The Knockoff Economy

by Kal Raustiala

  This picture is changing, and where it is heading is uncertain. Yet, while mega-stars still exist, there are signs that a larger and more stable musical middle class may be emerging—artists who are able, by making recordings, touring, and selling merchandise, to sustain a decent living. Because it costs these artists less to produce music, a viable career is possible at a smaller scale. And this can be done with less reliance on intermediaries like record labels. The same technologies that have made pirating music so easy also facilitate direct communication between musicians and their fans.

  Just ask pop singer Colbie Caillat. Caillet’s music career began in 2005 when a friend posted several of her home-recorded songs to MySpace. One song, Bubbly, began to get word of mouth among MySpace users, and within a couple of months went viral. Soon Colbie Caillat was the No. 1 unsigned artist on MySpace. Two years after posting Bubbly, Caillet had more than 200,000 MySpace friends, and her songs had been played more than 22 million times. Caillet had built a global fan base while never leaving her Malibu home. In 2007, Universal Records released her debut album, Coco, which peaked at No. 5 on the Billboard charts and reached platinum status.

  Or ask rap artists Mac Miller, Wale, and J. Cole. Each of these artists built up a fan base by releasing free material on the Internet and interacting with fans on social media and blogs. And in a space of two months in 2011, each released a debut album that rose high in the charts (Mac Miller’s debut charted at No. 1 and sold 144,000 copies in its first week; Wale debuted at No. 2 the week prior and sold about 164,000 copies in its first week; a month earlier J. Cole’s album debuted at No. 1 and sold 217,000 copies in its first week).7 Fans could have pirated these albums—and doubtless some of them did. But thousands ponied up the money to buy them, perhaps partly out of appreciation for the free mixtapes that they’d downloaded previously.

  Social media and the fan base it enabled made the music careers of Colbie Caillat, Mac Miller, Wale, and J. Cole. Social media also broke UK stars Lily Allen, Kate Nash, and Arctic Monkeys, among others. This illustrates an important facet of the relationship between music and copying. Music fans love music, and they often want to support those who make the music they love. The Internet turns some fans into pirates. But it also turns fans into promoters. And the same technologies that enable piracy are also restructuring the industry in ways that create an entirely new relationship between creator and listener.

  The 2007 release of UK band Radiohead’s album In Rainbows is an intriguing example. The previous year, Radiohead had terminated its recording contract, and the band decided to release its new album itself. Thom Yorke, Radiohead’s lead singer, explained the reasons for that decision: “I like the people at our record company, but the time is at hand when you have to ask why anyone needs one. And, yes, it probably would give us some perverse pleasure to say ‘Fuck you’ to this decaying business model.”8

  The particular way in which Radiohead released the album was unprecedented. They put up a Web site, and allowed fans to pay whatever they wanted to download the album—including $0.00. And then about two months later, the band released a limited made-to-order “discbox” that contained 2CDs and two 12” heavyweight 45-rpm vinyl records with artwork and lyric booklets. The overall set, packaged in a hardcover case, was priced at approximately $80. The CD itself was also released in normal packaging and with standard pricing.

  So how did Radiohead’s experiment work out? Exact figures have not yet been released, but about a year after In Rainbows’ release, the band’s licensing agent confirmed that Radiohead made more money from paid downloads of In Rainbows than they made in total on their previous EMI-released album, Hail to the Thief. In all, there have been 3 million purchases of In Rainbows (including CDs, vinyls, box sets and digital sales). Radiohead has admitted that more people downloaded the album for free than paid for it. Still, the 3 million in total sales—100,000 of which came from the $80 box sets—is a hugely successful number considering that the album was both given away for free and was actually downloaded more times via BitTorrent than legally through Radiohead’s own site.

  Radiohead’s experiment garnered enormous publicity. And it likely is not the last stab at a new way of selling music, because the music industry is changing in ways that make a variety of business models possible. There are two changes that are, in our view, the most salient, both of which flow from digital technologies. First is the fragmentation of the audience into smaller and smaller groups, as more music becomes more available and hence the universe of choices far more diverse. Second is the ability of these smaller groups effectively to communicate both with one another and with the artists they like.

  What is likely to flow from these changes? These are the conditions—relatively small groups, able easily to communicate—under which social norms can help to regulate behavior. As we described in Chapter 3, this is precisely what we see in the world of stand-up comedy—there are a few thousand touring comedians, and because they often appear together in the same comedy clubs, they communicate readily. These conditions allow comedians to control copying not by relying on copyright law, but through norms.

  The problem of piracy in music is, of course, very different from the problem in comedy. Stand-up comics worry most about a rival, not a fan, copying their jokes. Still, the reduction of consumer copying of music via norms may be possible, and will become more imaginable if the music industry experiences ever-greater fragmentation and communication. There is already an interesting example of norms playing a substantial role in controlling copying in music. In the culture of jambands, we see the fans themselves taking action to deter pirates.

  What are jambands? In a fascinating 2006 article,9 legal scholar Mark Schultz studied the unique culture of a group of bands that belong to a musical genre, pioneered by the Grateful Dead, characterized by long-form improvisation, extensive touring, recreational drug use, and dedicated fans. Although acts like Phish, Blues Traveler, and the Dave Mathews Band vary in their styles, they are all recognizably inspired by the progenitors of jam music, the Dead. But the Dead’s influence is not only musical. Most jambands adhere to a particular relationship with their fans that also was forged by the Dead.

  Touring is central to the jamband culture, and most allow fans to record their live performances. Many even encourage fans to share the live recordings they make. Some bands even set up special “tapers” sections at live shows, and occasionally even allow fans to make recordings directly from the soundboard. And many jambands also set rules whereby some recordings—the band’s studio albums, and some special live recordings intended for commercial distribution—cannot be freely shared. The Grateful Dead’s statement on taping is a typical example of these rules:

  The Grateful Dead and our managing organizations have long encouraged the purely non-commercial exchange of music taped at our concerts and those of our individual members. That a new medium of distribution has arisen—digital audio files being traded over the Internet—does not change our policy in this regard. Our stipulations regarding digital distribution are merely extensions of those long-standing principles and they are as follows:

  No commercial gain may be sought by websites offering digital files of our music, whether through advertising, exploiting databases compiled from their traffic, or any other means.

  All participants in such digital exchange acknowledge and respect the copyrights of the performers, writers and publishers of the music.

  This notice should be clearly posted on all sites engaged in this activity.

  We reserve the ability to withdraw our sanction of noncommercial digital music should circumstances arise that compromise our ability to protect and steward the integrity of our work.10

  Schultz documents how jambands and their fans interact on the basis of a strong and long-standing norms system. The fans are often very invested in the bands that they follow, and they believe that because the bands give them freedom to record live shows and to share those recordings, they a
re valued as community members and treated fairly. And in return, fans largely adhere to the rules and discourage others from violating them.

  Technically savvy jamband fans have even built music-sharing systems that express the community’s norms. One such system is Furthurnet, which is open only to bands that allow sharing, and which allows fans only to upload music by those bands, and to report those who break the rules. Another such system—surprisingly—is BitTorrent, which was written by programmer Bram Cohen to help his friends share their recordings. Much of the press that BitTorrent receives these days relates to those who use it to pirate music and films. But at the network’s inception, it was dominated by jamband fans, and these users kept an eye out for illegal filesharing, and reported it.

  While the jamband ethos is unlikely to take over all forms of music, it may spread beyond its original home. And the changes in the industry we noted earlier may make this more likely. Digital technologies allow for smaller, more closely knit fan groups, and easier communication between bands and their fans. Facebook provides a virtual way for fans to interact, and of course live concerts allow a real-world version to develop. The jamband experience suggests that bands cannot simply set rules and demand compliance; Schultz argues that the fans must feel that they are getting something in return. For jambands, it is wide access to recordings of live shows. Given the likely importance of live performance in the future, this may be a workable strategy for a range of musical genres.

  Norms are not a panacea for pervasive copying. The casual fan who treats music as a disposable pleasure is unlikely to respect the norms of any particular musical community. So for some types of music, norms are unlikely to have much effect. The pop music of the moment, for example, is unlikely to create the kind of enduring community that can form and sustain a norms system. And the very improvisation that is at the heart of jambands—the jam—makes copying generally less harmful, since no single performance is quite like another. Still, there is no reason to believe that a successful norms system is limited solely to jambands.

  In any event, much of what we’ve said here is about possibilities, not current reality. The power of norms has been noticed by the music industry already, albeit often clumsily. Most music industry discussion of norms thus far has focused on emphasizing the moral wrongness of illegal downloading and declaring downloading to be theft. That approach has had little effect on fans. What the jambands’ story—as well as our explorations of chefs and comedians—suggests is that norms that rest on a shared sense of community can have much more power than those that are issued as edicts.

  EMPHASIZE QUALITY

  The previous chapters in this book suggest additional strategies that the music industry could explore. For music, the pleasure is in the listening. Yet the record labels have done surprisingly little to make listening quality an important part of the music experience. Quality, however, has not been ignored by other creative industries in which rules against copying are ineffective. It is one of the important ways in which chefs maintain their capacity to innovate when others may freely copy their recipes—they focus on achieving the best preparation of that recipe and compete based on quality. We also see quality figuring importantly in the fashion industry. High-end fashion originators face knockoffs very quickly, but the sumptuous materials, precise cut, and meticulous construction of some of their garments rarely can be reproduced at the imitator’s price point. The music industry could take a cue from chefs and fashion designers and focus on quality as a way of blunting the effect of piracy.

  Despite massive technological change generally, there has been little recent innovation in the provision of quality sound. Indeed, many audio-philes believe the quality of music reproduction has actually gone backwards. Despite the introduction of the CD in 1982, vinyl records never went away, and lately are having a renaissance. Look again at the chart of music industry data shown earlier in this chapter. Since 2006, sales of vinyl more than quadrupled, making the reappearance of the LP a rare music industry success story.

  Why are people still buying LPs, a 1940s technology? One reason is that the record industry’s mainstay, the CD, has many problems. It comes in packaging that’s hard to open, easy to break, and too small to reproduce cover art and lyrics people that can easily read. But the CD has another problem—its sound quality. Invented at a time when computing power was expensive, CDs are encoded at the low bitrate that inexpensive electronics were capable of processing in the late 1970s. The result is a small, airless sound that lacks the warmth and presence of an LP.

  That explains, in part, why so many consumers who care about music are returning to LPs: the older technology sounds better.* For the vast majority of listeners who do not migrate back to vinyl, however, the CD’s infirmities have an important consequence. Because CDs are not a sonically great experience, consumers copying compressed mp3 files from the Internet weren’t missing much. And so the fact that mp3 files sound even worse than CDs wasn’t the barrier to piracy that it might have been.

  You would think that making music sound better was one of the things the record labels would be most eager to do. Yet the labels made only the most superficial attempt to improve fidelity. A decade ago the industry flirted briefly with two new formats, DVD-Audio and Super Audio CD, that offered superior sound. But as consumers shifted to (mostly pirated) downloads, these efforts withered. Revenues from Super Audio CDs peaked in 2003 at a comparatively minuscule $26 million; revenues from DVD-Audio peaked at less than a third that level. Both formats are now dead.

  What can we learn from this? The story is mostly one of a path never taken. There has always been a small group of consumers who value musical fidelity. Then there are legions of consumers who care very little about sound quality. One strategy that might have been pursued, but never was with any vigor, is to try to enlarge the size of the first group by creating new audiophiles.

  The renewed popularity of LPs suggests that a well-presented physical medium with high-quality sound can succeed. Perhaps not surprisingly, some higher quality downloads are already available on p2p networks. And recently, a couple of labels have been working with Apple to offer downloads at CD quality. By making them available on iTunes, at least people who are willing to pay can get the same quality that the pirates get.

  ALL ROADS SHOULD LEAD TO YOUR CONTENT

  For years, the record labels had a business model that was consistent and single-minded: (1) bundle together a dozen songs on a CD, (2) ship the discs out to retailers, and (3) collect money. The labels’ business became even simpler following the shift from LPs to CDs—it was at that time that the labels killed off the singles market. Why ship CD singles when, for virtually the same cost, you could ship an album and charge at least three times the price?

  But it turns out that by killing the single, the record labels made the Internet piracy problem, when it arrived, even worse. One of the major attractions of filesharing was that it brought back singles. Consumers wanted the one or two songs on the album that they liked, and not the ten they didn’t. Look again at the music industry data chart. The market for singles downloads is much larger than the album downloads market. It is enormously larger by units sold—so much so that it’s almost twice as large by revenues, even though, on average, albums cost ten times as much.

  What we learn from this is unsurprising. Consumers like choice, and new technologies frequently offer more choice than the old. In this case, Hollywood’s very different, more profitable, and more piracy-resistant approach is instructive. The movie industry has long managed releases according to a series of “windows.” Films are first released at the box office—and at a premium price. Then, after a few months, films are released to the DVD sales and rental market. Shortly after that, they are available via video-on-demand, pay-per-view, and on airlines. And later still, the films are released to pay-TV cable channels like HBO and Starz. And then, finally, they go to basic cable and broadcast channels.

  This system gives consumer
s a wide variety of ways to watch movies. And different ways of watching movies appeal to different types of consumers. For those with willingness to pay, there is the new release in the theater. And for those willing to wait, there is video rental, pay-TV, and commercial television.

  The rental channel in particular has long been a very important piece of the industry’s overall revenues, and it is growing in importance as Netflix (the current market leader), Amazon, and other competitors introduce “all-you-can-eat” streaming video plans. Video rental may be Hollywood’s biggest anti-piracy tool. Take Netflix, which offers consumers unlimited streaming from a substantial library of licensed content. The allure of Netflix and other streaming services is that they get Hollywood’s content immediately into the hands of people who want it. And people want it. In the United States, movies streamed over Netflix now represent more Internet traffic than does piracy over BitTorrent.11 The rental channel, moreover, is expanding as both Amazon and iTunes expand their video rental and download offerings.

  Hollywood’s release windows system was conceived long before the Internet arrived. For our purposes, however, the system matters because it functions as an anti-piracy tool. Hollywood did not attempt to enforce a one-size-fits-all business model. Instead, it realized that different consumers would have different willingness to pay, and so it developed a distribution model that gave consumers more choice.

  Importantly, this system can accommodate technological changes. The gap between theatrical and home video release has shrunk as ever-improving streaming technology encourages more people to watch movies at home. And, on occasion, the system can be upended entirely when a particular film calls for a different marketing approach. One recent example is a documentary based on the best-selling Freakonomics book.* The Freakonomics documentary was released online via iTunes before it appeared in theaters. Why? Because a big part of the anticipated audience was comprised of people who prefer to get their video online.