Summary

Alan Krueger uses the music industry to explore the functioning of the broader economy. The rise of technology has increased the potential reach and scale of the market, but scale outweighs increased reach. Thus, the superstar market leads to a power law rather than a long tail distribution when we have imperfect substitutes. The book also discusses the impact of luck on success and the vital importance of paying attention to regional and cultural differences across markets. The music industry is a small part of the economy, but has outsized positive externalities on society.

Key Takeaways

• Superstar market: economies of scale outweigh tech’s increased reach (imperfect substitutes)
  • power law dominates, not a long tail phenomenon as once theorized
  • The rich get richer
• Music is only 0.1% of the US economy but has an outsized impact on society
• Luck plays a massive role in success and discovery
  • Study of random upvotes in music playlist
• Need to pay close attention to regional and cultural differences across markets

https://overcast.fm/+1Lef8QoCk

• 1991: Billboards become automated, find true hits of country, rap
• Streaming era: purchases → plays
• 30 secs of play time → shorter intros
• Melody → rhythm
• Horizontal → vertical (visual) music writing
• Context drives creativity, rather than divine creation independent of context (Darwinian)

Notes

1: Prelude

• Streaming economic incentives directly affect how songs are performed (30 secs)
• Focus on live events for revenue

2: The music economy

• $18.3b in 2017: 0.1% of US GDP
• US is 1/3 of global music spend
• Outsized positive externalities
• Only 2% of entertainment industry
• Spend: 1/2 recorded, 1/2 live performances
• Top artists: ~80% money is performances
• Social purpose as a long-term profit-driving mechanism

3: The supply of musicians

• Over 200k musicians as main occupation, 0.13% of total workforce
• Demographics largely match that of US
• Top 29 solo artists: $19m in 2017
• “Find a field that you enjoy and that others find less enjoyable”
• Increasing rate of artist collaborations
• 3x risk of drug addiction as musician

4: The economics of superstars

• Superstar market: where small num of top performers earn outsized share of outcome
• ↑ two components:
  • Scale: tech increases potential reach, scale of market
  • Imperfect substitutes: style / skills that affect profitability (non-commodity)
• Concert revenue for top 1% increased from 26% to 60% over 40 years due to scale
• Pareto principle, 80/20 rule, power law
• Economies of scale equal to / outweigh tech’s increased reach, so power law persists and less long tail phenomenon
• Same applies to general wages:
  • Globalization, tech change (35-40%)
  • Erosion in union membership
  • Real value of minimum wage
  • Non-compete clauses
  • Less fairness: ↑ top executive pay

5: The power of luck

• Only 40% of top 100 song artists did so multiple times (repeated luck or skill?)
• Diversification is the key to overcoming risk associated with luck

6: Economics of live music

• Tickets often sold below market demand price, leading to scalping
• Scalping is an efficient market practice but bad for average consumer
• Solutions: raffles, auctions, tiered pricing, verified fan
• Merchandise sale is small but not insignificant

7: Scams in the music business

• Sunk cost means more to people than economists often concede
• 16% of NFL players filed for bankruptcy within 12 years of retiring

8: Streaming music

• Paid streaming customers expected to grow from 100m to 1b, vastly increasing reach
• Since popularity is all about viral nature, publishers can be paid to promote + inflate
• Illegal to pay radio stations, but not to pay streaming companies to advertise
• More data for artists
• New artists worse off due to lack of back catalog
• Playlists drive success: value of being on “Top Hits” is worth 20m streams, $150k
• Can game around streaming profit model to match demand curve, willingness to pay

9: IP in a digital world

• Copyright laws must stride line between encouraging innovation and not stifling it
• Non-rivalrous goods: ripe for copying
• Study shows 150% increase in innovation with IP protection (1800s, music, copyright)
• IP brings fairness, credit, creative control
• Different royalty fees for radio (none), streaming, and YouTube (DMCA)

10: Global market for music

• Streaming increases globalization, more international stars to come
• China: biggest outlier in GDP / music spend due to copyright issues, gov’t regulation
• Japan, Sweden have highest ↑
• India: 80% of spend on Bollywood music

11: Music and well-being

• Listening to music contributes to 1/5 a standard deviation increase in happiness
• Biggest increase during work, conversation