Monday, March 22, 2010

Hypercompetition, Scarcity, and the Economics of Music

I saw this last week and decided to pull together a blog post on several topics I've been thinking about:
About 1 million design students in China, compared to about 40,000 in the U.S. Implication: your competition for jobs is about to expand exponentially. Welcome to the flat world. ...

The supply is currently outstripping demand, so compensation for things like logo design is going to be low. "Crowdsourcing & Disruption Event at Pratt: Realities & Denial," eyecube, 3/11/10.
And also this:
There are too many films out there, there are too many filmmakers. "SxSW: Nobody Wants to Watch Your Film: Realities of Online Film Distribution," Magnet Media, 3/14/10.
Because of the Internet and global competition, we're seeing declining income in a number of creative fields (e.g., design, writing, music, video). People are competing for these jobs even when there is little or no payment.
RU Sirius, former editor of Mondo 2000 summed up the problem at a recent Net 2.0 conference in Amsterdam: “Get people to work for free.” That has essentially become the motto of the post-scarcity economy. "NET 2.0: Post-Scarcity Economics and the problem with Google," Medialternatives, 2/2/08.
One line of thinking is that if you give away your digital content, you'll gain exposure, build an audience, and then sell "scarce" goods and services. Here are two posts on the subject:

  • The Technium: Better Than Free
  • The Grand Unified Theory On The Economics Of Free

  • While I am not going to argue the rightness or wrongness of "free" (it's already a reality, so I don't think there is much to be gained by exploring the concept here), I am skeptical that there are a lot scarcities to sell. At least not in the areas related to creative content and to human labor. Pretty much anything you offer as "scarce" in these areas can and will be duplicated. Once people see there is money to be made, they will begin offering their own versions until the price is driven down. This is what is now commonly referred to as hypercompetition.
    You may think your business offers rare and valuable goods and services. But the chances are that, somewhere, a recent entrant or potential competitor is preparing to do something similar, for a lower price. As the author says: "Everything becomes a commodity eventually." "A more virulent form of hypercompetition," FT.com, 12/16/09.
    Here's a definition:
    Hypercompetition:
    A situation in which there is a lot of very strong competition between companies, markets are changing very quickly, and it is easy to enter a new market, so that it is not possible for one company to keep a competitive advantage for a long time.
    And two more explorations on the subject:
  • From our financial models, such as using net present value analysis to value projects, to our investment models, which presume more or less predictable and long life-spans for given business activities, we have built a lot of operating frameworks on the idea that our lines of business will be around for a while. And not only around, but profitable.

    All this began to change in the early 1990's, when a number of scholars, such as my colleague Ian MacMillan and his co-author Rich D'Aveni, started talking about a phenomenon they called "Hypercompetition." In hyper-competitive environments, to paraphrase Hobbes, the life of a competitive advantage is nasty, brutish and short. In other words, advantages don't last for very long before competitive entry, imitation and matching erode their edge, or customers move on, or the environment changes in such a way that the advantage becomes irrelevant. "Competitive Advantage Is Fleeting (And It's Okay to Admit It)," Harvard Business Review, June 2009.
  • "Welcome to Hypercompetition—Competitive Advantage at its Fastest"
  • Barriers of entry have kept some competitors out, but technology is reducing some of those. For example:
  • The tools of factory production, from electronics assembly to 3-D printing, are now available to individuals, in batches as small as a single unit. Anybody with an idea and a little expertise can set assembly lines in China into motion with nothing more than some keystrokes on their laptop. A few days later, a prototype will be at their door, and once it all checks out, they can push a few more buttons and be in full production, making hundreds, thousands, or more. They can become a virtual micro-factory, able to design and sell goods without any infrastructure or even inventory; products can be assembled and drop-shipped by contractors who serve hundreds of such customers simultaneously. "In the Next Industrial Revolution, Atoms Are the New Bits," Wired, January 2010.
  • The revolution that is brewing now will get us much closer to another seemingly impossible Star Trek technology: the Replicator. You won't be able (for some time) to press a button and get a whole meal synthesized on the fly, but we are at the stage where a short time after pressing the button you can have a wide variety of objects appear magically. These range from tiny, fully functional gears to large, colorful pieces of art and cover materials as broad as glass, ceramics, metal and plastic. Yes, glass, ceramics and metal! "Communicator: Done. Replicator: Next. The Future of Making Stuff," usv.com, 3/22/10.
  • The music industry used to have significant barriers of entry, but now that everyone can cheaply record and distribute music, the flood gates have opened. There are still some barriers (e.g., getting on broadcast radio), but artists are being told there are many opportunities for them these days. Sure, they may have to give away their recorded music to get some attention, but to make money they can offer fans goods and services that aren't easily duplicated.

    However, I'm saying that just about everything an artist or band can offer can be duplicated:

  • Develop some interesting merchandise, and it will be copied.
    Representatives for the jam-band Phish are due in federal court this afternoon to argue that it should be allowed to stop bootleggers from selling T-shirts, jackets, bumper stickers and other merchandise bearing its trademarked name during its upcoming reunion tour. ...

    The issue isn't necessarily about money, the lawsuit says. The band says the unauthorized merchandise sales "threaten" the band's reputation because it relinquishes control over the quality and appearance of the merchandise, according to the suit. "Phish in court this afternoon to block bootleg merchandise," The Virginian-Pilot, 3/5/09.
  • Create a great live act, and that can be copied as well.
    ... the sheer number and variety of tribute bands has exploded, branching out to modern-era acts such as Pearl Jam, the Dave Matthews Band, and even the Arctic Monkeys. "Tribute bands are music to fans’ ears, wallets," The Boston Globe, 3/6/10.
  • Even relationships aren't perceived as scarce. While it's nice to think that artists/bands will hang on to their fans for life, the reality is we're a society where people too often change friends, even spouses, when they see someone better. Toss in commitment phobia and you have a situation where relationships aren't a sure thing.

    Given all of the above, I question the usefulness in talking about scarcities as a music business strategy. In addition, much of what we buy has little to do with scarcity anyway. Sometimes it just comes down to being in the right place at the right time. For example, if we want a cup of coffee, and we see coffee vendors on all four sides of the street, the reason we pick one over the other isn't a scarcity issue. Similarly, if every girl on our block is selling Girl Scout cookies, we may end up buying from whomever comes to our door first. Or maybe we'll buy a box from each one of them.

    Buying behavior is much more complicated than saying people will pay a premium for scarcity. Here are a few resources that outline the many factors which determine why we buy what we buy:

  • Factors Which Influence Consumer Choice. If you want the PowerPoint version, go here.
  • Buyer Behaviour: Stimulus-Response Model.
  • The Black Box Model of Consumer Behavior.

  • So I think talking about "selling scarcity" can be the wrong strategy. As I have already mentioned, hypercompetition suggests that as soon as you have an idea, someone else will copy it and drive down the price. For musicians, that means being on an endless treadmill trying to find scarcities to sell. As soon as you come up with something fans will pay for, many other bands and artists will try it too. There will be a glut.

    You may make money in music, but I doubt that offering scarce goods and services will be the key. For virtually every option that an artist/band offers, there already is or will be someone else offering something similar. And it won't take much effort for fans and potential fans to find it. All anyone has to say is, "I want ... " and the marketplace will provide it, often in multiple ways. Think of the various "saleables" that artists/bands currently offer (e.g., entertainment, merchandise, community, engagement, celebrity access) and there are equivalents both within and outside of music.
    We're running out of scarcity. ...

    It seems as though once a category becomes successful, the headlong rush to knock it off is stronger (and quicker) than it ever was before. ...

    While there are almost half a million lawyers practicing in the United States today, there are (gasp!) more than 125,000 in school right now. ...

    The same thing is true for doctors, Web sites, T-shirt shops, sushi restaurants, thumbtack manufacturers, and brands of blank CD-ROM disks. ...

    If it's remotely digital (like music), then it's easy to mimic. And if it's easy to mimic, someone wins if they can knock off the original--the sooner the better. When someone starts to sell exactly what you sell but for half the price, how long does your good-service, first-mover, nice-person advantage last? "The Scarcity Shortage," Seth Godin's Blog, 8/27/07.
    And even the fallback argument, that talent is scarce and people will pay for access to it, doesn't really hold water because making money in music and having the most talent do not necessarily go together.
    SUCCESS = SOME TALENT + LUCK
    GREAT SUCCESS = SOME TALENT + A LOT OF LUCK
    Nobel prize-winning economist Daniel Kahneman quoted in "FORMULAE FOR THE 21ST CENTURY," Edge.org, 10/13/07.
    Godin acknowledges there might be a few scarcities, but even those may not confer a lasting advantage.
    So what's scarce now? Respect. Honesty. Good judgment. Long-term relationships that lead to trust. None of these things guarantee loyalty in the face of cut-rate competition, though.
    Some people are even suggesting that we're surrounded by so much abundance that now we want less. J. Walker Smith, president of Yankelovich Inc., lays it out in an article, and then Mike Heronime, Partner/Strategic Services Director, Numantra, expands upon the idea in a presentation.

  • Enough of Too Much
  • Marketing to Consumers in a Post-Abundance Economy

  • However, these models tend to benefit people and companies that provide filters rather than artists trying to sell their music and music-related products. It would be a bit like having a musician say, "Pay me to go away."

    So let's jump ahead and envision a world where there's more stuff than any of us can consume. Imagine a scenario where people are making a ton of music and art, but there are few economic transactions. So how do artists (or anyone for that matter) make a living in the post-scarcity society?
  • In the post-scarcity world, technological advances will facilitate decreasing costs until conceivably almost everything is “free” to the consumer. Scarcity will no longer exist in this world, and, without scarcity, the concept of charging a price to consumers as a means of generating revenue will be unworkable. The post-scarcity world will put tremendous pressure on current business models, potentially rendering them irrelevant and obsolete in the future. If traditional businesses do not adapt to this emerging “free” world, many of the strong, traditional organizations of the early twenty-first century will cease to exist over the next 50 years. "The Post-Scarcity World of 2050-2075"
  • If products are no longer scarce, does this mean that the only jobs left will be service positions? Are there enough service positions for everyone? Or do people do the services that they find fulfilling, leaving others to lounge around and/or be non-productively creative?

    I'm not a regular Burning Man attendee -- the schedule rarely works out -- but I have gone. My first time wandering the playa, visiting the various camps offering gifts of art, services and/or more physical forms of entertainment, I was struck with a realization: this is one model of what a post-nanotech world might look like. Assume your material needs for food, water, shelter and toys were met, and that you no longer needed to work; what might result is a world where creativity, mutuality, and the gift economy ruled... or a world where sex, drugs and sleeping until 2pm ruled. Or, as with Burning Man, both. "Abundance, Scarcity and Beta-Testing Tomorrow," Open the Future, 9/12/06.
  • How are we to survive as producers and creators in an age, in which value is no longer determined by scarcity, but rather the accumulation of bits and bytes, the 1s and Os that describe information?

    ... We figure out a system of revenue sharing, in which the exchange of information is granted value. ...

    One day we will awake to find the proverbial Google cheque in the mail. It will be a dividend in which all the clicks on the internet have been divided by the total population of the world and squared with the amount of money earned by the earth’s service providers. The legend will say: You are user # 51 298 123 187 here is you ten-cents (US$) for the 8kb of data we actually siphoned off your site. We know its yours, because the IP number says it’s yours.

    The result, I predict, will be a practical and infinitely rewarding utopia in which everybody would have a guaranteed income, courtesy of Google Corporation. This is the kind of error, which could make life worth living. "NET 2.0: Post-Scarcity Economics and the problem with Google," Medialternatives, 2/2/08.
  • The above scenarios, where EVERYTHING is abundant, are still in the future. But the world where music (and everything associated with it) is abundant is already headed our way. The oft-proposed solutions, based on some sort of scarcity, are going to be hard to sustain. So I suggest we look beyond that.

    Suzanne Lainson
    @slainson on Twitter

    UPDATE 4/4/10

    This article says that there are now so many photos online available for licensing that the price paid per photo has gone down significantly.
    For Photographers, the Image of a Shrinking Path

    UPDATE 7/14/10
    This article talks about how museums sometimes pay a great deal of money for something that turns out to be fake. The value isn't in the object itself, but in the perceived artist. Therefore, if you can produce a copy and convince someone it is real, they may pay you the same amount as if it is real.
    Testing Art for Authenticity at London’s National Gallery

    UPDATE 10/17/10

    I mentioned in the post that as a society we will even replace personal relationships if someone better comes along. Here's a recent article on the same subject.
    [Writes sociologist Eva Illouz in Cold Intimacies,] "Romantic relations are not only organized within the market, but have themselves become commodities produced on an assembly line, to be consumed fast, efficiently, cheaply, and in great abundance.” In other words, as dating (or ersatz love) has migrated to the internet, it has undergone the same changes as everything else that has moved online: it has been remade by the ethic of convenience into something more solipsistic and disposable. "Love Worth Fighting For," The New Inquiry, 9/30/10.

    7 comments:

    1. A lot of interesting food for thought there, Suzanne.

      Personally, I feel that should we ever reach a true age of abundance, the situation will resolve itself - once EVERYTHING is abundant, one will no longer have to search for scarcities. I am willing to do nothing, but make my work available for free to all, so long as I get all I want for free.

      The problem right now is that while some things have effectively become abundant, most of what we really need to live hasn't. This is a bummer for all those who could contribute to furthering abundance in the few spheres where it already exists, except that they have to eat like the rest of us.

      I wouldn't underestimate scarcity though - humans are selective and some things simply cannot be duplicated. A tribute act may do in a pinch, but most fans will prefer to see the real deal. A person has the natural monopoly, if you will, on himself or herself - no one else is a perfect substitute.

      Of the things you bring up, the one I find especially noteworthy is the issue of merchandise. I haven't noticed anyone pointing this out, but right now it's quite feasible for fans to make their own through a number of companies - all they need is to cop the designs they'd like from someplace (maybe slap something together in Photoshop even). For those who've bought into the "Merchandise-supported music" idea, it's not a happy reflection.

      If I have an issue with this post, it is the conclusion. How do we get past the idea of scarcity? You can't exactly sell someone what they already have.

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    2. I have a horrible feeling that in 50 years time the human race will have slightly more pressing issues than over abundant art.

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    3. Thanks for your comments. The reason I wrote the post is that I think making money in music is a bit more complicated than "give away your music and sell scarce goods."

      The reason most of us buy what we buy, beyond the necessities, doesn't have to do with scarcity as such. We may choose to buy something from one person rather than another person, but that decision comes from multiple inputs.

      So I'm trying to get us beyond the scarcity argument. It just doesn't seem to be very illuminating when it comes to a music marketing strategy.

      We can explore other ways to compensate musicians, but if we keep focusing on scarcity, we'll be in a never-ending cycle of trying to offer something before everyone else does, and then moving on to something new when the marketplace becomes crowded.

      The idea that merchandise is scarce is becoming less and less of an adequate argument as there are more ways to make copies of those.

      Live performances, yes. But there are always the questions of how long will your fans will want to keep coming to see you, or whether they will switch to someone else if they can't afford your tickets.

      There aren't any simple answers.

      What I do see are many people making music. So there aren't a lot of scarcities there. There's more music than most of us have time to consume. So how do musicians survive in a world of hypercompetition where every musician is willing to give away just about everything to get noticed?

      It's like the designers in China. Lots of people in the field. The prices go down. Writers, designers, musicians, photographers, etc. The professionals in these fields are taking a financial hit because there are so many people offering up their creations for little or no money. And then if they try to sell scarce goods, those goods don't stay scarce.

      As for what's going to happen in the next 50 years, I think if we don't come up with cheap, non-polluting sources of energy, we've got some serious problems ahead.

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    4. I suppose in a nutshell I am saying that what is happening in music right now is truly disruptive. It's not just about the labels. A bigger issue is that technology has given many people the tools to make and distribute music and they are doing it. It is a flood of music, which is great, but it's hard to find scarcities in this new music world. So I'd like to explore where it is all headed.

      YouTube has shown us how it is possible for totally random offerings to go viral. That's the creative world we live in now. We can find gems from unlikely sources, and then move on to other gems. There doesn't have to be any connectedness to the artist. While a few people may be creative enough to put out a steady stream of gems, as audiences we can also be entertained with a stream of gems from divergent sources. We're not really dependent on just a few sources for our entertainment or our music.

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    5. Sorry Suzanne, I was very tired.

      I think every artist should read this post just so they don't get illusions of grandeur.

      Maybe it just shows that pretty much anyone can make music that is half way decent if given the opportunity (which is a good thing). Should artists get paid for doing something that anyone can do?

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    6. My goal has been to inject some realism into the discussion. There are, of course, some artists/bands who are making it. But there are many talented artists/bands who won't be able to quit their day jobs. And even if they do all marketing/relationship building people suggest, it may not be enough.

      If I lower everyone's expectations about what is possible doing music, then what income they do generate will be a happy development. Most people who play sports never expect to make a living at it. Most people who take photos never expect to take a living at it. It's a bit misleading to suggest that everyone who makes music and who can put together a band can generate enough to do that alone. And when artists/bands are trying everything they can and the numbers still don't work, they are told they aren't talented enough or they aren't selling the right stuff. Sometimes yes, and sometimes no. More likely, the sheer numbers of people out there making music makes it hard for most of them to tap into significant amounts of money.

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    7. Suzanne,

      Another excellent, relevant piece that illuminates the issue with a perceptive light.

      A much needed dose of reality for the aspiring music star of today.

      I think most of the people making money in the music business today are those selling goods and services to aspiring, hopeful young artists.

      I just got an ad for a trade school in Florida wanting to sell me on a bachelor's degree in "music production."

      Right.

      That degree put me on easy street doing what I love and I'll be able to comfortably pay back the $40,000-50,000 tuition loan I'd need...you think?

      Thanks for another informative piece.

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