Wednesday, December 28, 2005

Eliot Spitzer: New York's crazed King Kong, on a rampage again

Eliot Spitzer, the state Attorney General of New York, has issued subpoenas to several major firms in the music industry. Just be careful if you click on the link, because that is a hell of a creepy picture of Spitzer's beady little eyes:
ALBANY, N.Y. - State investigators have subpoenaed several major music companies as part of a preliminary inquiry into whether the digital music services have engaged in any illegal price-fixing activity.

Darren Dopp, a spokesman for state Attorney General Eliot Spitzer, said the office was seeking information on wholesale prices the music labels charge for digital music files that can be downloaded. Dopp said Tuesday that it would take months for the office to launch a full investigation, if one is warranted....

In September, Apple Computer Inc. CEO Steve Jobs publicly criticized music companies, calling some major labels "greedy" for pushing Apple to hike prices on its popular iTunes service. Recording company executives have scoffed at the suggestion.

In a speech before an investors conference, Warner Music Group CEO Edgar Bronfman Jr. said that Apple's 99-cent price for single tracks ignores the issue that not all songs are the same commercially and, like any other product, shouldn't be priced the same.

Such discord has not kept the labels from licensing their music videos to Apple. Still, as their contracts with Apple come up for renewal, the music companies are seeking to improve their take.

"All the prices do seem to move in lock step," said industry analyst Phil Leigh, who runs U.S. market research firm Inside Digital Media. "There has been talk of raising prices for several months. I'm surprised (music companies) raised the issue. It's clear the industry convention is 99 cents."

The subpoenas issued this month are not the first time Spitzer, a Democrat running for governor in 2006, has looked into the music industry.

In November, Warner Music agreed to pay $5 million to settle an investigation into payoffs for radio airplay of artists. In July, Sony BMG agreed to pay $10 million and stop bribing radio stations to feature artists.
So let me get this straight: it will take months before they can even commence the investigation, and after spending how many millions of state taxpayer dollars?

Spitzer and Jobs have apparently never heard of "supply and demand," or really looked into how music royalties really work. Despite what "industry analysts" like Leigh claim, and I wonder how he can even call himself an "analyst," there's no conspiracy to keep the same prices. There's as much "price-fixing" between the big music companies as there is between competing grocery stores that happen to have similar prices on groceries. I can say this because I used to work in the music industry, specifically in royalties, and I learned a thing or two.

There's also an innate problem with price-fixing conspiracies: someone will eventually start selling for less than the rest, forcing competition. It's virtually impossible for cartels to stick to their own terms, especially big ones like OPEC (some of whose members regularly sell more than the established quotas). So even if Apple and most others were engaging in collusion, they don't have the power of the state to inhibit market entry: they can't stop Wal-Mart, which offers its own selections for 88 cents each. So Eliot...what price-fixing, when consumers can go elsewhere, and in fact for less? Ten cents per song is actually a lot, but it's nothing new to Wal-Mart: its strategy has generally always been about low profit margins and high sales volume. Apple and the rest, however, gravitated toward about $1 per track, competing against each other with audio formats, the interface, and service quality.

Edgar Bronfman is completely correct, and I don't say that just because he heads where I worked. One thing that irks me about most albums today is that you get a few great tracks and a couple of good ones, but the rest are often junk. Few will want to buy bad songs online, but people will be willing to pay a little extra for a great new hit. Let's say someone pays the new higher price of $2 for it: is he somehow being forced? I don't see how Apple, WMG or anyone can put a gun to his head, or twist his arm, so it seems to me such a decision would be completely voluntary. Such a transaction is of great benefit to both sides. The consumer might pay $10 for five tracks he wants, instead of $15 for an entire CD that he mostly doesn't like. The company saved on distribution costs. I don't know what Spitzer calls this in the reality he lives in, but I call it "win-win."

It's not "greed"; it's the free market. If Apple won't charge more for more popular songs, which consumers would most likely be willing to pay, then the music companies will not renew their contracts with Apple and go with someone else. Steve Jobs had better tread carefully, otherwise he might kill Apple's revenues (its iTunes Music Store is highly profitable) in the same way Steve Case wrecked AOL and Time Warner with the disastrous merger.

I personally think the earlier investigations into Warner and Sony were 100% bogus, and more manifestations of Spitzer's shakedown tactics. The money paid was essentially promotional fees, which is one form of advertising. Advertising is not just a matter of competition, but how companies try to reduce consumers' search costs. If you hear a new song fairly often, you'll want to buy it on CD or download it. If it's played so rarely that you never hear it, you might never get it and instead buy inferior music.

Should a music company push what consumers think is a bad song, the free market will take care of it. Consumers are hardly captive, and one of their most powerful abilities is to choose not to buy (New Coke, anyone?). If they wish to take a stand on principle, they won't listen to a radio that accepts money to play certain songs more often, and they won't buy music from a company that pays money to radio stations. We don't need a self-anointed messiah like Spitzer to protect us from commercial situations where there is no force or fraud, because we are in more control than any government official could imagine. As Ludwig von Mises said:
The direction of all economic affairs is in the market society a task of entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer.
After years of Spitzer's crusades, we shouldn't be surprised that he doesn't know what real competition is. When it comes to radio airtime, since the consumer is completely in control, it's as simple as changing the station. Or is he trying to get "fair" and "equitable" airtime for each song? Would this be some twisted form of affirmative action for bad songs "that ought to have a chance" to be heard?

If that's a stretch, well, so are his accusations of price-fixing.

Previous entries about Spitzer:
Maybe Spitzer isn't so bad after all (or maybe he is)
When government turns people into sheep
Big government: yo, where's our cut? Part II

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Blogger DonA said...

"There's also an innate problem with price-fixing conspiracies: someone will eventually start selling for less than the rest, forcing competition. It's virtually impossible for cartels to stick to their own terms, especially big ones like OPEC (some of whose members regularly sell more than the established quotas)."

This is not a new phenomenon. My grandfather, who was a manufacturer in the 1915 - 1935 era, told the story about travelling to Chicago on the train to meet with his chief competitors. After they agreed on a scheme to divide the country into exclusive territories for the purpose of price fixing, he told of plotting to sell into the competitors' territory on the train trip back home.


Wednesday, December 28, 2005 12:56:00 PM  
Blogger TKC said...

I've never understood why 'pay for play' is not allowed. If I am the CEO of Acme and want to sell my new widget then I might consider advertising on the radio. But if Acme is a music company and the new widget is a certain band then I cannot offer the radio station money to play the new song? That makes no sense. If people think it is a crappy band then they won't buy the music. If they really think it is a crappy band then they'll change the station. So where exactly is the problem here?

Wednesday, December 28, 2005 4:30:00 PM  
Blogger Perry Eidelbus said...

Spot on, guys. It's really, really hard to suppress free market forces. By themselves, businesses just can't hold monopolies. Sustaining true monopolies takes force -- government force, backed by police, courts that fine and break up companies, and jails.

Wednesday, December 28, 2005 11:25:00 PM  
Anonymous Sphynx said...

The only "price-fixing" that works is what Wal-Mart (and a few other retailers) practices: Wal-Mart's buyers tell thier vendors the price they will pay per-unit for a given product. The vendor can take it or leave it. Wal-Mart's vendors sell at its buying price because a standard order for Wal-Mart is in the 100,000's or millions! The above came from my memory of a 60 Minutes episode on Wal-Mart business practices a few years ago, but I can't find a link for it.

Notice: in the above price setting model, there is no coercion, W-M can't force a vendor to sell, the vendors can't force W-M to buy. This method was cited as one of the ways W-M keeps prices down. It has been criticized for "forcing" manufacturers to move production overseas to meet the buying price, but out-sourcing is a whole other blog topic.

Thursday, December 29, 2005 11:50:00 PM  

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