide a return on investment for the record companies.20 Still, there are some simple rules artists can follow to protect themselves financially and to save for the future. For example, I discuss a practice that has evolved in the industry where the artists collect and audit the money and then pay their manager, to prevent malfeasance and misunderstanding.

  After the publication of the USA Today story, Ron Christopher, a music producer in Los Angeles, informed me that he mixed an album by the band Flash Kahan for Capitol Records in 1985 that included the song “Rockanomics.” The song included these long-forgotten lines:

  Goin’ to take a Chevy for a U.S. guitar

  Rockanomics, rockanomics

  Needless to say, “Rockanomics” did not become a household word or a hit.

  For the purposes of this book, any music that is popular and amenable to economic analysis fits in the rockonomics tent. That’s practically every genre of music and aspect of the business, from after-school music lessons and bar bands to Carnegie Hall, Ticketmaster, Live Nation, and Spotify, from ABBA to ZZ Top. To paraphrase Billy Joel: hot funk, cool punk, even if it’s old junk, it’s still rockonomics to me.

  It’s a Small World After All

  Two things are certain about music: First, musical styles continually change, and each generation looks down upon the next generation’s tastes in music. And second, the way in which we listen to music—from vinyl records and digital downloads to YouTube and iPhones—will continually change. Streaming services such as Spotify, Pandora, Tidal, Deezer, and QQ are the l
atest innovation in how people the world over listen to music. Streaming is bringing profound changes to the music world. On one hand, streaming is boosting revenue for recorded music for the first time in more than a decade. After years of decline—global recorded music revenue fell from $25 billion in 2002 to $15 billion in 2015—industry veterans have a reason to feel some optimism, as revenue rose in 2016 and 2017 thanks to streaming.21 As I discuss in Chapter 8, with billions of streams and millions of customers, streaming provides a remarkable laboratory to see economics in action.

  Pandora, for example, conducted a one-of-a-kind experiment on twenty million subscribers to its ad-supported free service to learn how sensitive their listening habits are to the number of commercials that they are exposed to each hour they listen to music.22 The results provide about the strongest evidence of a demand curve that one could find in economics. The more listeners were exposed to increased nuisance costs in the form of additional ads, the less likely they were to continue utilizing the free ad-based service, and the more likely they were to switch to the paid service. This is a textbook example of the type of evidence companies can use to maximize profits and improve their customers’ experiences.

  Streaming has another, broader effect as well. Listeners are not limited to the relatively small number of records that record stores used to stock on their shelves, or to the music playing on the radio. Historically, record stores filled their limited shelf space primarily with local music and popular hits. Today, just about all the music ever produced is available at your fingertips (or with a verbal command to Amazon’s Alexa) anywhere in the world. As we’ll see in Chapter 10, this change is beginning to affect the music that people are listening to around the world, with less focus on musicians from one’s home country. It is a smaller world after all when it comes to music.

  Although no one knows for sure how streaming will evolve in the future, it is certain to change. The blending of movie streaming services and movie producers (Netflix, Amazon, Disney) suggests that music may move in the same direction. It is not unreasonable to speculate that in the future music will be bundled with other entertainment programming, such as movies, sports, and television shows, as it is with Amazon Prime. Look for Spotify, Amazon, Apple Music, and other distributors to try to create original content, following the Netflix and Amazon movie model. If so, the economics of the music industry will likely be upended again.

  Streaming offers the opportunity for new musicians to break in and reach a broader audience without the need for a record label. And new companies are emerging to take advantage of this opportunity. In Chapter 8 you will meet Rehegoo, a four-year-old company started by Italian and American entrepreneurs that works with undiscovered musicians to improve, market, and stream their music. So far, their music has been streamed more than ten billion times. If the long tail is to offer musicians more opportunity, it will be because of innovations like Rehegoo.

  All economies operate under rules. Chief among these rules is the definition, allocation, and defense of property rights—who has the right to own or use certain goods and resources, and how are the rights traded and protected? In the music business, a key set of rules concerns how music is licensed under copyright law. Musicians and labels produce music. The music is copyrighted. Different licenses are required for different uses of music. For example, a synchronization license, or sync license, is required to use music in a movie or video. The laws governing the licensing of music were obsolete before streaming, and they are even more obsolete today, despite major legislation known as the Music Modernization Act, enacted in 2018. In Chapter 9 I discuss why music licenses matter, what trade-offs are involved, and how the licensing process can be improved in the age of streaming.

  The Sounds of Happiness

  My research with the psychologist Danny Kahneman revealed that the time people spend listening to music is ranked among our most enjoyable activities of daily life.23 Music is thought of in the same class of activities as participating in sports, religious worship, or attending a party, in terms of the positive emotions that it generates, and the negative feelings like stress and anger that it helps to counteract or chase away. What’s more, listening to music improves the experience of other activities, such as commuting to work or cleaning house. Every student who ignored his or her parents’ requests to turn off the music while studying knows that music can improve any number of unpleasant activities. In fact, there’s a reasonable chance you’re listening to music while you read these words.

  In Chapter 11, I argue that music is one of the best bargains human society has ever conceived of—and it is getting better by the day. On average, we spend three to four hours a day listening to and enjoying recorded music. Yet the average consumer spends less than 10 cents a day for that music. That is down 80 percent since 1999, after adjusting for inflation.24 Americans spend more on potato chips than on recorded music.25

  Now that listening to virtually any song or genre of music anywhere and anytime has become essentially free, human welfare has been greatly increased.

  In fact, music is a quintessential part of the “experience economy,” the segment of the economy that relies on selling experiences rather than physical goods or services. An increasing share of our GDP is derived from producing and selling experiences. The rest of the economy can learn a great deal from the music industry about how to sell and create experiences.

  What, precisely, is it about music that produces such profound emotions? What leads people to want to experience music when they’re feeling blue or happy, when they are feeling lonely or longing to be part of a crowd? What is it about music that led Madison Avenue to discover that playing it helps to sell products, from coffee to cars? Music sets the mood for political campaigns, bars, senior proms, weddings, and countless other events and rites of passage. Music teaches us our ABC’s and reinforces our memories. In fact, musical therapy has proved to be helpful in treating some psychological and neurological disorders.26 Although the magic of music remains in part a mystery, archaeologists have found that musical instruments have been part of civilization for millennia, predating other known human tools and instruments. Music, it seems, is embedded in our DNA. As the lyrics to the ABBA song “Thank You for the Music” put it, “Without a song or a dance what are we?”

  Where the Streets Have No Name

  In a highly polarized age, music is one of the few endeavors in modern life that unites people from different political, religious, cultural, regional, ethnic, and racial backgrounds. Economic problems are also universal. The challenges of finding dignified and rewarding work, saving for the future, and pursuing happiness are vital for all people. And I would argue that essential insights into understanding and overcoming these challenges can be found in rockonomics.

  So what songs were on my walk-on list at the Rock and Roll Hall of Fame in Cleveland? My first selection was perhaps obvious to many: Bruce Springsteen, a fellow New Jerseyan whose heartfelt anthems and three-hour concerts highlight the struggles of the working class in a changing economy. His “Land of Hope and Dreams” was the top song on my playlist.

  The second warm-up song I selected was John Mellencamp’s “Hand to Hold On To.” I wanted the audience to reflect on the simple and universal wisdom of his moving lyrics: “Don’t need to be no strong hand / Don’t need to be no rich hand / Everyone just needs a hand to hold on to.”

  And my last two songs? Sixto Rodriguez’s “Sugar Man” and Parker Theory’s “She Said.” To understand why I selected them, you need to read Chapter 5, which documents the outsized role of luck in success and failure.

  *1 Interested readers can access the data from this survey and several other data sources used in this book from www.Rockonomics.com.

  *2 Mr. Steigerwald wrote me after the USA Today piece came out to claim credit. He presciently wrote, “When you write your book on rockonomics, which I’m sure you will someday (
you should; it’d make a great teaching tool for economic principles), please give me credit.”

  CHAPTER 2

  Follow the Money: The Music Economy

  The fact of the matter is that popular music is one of the industries of the country. It’s all completely tied up with capitalism. It’s stupid to separate it.

  —Paul Simon

  Paul Simon grew up in the music industry. His father, Louis, was a professional bass player, session musician, and dance bandleader who performed under the name Lee Sims. Both Paul and his father understood the music business, from playing bar mitzvahs, weddings, and debutante balls to entertaining half a million fans at Simon and Garfunkel’s landmark concert in Central Park.

  Although Paul Simon is undeniably correct in saying that popular music is one of the “industries of the country,” it is a surprisingly small industry, one that would go nearly unnoticed if music were not special in other respects.1 Total expenditure on music—including concert tickets, streaming fees, record sales, and royalties—were $18.3 billion in the United States in 2017. Although that may sound like a lot of money, and it is enough to support some of the best and most sophisticated entertainment ever produced, it represents a little less than 0.1 percent of GDP, the value of all goods and services produced in the country that year. In other words, less than $1 of every $1,000 in the U.S. economy is spent on music. The music industry employs less than 0.2 percent of the workforce. And the United States is the world’s largest music market, accounting for more than a third of all music spending worldwide.2