Radio Daze

Having crippled internet radio with high royalty demands, the recording industry’s trade association, RIAA, is now taking aim at good old-fashioned terrestrial broadcasters. These broadcasters have never had to pay royalties, but the RIAA now apparently believes that radio is more a substitute for than a complement to sales of recordings:

In a study published earlier this year, University of Texas at Dallas economics professor Stan Liebowitz argues that radio acts as a substitute for music sales. “I am not disputing that radio is very good in picking which songs are going to become very popular,” says Liebowitz, the director of Center for the Analysis of Property Rights & Innovation at the university. “But if radio didn’t exist, we could see a 50% to 60% increase in record sales.” How so? Instead of listening to the radio in their cars, Americans might buy more CDs or digital recordings, he says.

I have looked at the study (correction: this was a precursor to the 2007 document, which can be found here), and I cannot understand how Liebowitz derives the “50 to 60%” increase figure. Liebowitz claims that a chart on p. 15 of the study buttresses his claim that radio contributed to a drop in recording industry share of GDP–apparently it was 0.12% in the 1921 and only regained that level in the late 1950s. But I don’t really understand how Liebowitz isolates the effect of terrestrial radio from all the other potential variables playing into that shift. I also don’t see how one can reliably extrapolate an effect of radio from pre-internet days to the current situation.

A few more thoughts after the jump. . .

First, I would think anyone working in this field would be very careful about estimating exact numerical effects. The question of music consumption is a very difficult one, and I think we have very little idea of the actual elasticity of demand involved.

Second, I’ll quote some of Liebowitz’s earlier, qualitative analysis on a similar substitution/complement problem:

VCR manufacturers earn revenues selling a product which would, for practical purposes, have little value if not for the existence of copyrighted intellectual products. Notice, however, that an identical argument can be made for the producers of television sets, TV guides, antennae, Neilsen ratings, TV stands, etc. All these products are strong complements with television programming and are “exploiting” the television market to earn revenues. Should they all pay a portion of their revenues to copyright owners (as cable television owners now do for retransmission of over-the-air broadcasts)? … Perhaps copyright owners should pay part of their revenues to the manufacturers of these complementary products?

Agreed. And perhaps radio stations should charge the recording industry for playing records–but not in too focused a way, to avoid charges of payola. As a Clear Channel exec says, “Congress has recognized for more than 70 years that the record labels receive a substantial benefit from the airing of their music on free radio. They are basically receiving free advertising. This idea is just plain backwards. They should be paying us to play their music. Unfortunately, that’s against the law.”

Or perhaps both sides should declare a truce, and recognize that the types of “free-rider” accusations they make against one another are essentially impossible to prove. Rather, they just manage to sour what should be symbiotic relationship into endless accusations of parasitism. As Liebowitz himself admits in the study, we have little sense of the direction new technologies or listening patterns are taking us: “Television took audience away from the movies. But television also made possible the VCR which allowed the movie rental business to get started, and which has been a boon to the industry.”

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