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Rockonomics: The Economics of Popular Music

Alan Krueger

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From the gramophone to online streaming, disruption caused by tech innovation occurs first in music. It is the canary in the coal mine.

Now digitization has changed the way music is produced, discovered, promoted, distributed, consumed. And musicians, record companies, radio stations and fans have all had to respond to those changes.

The rich get richer - in 1982 the top 1% took 26% of concert revenues; today it's 60%. Now a superstar, winner-takes-all environment.

Today news is available, often for free, from multiple outlets. If the music analogy holds, online news outlets and magazines will become loss leaders for live conferences and lectures.

Music is financially insignificant. Total expenditure on music in US in 2017 - concert tickets, record sales, streaming fees - was $18.3 billion. Sounds like a lot, but it's actually less than 0.1% of US GDP. In other words, less than 1 out of every 1000 dollars spent in US goes on music. And the music ind employs less than 0.2% of USworkforce.

Global spending is even less - in 2017 approx $50 billion, which is 0.06% of world GDP. Worldwide, $2.2 trillion was spent on 'entertainment'. Music represented just 2% of that total.

Americans spend five times more on cigarettes than they do on music. Tobacco companies spend more on advertising their products than Americans spend on recorded music. Even the fees for unused health club memberships exceed the total revenue collected for recorded music.

Radiohead 2007 expt let fans pay what they thought downloaded album was worth. 60% paid nothing. But the other 40% paid an average of $6 each. Radiohead earned $3 million from it, more than they made from all their other albums put together.

Chance the Rapper releases all his music free, making all his money from live performances.

Bands start out as a democracy. It's a battle for survival, so everyone has to get the same amount. At the early stage, band needs to earn enough to keep everyone committed to the effort. But if the band reaches stardom, there's a risk that the biggeststar will leave unless he gets paid more.

Some artists become superstars bc of 'imperfect substitutes' - people won't pay to see someone almost as good. But bc talent is hard to spot/predict, luck is also impt - who gets the opportunity in the spotlight. And you actually need a string of good luck to get to the top.

Spotify has (as of 2017) 35 million tracks. It would take you six lifetimes to listen to each one once. Our choices are strongly influenced by friends recommendations.

It took Billy Joel until his fifties to earn as much (in inflation-adjusted dollars) as Justin Bieber earned by the time he was 23.

Reginald Dwight answered an ad for singers and songwriters. When he showed up at Liberty Records to audition, he found an office overflowing with tapes and piles of envelopes. The guy behind the desk asked him what he did. He said he cd sing and compose tunes, but he couldn't write lyrics. The guy dug through the pile of envelopes, pulled one out and said "Why don't you take this?" Dwight took it, and on train home opened it. It was from a 17 yo Bernie Talpin. The pair have since sold 300 million records.

Jk Rowling chose Christopher Little as her literary agent bc he sounded like a character from one of her books. He made tens of millions of dollars from this one spectatcular piece of luck.

Michael (Liar's Poker) Lewis gave graduation speech at Princeton U in 2012: "You are the lucky few. Lucky in your parents, lucky in your country, lucky that a place like Princeton exists that can take in lucky people, introduce them to other lucky people, and increase their chances of becoming even luckier. Lucky that youlive in the richest society the world has ever seen, in a time when no-one actually expects you to sacrifice your interests to anything."

In the sixties, concert tickets drastically underpriced. Tickets to see Beatles in Shea Stadium in 1965 were $4.50 ($32 in today's dollars). Billy Joel at the LAForum in 1987 was 10 bucks ($34 today).

In pre-Napster days it made sense to keep stadium prices low and make your money off album sales. But today the music is free or cheap and artists depend on the popularity of that to drive stadium attendance.

Country singer Garth Brooks - instead of raising ticket prices to meet demand, hekept prices low and just added more shows.

Merchandisers and venues spend around 2% of gross revenue hiring off-duty cops to rpevent bootleggers selling inlicensed products around the stadium. But margins are low; bands don't make a lot of money from merch.

Of NFL players drafted between 1996 and 2003, 16% had filed for bankruptcy within 12 years of retiring. And that was with a median income of $3.2 million over a six year career.

Pandora ran an expt to see what impact of increasing no ads on the free streaming service. Although some listeners dropped out, this was more than offset by the higher income from advertisers. And for every 3 who dropped the service, 1 signed up for the subscription (no ads) side. Older listeners wer more likely to move to pay, younger ones more likely to drop it (probably to go to YouTube).

In 2018 18,000 new tracks were added per month to the online music encyclopedia MusicBrainz. Stremaing makes it possible for many musicians to make a littlemoney, but hard for any to make a lot. Survey found that 28% of the musicians earned some income from streaming, but the median payout was just $100.

To qualify as a spin for royalty and chart purposes, someone has to listen to song for at least 30 seconds. So how a song starts is crucial. Catchy bits come early and at a rapid clip. And they try to sound a bit like other top tracks, bc people will linger on something that sounds familiar.


Then 1999 arrived, the file-sharing site Napster launched - and the world changed overnight.

Alan Krueger, the Princeton economist and co-author of the 2005 paper Rockonomics: The Economics of Popular Music, describes the post-Napster music industry using what he calls the "Bowie theory". Back in the 80s and 90s, Krueger explains, most artists made most of their money from music sales, using tours as promotional vehicles for their latest album. U2 sold 14 million copies of The Joshua Tree in its year of release, earning the band around $37 million in the US. The original 111-date Joshua Tree tour grossed roughly the same, at $40 million.

Post-Napster, the link between recorded and live revenues has been severed, a trend spotted by David Bowie in 2002 when he told The New York Times, "Music itself is going to become like running water or electricity. Artists better be prepared for doing a lot of touring, because that's really the only unique situation that's going to be left."

Crispin Hunt agrees. He experienced a brief flash of fame in the 90s as the singer in Britpop band Longpigs, best known for their indie anthem "She Said". He became a successful songwriter after the band broke up, writing hits for the likes of Lana Del Rey, Ellie Goulding, Florence + the Machine, Jake Bugg and Rod Stewart. It's a living, he explains, but the post-Napster world of streaming services and online video hasn't rewarded the songwriter.

"If I'd written songs that reached the same chart position in the 80s or 90s, I wouldn't be talking to you now," he grins wryly. "I'd be by the pool in LA. But as long as Spotify pays, on average, between $0.006 and $0.008 per stream, and while YouTube's royalties are cloaked in secrecy, that's impossible to imagine. I recently had a song on BBC Radio 1's C-list - that's six plays a week. In the same week, a Jake Bugg track I wrote had 12 million views on YouTube. I earned £75 for six plays on Radio 1 and £65 from 12 million YouTube plays. The only way to make money is to be able to sell out 2,000-seat or larger venues. Any tour, any gig, for any size of band has basic running costs - transport, crew, PA. Unless you sell over 2,000 tickets you're losing money."

In 1999, recorded music in the US - the world's biggest music market - earned an inflation-adjusted $20.6 billion, according to the Recording Industry Association of America. In 2015, auditors PwC estimated global music-industry revenues from recorded music, whether sold or streamed, totalled around $15 billion. Across that same period, the live touring industry saw the kind of expansion rarely seen outside Silicon Valley, with US concert ticket sales tripling in value between 1999 and 2009. In 2016, live music took more than $25 billion per year in ticket sales and another $5 billion in sponsorship - around double the global revenues for recorded music and larger than the GDP of Iceland.

For artists, the difference is stark. U2's album sales have been in decline since The Joshua Tree, from Achtung Baby's eight million in 1991 to, in 2009, No Line on the Horizon's 3.4 million copies sold. Ticket sales, meanwhile, have been rising: 1992-1993's Zoo TV tour, supporting Achtung Baby and Zooropa, saw box-office revenue top $151 million; 2009-2011's 360° tour took a record-breaking $736 million. The Joshua Tree's 2017 tour has fewer than half the dates of the 360° tour, but it took $62 million in its first month.

"Live music is competing for the same entertainment dollar as movies, box sets, restaurants, nightclubs and theme parks," Winky explains. "Shows have had to become spectacles to compete but the relationship between fan and star is incredibly intimate. Our challenge is, how do we wow tens of thousands of people? If you're sitting at the back of the hall, how do we deliver the artist to you in a way that feels intimate and personal? Otherwise, you're not coming back."

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