[LINK] $60 million music piracy operation and economics

Tim O'Leary oleary at alphalink.com.au
Mon Apr 28 14:20:42 EST 2003

At 11:20 AM Monday 28/04/2003 +1000, Dean Povey wrote:
>On Mon, 28 Apr 2003 10:52:23 +1000, "Chirgwin, Richard" wrote:
> >James - I go with TL on this one. $60 million of "what" is the question.
> >It's the old "street value" question. If they're saying "these three people
> >took orders worth $60 million" then the question begged is "why give money
> >to these guys but not buy the stuff legit?"
>Right. This spouting of "X millions of dollars lost due to MP3 downloads"
>by the recording industry does not take into account the simple economic
>effect of price on supply and demand.  It assumes that the people who
>downloaded hundreds of songs for free, would have forked out money for them
>if they had not been able to download them.

More importantly it assumes that if you downloaded say a Radiohead new 
album that you would NOT spend the money saved on any CDs by other artists.

I think classic economic theory might say something more along the lines of 
the following.

If an angsty, sullen, spotty but nevertheless lovable teenager in his / her 
bedroom has made a rational decision to spend $28.95 on music each month 
then he / she will download the new Radiohead in MP3s instead of buying it 
but will still spend that $28.95 on music. However that $28.95 may go to 
the new Eminem CD or to a DVD of Eminem's new movie or even to a Radiohead 
DVD.  If it is the DVD it will add to the media companies revenue but will 
also contribute to a decline in official figures of sales of music CDs. 
There may be no loss of income to music industry through forgone purchase 
of a music CD directly due to downloading.

[A side note about something that is always ignored in downloading 
discussions: if that aforementioned teenager is over the family BigPond 
broadband limit for the month it would cost about 15c a MB to download 
anything. Assuming an MP3 compression to one third the size of a 650MB 
music CD then 220MB of Radiohead MP3s @15c = $33 costs - I make no detailed 
mention of the dreadful sound quality of compressed music at these 
compression levels.]

>A similar, and even more incredulous lie is told when the recording
>industry tells you that "piracy adds $X to the cost of the CD".  Again, the
>simple economic fact is that competition generally works to decrease costs.
>In theory, piracy (and P2P/Internet downloads in particular) should work
>to keep the price of a CD down, by greatly decreasing the scarcity of the

I don't have Adam Smith in front of me (or Karl Marx and Hayek for that 
matter) but I think that the fact that CDs prices have not come down would 
suggest, in economic terms, that supply / demand has not been greatly 
effected by online downloading. Reduced sales should mean prices become 
lower and tend towards the marginal costs and therefore those with greater 
efficiencies (lower costs) or greater added or perceived value, survive and 
other firms leave the market due to un profitability.

 From memory black markets are said to arise from restrictions, imposed 
scarcity, monopolistic pricing and lack of different price points (demand 
curve) in the primary market. I'm not clear if downloading for _free_ is a 
black market. Of course I could be wrong about all this and I should be 
reading The Tragedy of the Commons again.

note: If these guys were selling this stuff then a whole new set of numbers 
and assumptions come into play.

oleary at strategos.com.au

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