And the Bands Played On: Digital Disintermediation and the Quality of New Recorded Music

Joel Waldfogel

University of Minnesota and NBER

How I got here: piracy

• The “the sky is falling” slide

– The standard music paper motivation since ‘99

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Research Response

• Mostly a kerfuffle about whether file sharing cannibalizes sales

• Surprisingly hard question to answer » Oberholzer-Gee and Strumpf (2006),Rob and Waldfogel

(2006), Blackburn (2004), Zentner (2006), and more

• …but most believe that file sharing reduces sales

Industry voices: revenue, investment

• IFPI: “Music is an investment-intensive business… Very few sectors have a comparable proportion of sales to R&D investment to the music industry.”

• Warner Music: “…piracy makes it more difficult for the whole industry to sustain that regular investment in breaking talent.”

• RIAA: “Our goal with all these anti-piracy efforts is to protect the ability of the recording industry to invest in new bands and new music…”

• RIAA: “this theft has hurt the music community, with thousands of layoffs, songwriters out of work and new artists having a harder time getting signed and breaking into the business.”

Industry responses

• Lawsuits against “file-sharing” individuals

• Police the pipes – HADOPI, SOPA, PIPA

My epiphany

• Revenue reduction, interesting for producers, is not the most interesting question

• Instead: will flow of new products continue? – (We should worry about both consumers and

producers)

File sharing is not the only innovation

• “Compound experiment”

– Costs of production, promotion, and distribution may also have fallen

– Maybe weaker IP protection is enough

• What has happened to the “quality” of new products since Napster?

• Contribute to an evidence-based discussion on adequacy of IP protection in new economy

Hard problem

• Quantifying the volume of high-quality new music released over time is hard

• Some obvious candidates are non-starters

– # works released (but skew)

– # works selling > X copies (moving target)

• “Quality”

– Economic, not aesthetic

• “Appeal”, “demand”, “marketability”, “service flow”

Two Broad Approaches

• Quality index based on critics’ best-of lists

• 2 indices based on vintage service flow

– Airplay by time and vintage

– Sales by time and vintage

Approach #1: critics’ lists

• Want index of the number of works released each year surpassing a constant threshold

• Use critics’ retrospective best-of lists

– E.g. Number of albums on a best-of-the-decade list from each year

– Retrospective: to be on list, album’s quality must exceed a constant threshold

Rolling Stone’s 500 Best Albums (2004)

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Rolling Stone Index

“Splice” together to create overall index, covering pre- and post-Napster era.

BETMSN.comNOWQ

Acclaimed AlbumsAcclaimed Songs

American SongwriterAustin Town Hall

Best Ever

BetterPropagandaBillboard

Blender songs

Boom Box, TheBoot, TheCokeMachineGlowComplexComplexConsequence of SoundConsequence of SoundCreative LoafingDaily CalifornianDecibelDelusions of AdequacyeMusicEntertainment WeeklyFACTGhostlyGigwiseGigwiseGlideGuardian, TheHipHopDXIrish TimesKitsap SunThe Line of Best FitLostAtSeaLost At SeaMetacriticMetromix DenverMixmagmusicOMHNMENMENoise CreepNational Public RadioNPROneThirtyBPMonethirtybpmThe Onion A.V. ClubPaste

Pitchfork 1990s (03)

Pitchfork 1990s (99)PitchforkPitchforkPopdosePopdoseResident AdvisorResident AdvisorRhapsodyRhapsodyRock's Back PagesRolling StoneRolling Stone

Rolling Stone

Rate Your Music

SlantSlantSpinnerSpinnerStateStylusStylus DecadeThe BoomboxThe GuardianThe SunThe Sunday TimesThe TimesThe WordTimes, TheTiny Mix TapesTrebleTrebleUncutUnder the RadarVirgin MediaWord, The

Zagat

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More evidence on validity The Most Critically AcclaimedAlbums of the 2000s

rank artist album number of

lists

year RIAA

cert

1 Radiohead Kid A 32 2000 P

2 Arcade Fire Funeral 31 2004

3 Strokes, The Is This It 29 2001 G

4 OutKast Stankonia 29 2000 3xP

5 Wilco Yankee Hotel Foxtrot 28 2002 G

6 Jay-Z The Blueprint 25 2001 2xP

7 Flaming Lips, The Yoshimi Battles the Pink Robots 21 2002 G

8 LCD Soundsystem Sound of Silver 20 2007

9 West, Kanye The College Dropout 20 2004 2xP

10 Stevens, Sufjan Illinois 20 2005

11 TV on the Radio Return to Cookie Mountain 19 2006

12 Modest Mouse The Moon & Antarctica 19 2000 G

13 White Stripes, The Elephant 19 2003 P

14 Daft Punk Discovery 19 2001 G

15 Interpol Turn On the Bright Lights 18 2002

16 Eminem The Marshall Mathers LP 18 2000 9xP

17 Radiohead In Rainbows 18 2007 G

18 Beck Sea Change 17 2002 G

19 Bon Iver For Emma, Forever Ago 17 2007

20 Broken Social Scene You Forgot It in People 16 2002

21 Spoon Kill the Moonlight 15 2002

22 Knife, The Silent Shout 15 2006

23 White Stripes, The White Blood Cells 15 2001 G

24 Animal Collective Merriweather Post Pavillon 15 2009

25 Madvillain Madvillainy 15 2004

Lots of concordance

Significant sales; not economically irrelevant

Methodology slide I

• “Splice” indices

• Plot θ’s

And voila: Index of vintage quality

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coef top of 95% interval

bottom of 95% interval

weighted

Album Year Dummies and Napster

Index is falling prior to Napster

Post-Napster constancy is, if anything, a relative increase

Answer #1

• No reduction in quality following Napster

– Cf “The sky is falling.”

• But:

– Critics are elites

– Right tail of “quality” distribution

– Not based on actual consumer choices

Approach #2

• Measure of vintage “quality” based on service flow/consumer decision

– Sales and airplay

• Idea: if one vintage’s music is “better” than another’s, its greater appeal should generate higher sales or greater airplay through time, after accounting for depreciation

Data: Airplay

• (Describing data first makes empirical approach easier to exposit)

• For 2004-2008, observe the annual share of aired songs originally released in each prior year.

• From Mediaguide

– 2000, over 1 million spins/year

– Lots of data: smooth, precise

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Vintage Distribution for Songs Aired in 2008

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Vintage Distribution for Songs Aired in 2008

Direct evidence of depreciation

Data: Sales

• Coarse sales data: RIAA certifications

– See when sales pass thresholds, know when released

• Gold=0.5 million, Platinum=1 million, multi-platinum=X million – Apportion uniformly

• 17,935 album certs; 4428 single certs

• Covers most of music sales

• Tracks known patterns

• Eliminate greatest hits

Depreciation in Sales Data

• Again, older albums sell less

• Question: after accounting for music age, are particular vintages sold, aired more? Or less?

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Distribution of Sales by Time since Release

Methodology Slide II

• Define st,v = share of vintage v music in the sales or airplay of music in period t. – Observe s for V vintages and T years – For a given year t, s varies across vintages for two

reasons • Depreciation and variation in vintage quality

• Regress ln(st,v) on age dummies, vintage dummies. – Allow flexible depreciation pattern

• Then: vintage dummies are index of vintage “quality”

Resulting Airplay Index

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Flexible Nonparametric

Airplay-Based Index

Sales-Based Index

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Flexible Nonparameric

Sales-Based Index

Bottom line

• No evidence that vintage quality has declined

• Some evidence that it has increased

• Hard to know what it might otherwise have been

• Big contrast to majors’ view

• Puzzle: Why is “quality” up despite revenue collapse?

And the Bands Played On: Digital Disintermediation and the Quality of New Recorded Music

Joel Waldfogel

University of Minnesota and NBER

Now, really:

Fundamental features of recorded music

• “nobody knows nothing” (Caves/Goldman) – Hard to predict success at time of investment

– Perhaps 10 percent succeed

• Traditionally, it has been expensive to “experiment” (Tervio) – Must bring a product to market to learn whether it

will succeed

– ≈$1 million using traditional means

– So bet on a few artists with ex ante promise • Result: “mediocrity”

Along comes digitization

• (…and demand: piracy)

• …and supply – Obvious effects on production and distribution

• Recording, distribution are now inexpensive

– Promotion too? • Traditionally, radio is a bottleneck

• Now Internet radio and online criticism

• It has become cheaper to “experiment” – Do we end up discovering more artists with ex post

value?

Outline of remainder

• “Model” rationalizing increased quality

• Resulting questions

• Data

• Results

“Model” inspired by Caves(“nobody knows”) and Tervio (“mediocrity”)

• Label forms estimate of album marketability q’ as truth + error: q’=q + ϵ

• Bring a product to market if q’> T.

• Cost reduction trumps piracy, so that on balance, digitization reduces T, raising the number of projects that can be brought to market.

• Big question: what happens to the volume of “good” work available to consumers?

Suppose marketability were predictable

• Then reduction in T brings more products

• But they are of modest quality: T’ < q < T

With unpredictability

• Release all products with expected quality above T’

• Result: more products with quality > T

• Release of products with less ex ante promise leads to a greater number of products with ex post success/value

Is this explanation right? Some specific empirical questions

• More new products to choose from?

• …including those with less ex ante promise?

– E.g. independent vs major labels

• A changed information/promotion environment?

– Do consumers have ways to learn about the proliferation of new music?

Questions

• Changed paths to commercial success?

– Roles of tradition radio, Internet, and critics

• Is sales concentration rising or falling?

– Do additional products draw share?

• Do the products with less ex ante promise – e.g. indie artists who would not have been released before digitization – account for a rising share of ex post success?

Illustrative Anecdote: Arcade Fire’s The Suburbs

• Released by indie Merge Records August, 3, 2011

• Critical acclaim – Metascore=87 (top 5%)

• Little conventional airplay – Not on BB Airplay Chart

– But big on Internet radio

• Success – Sold >0.5 million copies

– Best Album Grammy for 2011

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Arcade Fire – Ready to Start on Last.fm

On to more systematic evidence: Two Broad Data Sets

• Sample of albums released in the US 1980-2010 – By label type

• major, independent, self-released

– Physical vs digital

• List of commercially successful albums, 1985-2010 – from top-selling album charts

• (and my estimates of the albums’ actual sales)

– linked with • measures of traditional radio airplay • promotion on Internet radio • coverage by music critics • whether on independent label

…from 9 underlying sources

• Recordings

– Discogs, 1980-2011

• Albums (including vinyl, CD, “files”)

• Singles excluded

• Hand-matching of labels to label codes from Thomson (2010) – Plus… “underground”, “independent”,…

Commercially successful albums

• Billboard 200 – weekly ranking of top 200 selling albums, 1985-2011

• Billboard Independent album chart – 2001-2011

– Use for independent designation in dataset 2

Promotion

• Airplay – “Billboard 100” – 75 top songs of the week, 1990-

2011

– Top 200 airplay – 2009-2011

– Last.fm – top 420 songs of the week, 2006-2011

• Critics – Metacritic – coverage if 3+ critics review

– Appeared in 2000; growth to roughly 1000 albums per year in 2010

Sales Certifications

• RIAA – Gold, Platinum database

– 1970-2010

– I use to translate BB album rankings into sales estimates

Answers

• Growth in releases?

• Changing information environment

• Evolution of sales concentration

• Success and promotional channels

• Ex ante promise and ex post success

Growth in releases over time

• According to Nielsen: 35k in 2000, 100k in 2010

• Discogs:

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sum of self sum of indie

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(Continued)

Answers

• Growth in releases?

• Changing information environment

• Evolution of sales concentration

• Success and promotional channels

• Ex ante promise and ex post success

Changing Information Environment

• Traditional radio

– BB airplay – top 75 songs by week

• 3,900 listings per year

– But only about 300 distinct artists

• Traditional vs Internet radio

– Compare BB list with last.fm top 420 songs of the week

– Little overlap – 10 percent

Top 2006 BB Airplay Artists not on Last.fm Weekly Top 420

ARTIST BB airplay index

MARY J. BLIGE 14.3

BEYONCE 12.0

NE-YO 10.3

CASSIE 9.8

CHRIS BROWN 9.8

YUNG JOC 8.2

SHAKIRA 6.9

LUDACRIS 6.0

CHAMILLIONAIRE 5.7

AKON 5.2

ARTIST listeners

DEATH CAB FOR CUTIE 5,200,000

COLDPLAY 5,200,000

RADIOHEAD 4,700,000

MUSE 3,900,000

ARCTIC MONKEYS 3,000,000

THE POSTAL SERVICE 2,800,000

THE BEATLES 2,400,000

SYSTEM OF A DOWN 2,300,000

BLOC PARTY 2,100,000

NIRVANA 1,900,000

THE ARCADE FIRE 1,900,000

Top Artists on Last.fm in 2006 without BB Airplay

Takeaway: Internet radio allows promotion for artists with less promotion on traditional radio

Second, growth in criticism

• Much of it online

Rolling Stone

Alternative PressSpin

Q MagazineEntertainment Weekly

All Music GuideMojo

The A.V. Club

Pitchfork

Uncut

PopMatters

Drowned In Sound

Under The Radar

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Growth in Reviews

Answers

• Growth in releases?

• Changing information environment

• Evolution of sales concentration

• Success and promotional channels

• Ex ante promise and ex post success

Evolution of sales concentration

• More products available

• Do more products achieve (relative) commercial success?

– Do more albums enter the weekly BB200?

– Not the dumb question it sounds like

• 200 listings/week x 52 weeks = 10,400 listings/year

• Could be anywhere between 200 and 10,400 distinct artists per year

Sales grow less concentrated in top few artists

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Answers

• Growth in releases?

• Changing information environment

• Evolution of sales concentration

• Success and promotional channels

• Ex ante promise and ex post success

Success and promotional channels

• What’s happening to the role of traditional airplay among successful artists?

• What’s happening to the role of critics?

Declining role of traditional radio

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Declining share with airplay, especially since 2000

Even for top 25

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Contrast: increasing share with critical attention

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Answers

• Growth in releases?

• Changing information environment

• Evolution of sales concentration

• Success and promotional channels

• Ex ante promise and ex post success

And, finally:

Ex ante promise and ex post success

• Do artist with less ex ante promise – who would not have made it to market prior to digitization – now achieve sales success?

• Specifically, do indies account for a growing share of sales?

Yes

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Indie Share among Billboard 200

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Indie Share among Billboard 25

Conclusion

• Digital disintermediation provides possible explanation for increased “quality”

• Given unpredictability, more “experimentation” leads to discovery of additional “good” music

• Much of which would not have come to market before digitization

The changing face of “digitization”

to

Digital disintermediation in other products

• e-books: similar changes afoot

– Explosion of new products (self-published digital books)

– Lower prices, more draws from the urn

– Having an effect on consumers?

Teaser fact

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Share of Bestseller Listings Originally Self-Published

...plus about 100 other titles

Movies

• Digitization has reduced costs of production, distribution, and promotion

• Large recent growth in movies made

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Features Released

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Documentaries Released

New distribution channels

• Netflix, iTunes, Amazon Instant Video

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Online vs Theatrical

Many more movies available to consumers than were released in theaters

Deeper review coverage by pros

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Graphs by group

Growth in Critic Coverage by Group

…and amateurs

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Growing non-major share at box office

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Indie Share of Box Office

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Non-Major Share of DVD Top 20 Listings

…and on television

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by Release Vintage

Indie Share of Movies on TV 2009-2013