When I was young, purchasing music was frustrating. While I liked a couple of songs on any given album or cassette, was that enough to justify blowing my scarce pocket money on the whole thing? The same problem remains with CDs. The question there is, why? Why are all these songs bundled together rather than sold separately? That way I might be able to buy just the songs I want.
Cheap means of creating CDs have existed for some time now. The widespread use of CD ROM technology serves to remind us that music on CDs is merely data. It is relatively easy to copy. So it can hardly be difficult for would be music lovers to go into the local music store and order up a CD made to their specifications. No need to have just a few goods songs to the CD. Now the entire contents of the disc could be full of your favourites.
But this service is not offered. The problem cannot be technical. It is not prohibitively costly to make up a CD. It only costs me $4 to backup my hard drive to one. That suggests something economic.
The copyright owners of a particular song will expect to receive some payment if their song is downloaded to a customer's CD. One might think that this process of collecting payments might be too costly compared to accepting a price of the CD itself. But individualistic tastes of radio and television stations are taken into account daily through royalty payments. Collecting royalties from music stores would be no different.
The difficulty is how much a music publisher will be able to sell song-by-song. If this were available, then I would buy the songs I like but not necessarily the songs you like. This strategy might offer some but not much return for the copyright holder. They would have to price based on average demand for a particular song. After all, I won't pay more than the current cost of a CD for a CD with only the songs I like.
But consider what happens if these songs were bundled into a CD and only available in this form. Then both myself and others will buy all of the songs. This is a potentially higher return for the copyright holder. It might loose some buyers because of the high price of a CD but on average they will collect more revenue. The law of large numbers kicks in. Selling a bundle to consumers with slightly varying tastes will on average net you more value than trying to match each individual bit.
The message here, as US researchers Yannis Bakos and Erik Brynjolfsson have argued, is not for music but for information in general. The Internet held the promise of a new economy. One where, if you wanted a piece of information, such as a stock quote or sports score, you could just pay for that. No need to have to sift through or pay for other less useful bits of information. This disaggregation is made possible because selling a bit of information is about as costly as selling a bundle.
But the process of producing the information is another matter. It would be very costly for me to set up a service that only a fraction of the population might enjoy. Better to cater for diverse tastes and take my chances bundling many bits of information together. The economics of information point us towards aggregation despite the technological advances that have made the reverse possible.
The point here is that when we download our favourite music in the future, it will not be song by song. Or at the very least we will pay for the rights to download a group of songs. Technology might make it possible to eliminate the traditional album concept. But the economics will leave it be. The same logic applies for newspapers such as this one. Even if you just like reading my opinion alone, you'll at least have to pay for John Quiggin's.
Joshua Gans is an associate professor in economics at the Melbourne
Business School, University of Melbourne, and an academic associate of London
Economics, Australia.
This article was published in the Australian Financial Review, Wednesday 31st December, 1997, p.9.