Tuesday, June 30, 2009

I Take Back My Reznor Being a Genius Comment

The two goals of an artist releasing an album (or any other digital good) should be to maximize the amount of money made and to maximize the amount of people that can listen to it (see previous Radiohead analysis). I propose a 2 part system to accomplish these goals:

Part 1: Give away a free "basic" version, trying to maximize the amount of people who can have access to it.
Part 2: Auction off a limited quantity "special edition" version, trying to maximize the amount of money.

This system would allow a limited number of rich people (or poor hardcore fans) to purchase the special edition as a status symbol which in turn supports the artist and allows everyone else to get access to the music for free.

A while back I had called Trent Reznor a genius for the way he released his Ghost album, giving away the .mp3s for free but charging for a limited edition box set. I am now taking back my praise because while I think the free version maximized the number of people who could listen to it, I think he left money on the table by not auctioning off the limited edition on eBay.

The one part I haven't figure out is how many copies should be put up for bid. Producing the good is a trivial cost, so you are just trying to maximize the total amount of revenue that you take in. This gets into the interesting concept of "virtual scarcity", where something derives its value from being exclusive, and more money can be made by artificially restricting production.

If you sold just one copy, would it be so exclusive that someone would pay more than double what you could get for two copies? Or would 10 copies be better? Or one million? It economic jargon this would be the elasticity of demand. But, I have no idea in practice what that demand curve looks like or how you could determine this before hand.

The elasticity of demand is being tested out with Apple's new pricing scheme:

These are the results labels were hoping for when Apple relented and began selling music at three price tiers: 69 cents, 99 cents and $1.29. While variable pricing made sales volume decline, higher prices compensate for that to create more revenue.

Sales of the weekly top 40 tracks -- most of which now have the higher wholesale rate -- fell about 11% in the six weeks after the launch of variable pricing. But retailer revenue from those tracks rose about 10% after the price hike. That means labels took in 20% more revenue for those songs.
While the higher prices are leading to more revenue which is a good thing, it also means that fewer get the music is a bad thing. Which means artists have to choose between being rich or being popular. With the system proposed above, you get the best of both worlds.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.