Rockonomics

by Alan B Krueger

  I did three albums with Trip Shakespeare and an EP. And then the band did kind of a soft split. I formed Semisonic with Jacob Slichter and John Munson.

  How do you think about the progression of your career?

  Well, from within, I can sort of make a story out of my career, but from within I don’t experience it as a story or a progression. It’s kind of a sequence, but not exactly a progression.

  I had a math teacher in junior high who, speaking of me, told my parents that if you have a handful of clay and squeeze the clay, it’s going to come out from between the fingers. And he said that your son is like that too, “You don’t know what direction his talent is going to come out, but there’s too much talent and it’s going to come out.” He thought that genius was omnidirectional in some cases. He thought I was a good mathematician, but he didn’t think that’s where I was going to excel. I know a lot of people like that: if they’re songwriters now, they could have been filmmakers too, or they could have been painters. A lot of the path in life has to do with the sequence of yeses that come down from the universe to the artist and then it looks to all the world like you charted a path. But instead you just followed magnetically from one yes to the next. I feel in a way that that is what I do.

  When Semisonic was doing its very best work, my first daughter was in the hospital for a long, long time. When she came home she required twenty-four-hour nursing and a ventilator, and this continued until she was three. It became obvious that her issues in life were going to be profound for a long time. I don’t think it was a completely conscious decision for me, but the thought of being away for two hundred nights a year touring seemed less and less sustainable. So I applied a lot of creativity to try to figure out how to write songs for other people. That was a conscious decision in a way. The fact that it worked out so stupendously well definitely has affected how many gigs I do. If the writing had not gone well, I might have been a music teacher as well.

  You still do some live performances and tour. Why?

  I like performing for a couple of reasons. I love interacting with other musicians, so if I get to perform with other musicians, it’s where the stakes are highest and most immediate. The rush of channeling something is more intense when it is in front of an audience because you can feel the validation of the audience’s emotion. Also, I like making people laugh.

  What led you to produce music?

  When I first thought about being a songwriter, the model in my mind (because of my parents listening to soft rock and folk music) was Carole King, who wrote tons of songs for other people and performed a bunch of songs herself. She was incredibly flexible as a songwriter. Her genius was to me a kind of gold standard.

  When I was coming up, we were beginning an era that you had to play an A&R person a fully finished record to make them understand that it might be a hit. And because home studios were more and more available, the expectations of demos to be perfect presentations of hit-sounding prototypes of records changed; it wasn’t even a demo anymore, it was literally either the record or the prototype for the record. The pressure to be able to make a record out of the song was very high. I realized I had to teach myself how to produce records.

  I went on kind of an expedition for part of 2002 or 2001 and I wrote a bunch of records with pop producers in Europe for myself. My observation was that people who worked in digital media would always tell you all their tricks, whereas the analog recording tradition was shrouded in secrecy and black boxes. The digital producers I worked with taught me a massive amount about how to make a record sound great. I really do enjoy producing records.

  Everybody has a studio at home, because everyone can do whatever they want now on a laptop in their living room. I have musical instruments and the capacity to record things at home, but I use studios in LA if I want to record a big project.

  What is the impact of home studios and computer technology on musicians?

  Computers have made music a lonelier process for lots of people, especially beginners. But music is a social activity. The people who do the best are generally people who can play the hell out of their instrument and make the people around them feel great about themselves.

  A musician’s natural perfectionism will lead them to labor alone until something is perfect or right. That’s already an isolating factor. Now, if you have an entire studio and samples of all the great violinists in the world, and everything on your laptop, it is just one more avenue to keep you isolated from other musicians.

  Did your label know from the beginning that Closing Time would be a hit and garner a Grammy nomination?

  No. They rejected the album as having no singles and gave us the opportunity to make more songs.

  Our manager, Jim, said, “You’ll write several new songs, they’ll give you a budget, you’ll go back to the sandbox and make a few more songs and add them to the batch. When you’ve done three more songs for the label after they rejected your album, which songs are they going to choose as a single?” I said, “The new ones of course, because they commissioned them.” Jim said, “That’s right. So, here’s the question: can you guarantee me that the three new songs that you’re going to write are going to be better than ‘Closing Time,’ ‘Secret Smile,’ and ‘Singing in My Sleep,’ the three that we identified as singles?” I said, “No, those are great songs. I can’t guarantee beating those songs.” He said, “So you’re saying you want to go back to the studio to replace those three songs with songs that are very unlikely to be better and have those be the singles for the record.” So, we ignored the label for weeks when they called to try to convince me to do more songs. Finally, they got a new person at radio promo, who said, “I’ll take a risk on this.” And, the president of the label called my manager up and said, “Well, it’s your funeral for putting out a record like this.”

  Those were some magnetic yeses.

  Washington Gently Weeps

  A key principle of economics is that commercial policy should be neutral—neither favoring nor disfavoring one technology or company over another. This principle makes sense because governments are not good at picking winners or losers, and powerful companies are able to lobby the government for special treatment, even if they do not provide the best service or prices to customers. Moreover, the path of technology is often unpredictable. George Washington eloquently endorsed the neutrality principle in his Farewell Address in 1796, arguing, “But even our commercial policy should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing.”*3

  Current U.S. policy, which authorizes much lower royalty payments for airing music on terrestrial radio broadcasts and YouTube than on music streaming services, would make George Washington weep. Historical and legal circumstances have led to a different set of licenses and fees for the use of music over terrestrial radio, satellite radio, and interactive or non-interactive streaming services. In music circles, this is called the value gap.29

  Radio Rip-off

  Under long-standing copyright law, American radio stations do not pay for recorded music performance rights; they pay only for composition rights. As a result, Aretha Franklin was not paid when her iconic rendition of “Respect” was played on the radio, but the song’s composer, Otis Redding, or his estate, was paid royalties. Iran and North Korea are the only other countries that do not require the payment of performance rights to artists when songs are played on the radio, a peculiar axis for the United States to be a party of.

  In the past, it was argued that performers benefited from having their songs played on the radio because it promoted their work and increased record sales. In other words, performance royalties were unnecessary in light of the in-kind benefits performers received. But wha
tever merit this argument may have had in the twentieth century is moot in the digital age. Streaming services, such as Spotify, Amazon, and Apple Music, provide promotional benefits for touring that rival those offered by radio stations, yet these services do pay substantial performance royalties. Moreover, economic consultant Barry Massarsky has noted that just over half of the music currently played on radio stations is from the back catalog (two years old or older), so it is inaccurate to argue that radio promotes new music. Massarsky argues that music promotes radio, rather than the other way around.

  The differential treatment of radio and streaming services violates the neutrality principle, to the benefit of owners of radio stations. Figure 9.1 shows that music radio stations pay out a much smaller share of their revenues to music rights holders than do satellite music stations or streaming services.30 This creates a profitable business model for radio stations: music radio stations pay out only 4.6 percent of their operating budget for music, although music makes up two-thirds of their on-air content. And radio station owners, who are located in nearly every congressional district, and their trade group, the National Association of Broadcasters, have successfully lobbied to avoid paying performance royalties for decades, in a successful exercise of rent-seeking.

  Non-interactive streaming services, such as Sirius XM and Pandora, where users cannot select a specific song to play, qualify for a compulsory license with royalty rates set by the Copyright Royalty Board (CRB). But the neutrality principle is further muddied because the two services pay different royalty rates, as they are subject to different legal standards and different CRB rulings.

  Figure 9.1: Music Licensing Fees as a Share of Revenue, by Format, 2017

  Source: Massarsky Consulting. Note that the revenue base is adjusted to exclude revenue that is not subject to royalties.

  On-demand (or interactive) streaming services such as Spotify, Amazon Music, and Apple Music, where the user can select which song to play, must obtain a license from copyright holders for the use of sound recordings. And, as explained in Chapter 8, they negotiate royalty rates directly with the rights owners.

  YouTube Rip-off

  Perhaps the biggest violation of the neutrality principle belongs to YouTube, the giant online video-sharing platform. More music is listened to over YouTube than on Spotify and Pandora combined.31 YouTube is covered by the 1998 Digital Millennium Copyright Act (DMCA). The DMCA creates a safe harbor from copyright infringement for user-uploaded content on Internet platforms, provided certain requirements are met. Most important is that the platform must remove content in a timely fashion when it receives a request to do so, known as a takedown notice, from a copyright holder. YouTube is not required to pay for the right to use copyrighted material so long as it meets the requirements of DMCA. Spotify, Pandora, and other ad-supported services do not have this luxury because their music catalog is not uploaded by users.

  YouTube receives millions of takedown notices every week, but the system has become a losing game of whack-a-mole for copyright holders. Once popular content is removed, users often upload the same or similar copyrighted material again. This system is particularly problematic for less successful artists, who lack the wherewithal and the legal team to constantly search and police YouTube’s billions of postings. An obvious fix would be to require YouTube and other platforms to permanently remove copyrighted material once they receive a notification that the copyright holder does not want that material made available on their service. But Internet service providers have resisted this solution, for obvious reasons. Instead, record labels have negotiated from a weak position for a relatively small share of the ad revenue that YouTube collects. This situation provides YouTube with a significant economic advantage over Spotify, for example, which many users consider a close substitute.

  When President Clinton signed the DMCA, it was meant as a temporary measure, one that would allow the Internet to grow and evolve; the law was to serve as a stopgap until more thoughtful and appropriate regulation could be devised after the Internet had matured and it became more clear what shape platforms were taking. The Clinton administration did not anticipate that Google, which would later acquire YouTube, and other Internet service providers would become so large and powerful that it would be a Herculean task to unwind the temporary protection that DMCA afforded and legislate a more reasonable balance between content creators and Internet platforms. This is another example of the power of rent-seeking.

  Modernizing Copyright for a Digital World

  Early in this chapter I warned that music copyright rules can make your head spin. The lines that divide legitimate copyright protection from excessive copyright exploitation are blurred, the laws that dictate copyright fees and licensing requirements across different platforms are uneven, and the restrictions that govern the organizations that collect and distribute music royalties are antiquated. Marty Gottesman, who worked for the performing rights organization BMI for many years, aptly summed up this sad state of affairs when he told me, “Copyright rules don’t need to split so many hairs over minutiae that don’t matter anymore.”32

  After decades of infighting and failed efforts to reform the system, almost the entire music industry supported a set of proposals that were bundled together in the Music Modernization Act (MMA). This legislation, which was signed into law in 2018, establishes a new organization to collect and distribute royalties from digital streaming services; creates a public database that associates recordings with songwriters and publishers to streamline payments; creates a method for producers and engineers to receive royalties when their music is streamed; creates copyright protection for music recorded before 1972; changes the standard for setting rates used by the CRB to a free market standard; limits the liability of streaming platforms such as Spotify in copyright infringement lawsuits under certain circumstances; and introduces a variety of other technical changes.33 Although the act was unanimously passed by the House of Representatives in April 2018—an exceedingly rare feat—some last-minute wrangling was necessary to carry it across the finish line in the Senate in September 2018. For example, at the last minute Sirius XM managed to add language that locked in its current royalty rate (15.5 percent as of 2018) for an extra five years, from 2022 to 2027.34

  The MMA reforms, though significant, represent the lowest common denominator that all interest groups could support, and only scratch the surface of what is needed to modernize copyright laws for a digital era. The MMA does not address the distortionary value gap in radio and YouTube royalty payments, for example. And copyright royalty rates are still highly regulated, rather than determined by market forces.

  A much more significant step would be to level the playing field by moving to a uniform, market-based system: allow music rights holders or their delegates (e.g., performing rights organizations and record labels) to negotiate directly with all streaming services, radio stations, video-sharing services, and anyone else seeking to gain access to their music. This system is currently used for sound recordings by interactive streaming services, movies, and videogames. Why not extend it to AM and FM radio, YouTube, and other platforms?

  Legal researchers Peter DiCola and David Touve conducted more than thirty confidential interviews with individuals directly involved in negotiating access to rights for music for more than twenty interactive streaming services. They found that “licensing an Internet music service can take as little as nine months.” The median streaming service took eighteen months to negotiate for the rights to stream enough songs to launch their service.35 Although the time required to negotiate rights did not decline over the first decade of the 2000s, the volume of songs covered by the negotiations grew to the millions. It thus appears feasible for the market to work in an efficient fashion. Moving to a uniform system that requires all platforms to obtain the rights to use music, instead of imposing a compulsory license at an administratively determined f
ee for some platforms, would also enable artists to retain creative control over their works, which is a major objective for musicians.

  Even Lines

  A driver listening to music in her car can seamlessly switch from a terrestrial radio station to a satellite radio station to an Internet radio station to a streaming service without noticing the difference. Yet U.S. policy dictates differential royalty fees and licensing requirements for these platforms. The upshot is that government policy currently favors some formats over others, impeding progress. The uneven and blurry lines that policy makers have drawn for copyright laws have too often been etched to protect and expand the interests of rent-seekers, and not often enough to support the creative instincts of musicians, composers, and innovators.

  *1 In his deposition, Robin Thicke disclosed that he was under the influence of alcohol and Vicodin when he recorded “Blurred Lines,” and that Williams “wrote almost every part of the song.”

  *2 “It just happened that way” doesn’t make for good lyrics in the same way as “If it’s meant to be, it’ll be,” but it often provides a more accurate explanation of the music business.

  *3 Alexander Hamilton assisted President Washington in writing his Farewell Address. This fact is commemorated in Lin-Manuel Miranda’s song “One Last Time,” which envisions Washington instructing Hamilton, “Pick up a pen, start writing / I wanna talk about what I’ve learned / The hard-won wisdom I’ve learned.”

  CHAPTER 10

  The Global Market for Music