Digitization and Creative Products: Crisis or Renaissance?

Joel Waldfogel University of Minnesota and NBER Background: Napster...

• …and the collapse of revenue – Calamitous consequences in recorded music

• Real threats in movies, books – (but no precipitous decline) Initial 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 • Now, most believe that file sharing reduces sales Why care about revenue?

• Recouping investments – music is investment‐intensive (IFPI) – MPAA: ≈ $100 million per movie • Concern: weakened revenue could undermine the flow of new products Digitization is a two‐edged sword

• Napster/piracy are bad news for revenue • But costs may have fallen – Production • Studio + professionals vs Garageband – Distribution • CDs & stores vs CD Baby + iTunes, etc – Promotion • Radio bottleneck vs new environment: • YouTube/Pandora/Pitchfork/Spotify Purpose of copyright

• …to provide rewards/incentives to allow creators to cover costs so that they can bring new works to market

“To promote the Progress of Science and useful Arts, by securing limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

• Is copyright fulfilling its function better/worse since digitization? Is copyright working?

• If appropriability and costs have both fallen, then – “what has happened to revenue?” is not the right question • Instead, we should ask: • On balance, are the existing legal and technological protections sufficient to finance continued creation of new products? The right question is hard, but…

• With some empirical spadework, we can address: – Has flow of new products grown or shrunk? – Are the new products valuable to consumers and producers? • Contribute to an evidence‐based discussion on adequacy of IP protection in new economy Approach #1: critics’ lists

• How many works from each vintage surpass 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)

Rolling Stone Index Index Availability Word, The Virgin Media Under the Radar Uncut Treble from 2004 album list Treble Tiny Mix Tapes Times, The The Word The Times 80 The Sunday Times

.06 The Sun The Guardian The Boombox Stylus Decade Stylus State Spinner Spinner Slant Slant Rolling Stone Rolling Stone Rock's Back Pages Rhapsody Rhapsody Resident Advisor Resident Advisor Popdose Popdose 60 Pitchfork Pitchfork Pitchfork 1990s (99) Paste The Onion A.V. Club onethirtybpm OneThirtyBPM NPR .04 National Public Radio Noise Creep NME NME musicOMH Mixmag Metromix Denver Metacritic Lost At Sea LostAtSea The Line of Best Fit Kitsap Sun 40 Irish Times HipHopDX Guardian, The Index Glide Gigwise Gigwise Ghostly

Rolling Stone Rolling FACT Entertainment Weekly eMusic Delusions of Adequacy Decibel Daily Californian Creative Loafing Consequence of Sound .02 Consequence of Sound Complex Complex CokeMachineGlow Boot, The 20 Boom Box, The Billboard BetterPropaganda Austin Town Hall American Songwriter Q NOW MSN.com BET Pitchfork 1990s (03) Blender songs Rate Your Music Zagat Rolling Stone Best Ever Acclaimed Songs Acclaimed Albums 0 0 1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010 Year Year • Regression: “Splice” together to create overall index, covering • Plot θ’s pre‐ and post‐ Napster era. And voilà: index of vintage quality

Album Year Dummies and Napster weighted 3 Index is falling prior

2.5 to Napster 2 1.5 Post‐Napster

1 constancy is, if anything, a

.5 relative 1960 1970 1980 1990 2000 2010 increase year

coef top of 95% interval bottom of 95% interval Approach #2

• Measure of vintage “quality” based on service flow/consumer decision – Sales and airplay data • 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 Intuition of approach

• Popular music depreciates – older music is sold, aired less

Vintage Distribution for Songs Aired in 2008 15 10 mean of month_pct mean 5 0

1960 961 4 1 19621963 965 196 1 1966 0 196719681969 71 197 19 1972 7 197319741975 1 1976197 1978 3 19791980198 84 1982198 19 985 8 0 1 19861987 198 1989199 991 4 6 1 19921993 95 97 199 19 199 998 1 19 1 1999 3 2000200 2002 004 7 200 2 2005 08 Release vintage 2006200 20 • After accounting for usual effect of age, which vintages are used more or less than others? Resulting airplay index

Airplay-Based Index Flexible Nonparametric 2.5 2 1.5 1 .5 0

1960 1970 1980 1990 2000 2010 Vintage

Index top of 95% interval bottom of 95% interval Sales‐based index

Sales-Based Index Flexible Nonparameric 1 0 Index -1 -2 1960 1970 1980 1990 2000 2010 Vintage Bottom line on music appeal

• No evidence that vintage quality has declined • Instead, compelling evidence that it has increased • Big contrast to what’s happening to revenue • Puzzle: Why is “quality” up despite revenue collapse? Resolving the puzzle

• Fundamental features of creative products • “nobody knows anything” – Hard to predict appeal, few succeed • Traditionally, it has been expensive to bring new works to market – IFPI: ≈$1 million per album • So labels bet on a few artists with high ex ante promise Along comes digitization

• It has become cheaper to bring products to market • Do we end up discovering more artists with ex post value? • Yes, if appeal if unpredictable Suppose appeal were predictable

• Then reduction in cost would bring more products

• But they would be of modest quality Reality: unpredictability

• Release all products with expected quality above the new lower‐cost threshold • Result: more products with quality throughout the distribution, including above the old threshold – (then some “ex ante losers” become “ex post winners”) If this explanation is right, then...

• 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 traditional radio, Internet, and critics • 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? Answers

• Growth in releases? – Yes: tripling 2000 to 2010 in US, etc. • Changed information environment • Success and promotional channels • Ex ante promise and ex post success Answers

• Growth in releases? • Changed information environment • Evolution of sales concentration • Success and promotional channels • Ex ante promise and ex post success Changed information environment

• Online “radio” plays a wider variety of artists than traditional radio – Pandora, Spotify, Deezer, YouTube,… • Growth in online criticism

Growth in Reviews sources founded since 1980 with over 2000 reviews in Metacritic

100000 Of the music reviews at Under The Radar 80000 Drowned In Sound Metacritic, most are from PopMatters

Uncut 60000 Pitchfork sources born and/or The A.V. Club Mojo All Music Guide distributed online 40000 Entertainment Weekly Q Magazine Spin Alternative Press

20000 Rolling Stone Cumulative Metacritic Reviews2000-2011 Cumulative Metacritic 0

1970 1980 1990 2000 2010 Founding Year Answers

• Growth in releases? • Changed information environment • Success and promotional channels • Ex ante promise and ex post success Shifting information channels

• Of albums that become commercially successful:

Share of BB200 with Metacritic Reviews

Share of BB200 with Billboard Airplay .4 .3 .3 .2 .2 mean of dair of mean mean of dmeta of mean .1 .1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0 2 3 4 9 7 8 0 1 2 4 5 9 9 9 9 0 0 0 6 9 9 9 9 9 0 0 0 0 0 0 19911 1 1 199519961 19 19992 0 0 0 2 20 20032 2 20 200720082 2010

Airplay share declining Rising share in Metacritic Answers

• Growth in releases? • Changed information environment • Success and promotional channels • Ex ante promise and ex post success 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

Indie Share among Billboard 25 Indie Share among Billboard 200 .2 .4 .15 .3 .1 .2 mean of dindie mean of dindie .05 .1 0

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

• “even the losers get lucky sometimes” Recap of music improvement

• Digital disintermediation provides possible explanation for increased “quality” • Given unpredictability, more releases lead to discovery of additional “good” music • Much of which would not have come to market before digitization Similar effects in other media

• Books: – Explosion of new products circumventing traditional gatekeepers • (self‐published ebooks) – Lots of ex ante losers arriving in the market Share of originally self‐published books among best‐sellers

Share of Bestseller Listings Originally Self-Published Share of Bestseller Listings Originally Self-Published

.2 romance .6 .15 .4 .1 share share .2 .05 0

0 01jan2009 01jan2010 01jan2011 01jan2012 01jan2013 01jan2009 01jan2010 01jan2011 01jan2012 01jan2013 date date

• From Storming the Gatekeepers, Waldfogel and Reimers (2013) Movies too

• Digitization has reduced costs of production, distribution, and promotion • Large recent growth in movies made

Features Released Documentaries Released Source: IMDB Source: IMDB 8000 10000 8000 6000 6000 number number 4000 4000 2000 0 2000 1960 1970 1980 1990 2000 2010 year 1960 1970 1980 1990 2000 2010 year Changes in movies

• New distribution channels – Netflix, iTunes, Amazon Instant Video • Changed information environment – Lots of critical information available, professional and amateur • Independent products achieving growing availability, success, and quality Growing “indie” share at box office

Indie Share of Box Office B.O.Mojo Revenue, IMDb indie measure .4 .35 .3 .25 Indie Share of Box Office Box of Share Indie .2 .15 1990 1995 2000 2005 2010 year Growth in good movies at Rotten Tomatoes

Rotten Tomatoes Best 87-90, 90-95, 95 100 80 60 40 20 11 08 2012 201020 05 20 2009 02 20062007 0 6 200420 20 2003 19992000 93 19971998 1995199 19 1994

mean of low mean of medium mean of high

Growing share from “independents” Crisis?

• Yes, there has been a revenue crisis in music – With threats looming for other products • But costs have fallen, and new product introductions are rising sharply • A golden age of plentiful and appealing cultural products • Digital Renaissance Implications

• IP enforcement – There are good reasons to strengthen enforcement, but a creative crisis is not one of them • Cultural policy – the reduction in costs is great news for those seeking to promote local creation – production stimulation from tech change is equivalent to a very large subsidy