Sunday, Jul 14, 2012
I thoroughly enjoyed my recent conversation with Matt Goyer, President
and CEO of Fairtunes.
I think it’s great to see individuals experimenting with different models
within the music industry. Their ideas have been met with much enthusiasm
in the fan community, and with much interest in the music industry. People
like the idea of paying artists directly, cutting out middle men, and
being absolved of their Napster guilt.
I’m also pleased that this experiment is intended to provide
compensation
to musicians for their labor. Fairtunes, and other voluntary
contribution
mechanisms like it, start with an assumption I agree with — that the
work of musicians is valuable to individuals and to society. Their goals
are
focused on notions of fairness and value. Their idealism is certainly
to be commended.
That said, I think this economic experiment should be viewed scientifically.
Hypotheses should be proposed and tested. Fairtunes, for instance, has
based their model on at least two key hypotheses: first, that sufficient
numbers of music fans will be exposed to the tip jar mechanism through
either the Fairtunes website or the Fairtunes software embedded in media
players, and second, that such exposure will generate significant amounts
of revenue for artists. Over time, we can evaluate whether those things
will hold true.
I have some additional hypotheses to propose in this article, based on
some economic reasoning and analysis. These hypotheses are not as rosy
as those of the proponents of voluntary contribution mechanisms are. But
it’s important for the music community to be thinking about these critical
inquiries along with the blithe optimistic predictions. We can’t go looking
for good news or bad news based only on the assumptions of the businesses
that created online tip jars. We should focus on evaluating whether online
tip jars have positive or negative effects on musicians.
A quick note: In my interview with Matt Goyer, I did not present the
critiques of the voluntary contribution concept in their most robust form.
I think it’s important to be able to read and understand his thoughts
in that interview more than mine. But I certainly invite Matt, his colleagues,
and like-minded folks to take issue with any and all of my assumptions
and arguments in the Insound forum.
An Economic Definition of Online Tip Jars
So how do these tip jars work, economically speaking? It’s more complicated
than a handout to a person on a city street. It’s also slightly different
than, though in many ways similar to, tipping wait staff at a restaurant.
Online tip jars — also known as voluntary contribution mechanisms —
take advantage of internet technology to simplify the process of
private individuals giving to artists. They aim to make transactions
between an individual
and an artist (or group of artists) easier. Thus, they are based on the
assumption that music fans will support musicians financially, provided
two things: (1) they like that artist’s work enough to place a value on
the production of future work by that artist, and (2) there is very low
opportunity cost to actually making the donation.
Why Would You Tip a Musician?
Assumption (1) is phrased carefully. It explains the incentive we would
have to tip musicians. A tip for a musician functions to provide the ability
and the incentive to produce music in the future. It is not reward
or remuneration for past production. This would make no sense — why pay
later for music you have already heard?
Tips are meant to support musicians whose future work we believe
to have a high probability of being “good.” This is where tips for musicians
are unique — because musicians create something unique, tips function
like in an investment in their creation. It’s different than tipping wait
staff, which is an action that rewards past performance (the service received
at the meal just completed). Tipping musicians is more like a business
investing in new technology — it involves looking for a reward in terms
of future performance. The reward hoped for by fans is that their favorite
bands keep making music for them to listen to.
Tips are also meant to provide the incentive to keep making good
music by establishing that only creators of good music will be tipped.
This is intended to increase the probability that the music created will
be good. (It could also be established that creators of better
music receive larger tips, but this categorization of good vs.
better is not necessary to the concept.) Here we see a similarity to tipping
wait staff: our society has established in some sense that tips are meant
as appreciation for good service. Bad service generally won’t receive
a tip from very many people.
Thus, we only tip musicians we feel they have the potential to create
good music for us in the future. We generally base our belief in that
potential on the musician’s past work, but this does not have to be the
case. We give up some of our money now to get (what we hope will be) good
music later.
Is it Worth the Effort to Tip?
Assumption (2) is based on the idea that any costs an individual incurs
while trying to make a donation will take away from the value of that
donation. It states that the costs of tipping musicians are low enough
that people still tip. The idea here is that if assumption (2) doesn’t
hold, then no one would give any money.
Since it takes time to search for an artist’s mailing address, if it
takes time to write a check, and if it takes a stamp to mail the check,
those costs will count negatively against the value of the donation. Online
tip jars eliminate all these costs, replacing them with (what are assumed
to be) smaller costs: searching for the artist’s name on a centralized
website or searching for the artists’ individual website, typing in a
credit card number, and typing in an amount.
Say you enjoy swimming. But if the community pool is far away, you’re
less likely to go. You might be more likely to jump into the pool in your
neighbors’ backyard, if you know they’re not home. The community pool
is a tip jar. Your neighbors’ backyard is Napster. (I think the neighbors
just got home, but that’s another storyÆ’) So basically the pool needs
to be a quick drive from everybody’s home. It needs to be easy for people
to use it, or they won’t. The online tip jars hope they’re fast enough
and cheap enough to seem “easy,” and thus become something people use.
So what could go wrong with these two assumptions? What does economic
thinking — or, better yet, just common sense — tell us? What guess would
we make about whether the online tip jars will work? What hypotheses would
we form about whether their assumptions will hold true?
Hypothesis #1: You Can’t Even Count on Enlightened Self-Interest
Anyone can see that asking a person to pay a price for downloading music
instead of simply downloading the same music for free using Napster, Scour,
or Gnutella, is like asking for charity. The person who pays for downloads
would end up with the same music, but have less money. That is requesting
pure altruism: people are strictly worse off, and others (i.e. the record
labels and artists) are better off. This is clearly an unreasonable thing
to ask. You cannot count on people’s charity.
However, one should not characterize voluntary contributions as equivalent
to charity. They might appear to be based on the altruism of individuals,
but really they are based on people’s enlightened self-interest.
As said before, people expect to get good music in the future in return
for their tip. It appears they’re giving money away to the musicians,
but really they’re trying to give themselves — their future selves — good
music in the future. In other words, if people are smart (“enlightened”)
they will think about the long-term picture, not just the short-term.
I would interpret the traditional patronage system of voluntary
contributions
as being an example of enlightened self-interest. Patrons of the arts
aren’t being selfless; they choose to fund artists to receive the
benefit
of living in a world where that artist can work and they can experience
that artist’s work. More tangibly, many patrons have historically used
their patronage money to ensure the right of first access to an artist’s
work. So patronage isn’t charity or a giveaway, it’s enlightened
self-interest; clearly the patrons are getting something in return for
their dollars.
The problem here for tip jar donations lies in the fact that when people
act based on what will happen in the future, they are forced to act under
uncertainty. People don’t know what the future will hold. This can jeopardize
the entire notion of giving an artist money to secure their future work.
Any fan’s thought process must include a lot of questions that can’t be
answered. What if the artist moves towards a genre I don’t like? What
if the artist gets hit by a bus? What if the artist simply starts to suck?
In sum, how does one know that the artist’s works in the future are going
to be worthwhile — even if the past works have been worthwhile?
Due to this uncertainty, people have to build risk into their calculations
of the value of the musicians’ future work. Building risk in means paying
less — something risky is generally less valuable to something safe. (Most
people are risk-averse; yes, some people are risk-takers, but not many.)
This is why stocks generally give a higher return than treasury bonds.
Stocks are risky, and so the companies that offer them have to offer more
value in return for the risk that stock buyers take on.
So the enlightened self-interest model means that artists will in all
likelihood be paid less than the actual value of their work. Because it
relies on people’s predictions about the future, it will generate too
little money even if their future work meets the highest caliber that
could have been expected. In the uncertain situation of assessing the
future, that “best-case” scenario has to be averaged out against the “worst-case”
scenarios, too, i.e. the artist being hit by a bus or the artist starting
to suck. Thus, online tip jars seem very likely to under-compensate the artists.
Hypothesis #2: Success Wouldn’t Last Long
Let’s say that the online tip jar mechanism “succeeded.” In other words,
let’s say that, generally speaking, musicians were receiving enough money
from tips to compensate them “fairly” (in their estimation) for their
recorded works. Even in this rosy scenario, their compensation would necessarily
sag below this ideal level.
If artists were making enough money, it would probably be the case that
a given member of society could know that. They would probably know simply
by virtue of artists continuing to record music. Thus, music fans would
perceive that musicians would continue to make music with or without their
individual tip. So why give the tip?
This is an instance of the free-rider problem. Anyone can get
recorded music for free, so receipt of the good in question (recorded
music) has nothing to do with whether you paid or not. So long as “other”
people donate money to a give artist, an individual can continue to enjoy
the fruits of that musician’s labor. This removes the connection between
the economic value of the musician’s work and the number of people who
actually enjoy it. So in that sense, the musician is under-compensated,
because some people aren’t paying for the value they get.
A familiar example of the free rider problem involves under-funded public
television. Because public television comes over the airwaves free, anyone
with a TV can get it and no one with a TV can be prevented from getting
it. So public television stations hold subscriptions drives — which are
optional. So some people donate money, and other people are free riders.
The stations can’t make everyone pay, and some of them suffer for it.
Goods that are subject to the free-rider problem tend to receive less
funding than they need to continue being produced. This becomes more true
once more and more individuals figure out that they, too, can get away
with being free riders. Thus, even in the case of tip jars’ success, that
success would probably be unsustainable. People would see that others
are paying, and realize that their incentive to keep paying as an individual
isn’t all that strong.
Hypothesis #3: No Bellhops on the Cover of Time
Wait staff at restaurants receive tips through a fairly formal mechanism,
the standard 15% of the bill. Pizza delivery drivers receive tips as well,
though perhaps not as large. Coffee shop clerks typically put out a tip
jar to collect mostly coins. Bellhops in hotels receive tips. You get
the idea. There are many other examples of professions that usually or
sometimes do.
Plenty of intelligent, hard-working people are employed in professions
that receive tips. Regardless, I have to make an observation — none of
these jobs are to be found in a list of “Top 10 Starting Salaries.” And
guess what — they don’t tend to catch up, either. If you work in a job
where you receive -and perhaps count on — tips, you are probably not making
very much money. Sure, wait staff at very expensive restaurants might
do quite well for themselves. But it’s far more illuminating to speak
of the average employee, not the exceptions. In general, jobs that generate
tips are on the low end of the income spectrum.
This is connected to the fact that these jobs tend to be low on the
social value and social respect spectra as well. (I don’t feel that this
should be the case, but nowadays our heroes are CEOs and sports figures,
not pizza delivery men and bellhops.) Figuring out why requires a chicken-and-egg
question — do these jobs pay less because they’re not respected or are
these jobs not respected because they pay less? But that’s not the relevant
question here.
The relevant question is: “If you turned musicians into people who commonly
worked for tips, would their compensation and cultural value go up or
down?” The correlation between those three things — tips, low pay, and
low respect from society — cannot be ignored. Even without understanding
why exactly they go together — there are many reasons, most likely
difficult to measure conclusively — we should be concerned with the fact
that they do, and what that could mean for musicians, if this tip jar
idea indeed catches on.
Sure, the tip-jar mechanism might start generating a fair amount of tips.
Maybe its success would combat the “low pay” part of the equation. But
what if receiving tips causes people to value professions less, and subsequently
results in low pay? The cultural damage to musicians’ standing in society
could further damage their economic well-being.
Hypothesis #4: Short-Shrifting the People behind the Scenes
One particularly troubling critique of the online tip jar model is that
it ignores the songwriters, producers, engineers, session musicians, etc.
who participate in works of music but are not the “name” on the songs.
For instance, Mariah Carey is a recognizable name and her fans might be
happy to use their credit cards to send money to her. But what about the
men and women who write Carey’s songs? Because the online tip jar model
depends on fans looking up the name of the artist — and only the artist
— and contributing to the artist’s monthly check, it overlooks the artistic
contribution of many individuals.
Couldn’t artists simply pay the songwriters, producers, etc. out of their
tips? In theory, yes, but in practice this would lead to further devaluation
of the songwriters’ efforts, a probable result from getting handouts from
tip revenue. Why should session musicians, for instance, depend on a secondary
cut from the uncertain revenue from tips to earn a living?
Furthermore, once the tip revenue starts being divided, it then becomes
subject to requests from labels (for past promotional work, perhaps).
The artists end up with the same problem they have now: a revenue pie
being divided among too many people. And what if the artist didn’t collect
enough to pay everyone? Could they be sued for not garnering enough tips?
As for the songwriters, producers, etc., their revenue source seems far
from guaranteed in this case of depending on the artist to share the wealth.
A remedy to this problem could be to include the names of songwriters,
producers, engineers, and session musicians on the online tip jar website.
Yet most fans probably won’t know those individuals’ names. So perhaps
the online tip jar could include information about who else should receive
money. (That is, it could point out the relevant songwriters, etc. to
people who donate to Mariah Carey.) It seems a bit tenuous and time-consuming
to ask people to do so, which would begin to violate the “makes donating
easy” assumption. But even if one assumes people are willing to pay the
songwriters, etc. there are problems with this solution.
Fans may be willing to send money to all the parties involved. (We assume
that the online tip jar could somehow have perfect information about all
contributors to a given song.) But the fan has no information to divide
the pie. Let’s say the fan is willing to pay $5 for 10 downloaded Mariah
Carey songs. How much does Mariah get? The producer? The songwriter? There’s
no way for the fan to donate in a fair manner or to know that they’re
donating in a fair manner. Some artistic contributors will always be forgotten
or short-shrifted.
This hypothesis is almost unavoidable, because fans will only know (or
want to know) so much about the songs they’re hearing. One is led to predict
that the online tip jar model would produce highly unfair results for
the behind-the-scenes creators and facilitators.
Hypothesis #5: That “Water” in the Test Tube Might Be Sulfuric Acid
My last, and most troubling, hypothesis to add is that instituting online
tip jar revenue as a viable stream of (some) income may result in structurally
lower levels of compensation for artists. If this economic prediction
were to hold true, the online tip jar experiment could prove to have been
a dangerous one. In other words, it could backfire.
No one has claimed that online tip jars should be artists’ only revenue
source. Matt Goyer from Fairtunes compared tip jar revenue to the leg
of a table. This sounds great — until you see that the leg is halfway
sawed-through and could collapse, knocking the whole table down with it.
Let’s return to the wait staff analogy. It is legal for restaurants to
pay less than the minimum wage to wait staff because they receive tips.
The rationale is that tips will bring waiters’ and waitress’ total compensation
(wages plus tips) to an acceptable level, at or perhaps beyond what the
minimum wage would get them.
The problem is, some wait staff receive huge tips — say, at fancy expensive
restaurants with high average tabs — but many, many do not. Wait staff’s
hourly wages are probably similar from restaurant to restaurant, but their
tips vary widely. Thus, only a select few waiters and waitresses exceed
the total compensation level they would have made at the minimum wage.
Most waiters and waitresses get stuck below that, I would guess.
What if this happened to musicians? Granted, musicians are not employees
with an employer that sets their total compensation level. (Total compensation
refers to income from all sources added together.) But when the music
industry and the government begin making decisions that affect musicians’
compensation, they could count this uncertain tip revenue as part of what
an average artist gets. That average would reflect a few big-name artists
getting a lot of tips and most artists getting very little. So artists’
total compensation would be set in a way that exaggerated how well most
artists were doing. Most artists would be hurt by this over-estimate of
what they were pulling in from tip revenue.
Even if successful, the online tip jar experience will produce widely
varying levels of tips among artists. And most artists will suffer as
the skewed “average” tip jar revenue figure is counted as something they
get, when really its an uncertain, variable amount.
In effect, the addition of tips to artists’ total compensation allows
their work to be devalued in a structural, systematic, and codified way.
At the first indication that this particular hypothesis is coming true
or is close to coming through, artist advocates must be vigilant in preventing
that result.
Not Cheerleaders but Watchdogs
Even if the tip jars don’t generate much revenue for artists, that might
not be such a bad thing — at least the music and technology industries
will learn from this experiment. Perhaps articulating these critiques
in the form of hypotheses will help the process of evaluating, improving,
and refining this business model. Of course, if many of these hypotheses
turn out to hold true, I would hope that the music industry would take
caution. We should refrain from spending an inordinate amount of time
on — let alone championing — a model that does not work or, worse, does
damage to the value of musicians’ labor.
None of these comments are meant to take away from the hope that this
business model will work for artists. I am interested in anything that
works. Yet the focus must remain on working towards viable solutions
to the problem of compensating artists. It would be irresponsible to follow
the lead of most journalistic treatment of the tip jar phenomenon and
to ignore the likelihood that the online tip jar model might not
be one of those solutions. The economic machinery behind the voluntary
contribution model is subject to many pitfalls.
So wish the tip jar folks like Fairtunes luck, and tell all the music
fans you know about them, if you want — but watch closely to see all that
happens when and if those fans start tipping musicians online.
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