Filesharing and Artist Incentives for Creating New Music

-- By ChristopherWlach - 22 May 2008

I. Introduction

Many commentators inside and outside the music industry put forth an argument against filesharing based in artist incentives: filesharing reduces music sales and, by extension, artist royalties; without the financial incentive of royalties, artists create less new music; thus, filesharing results in more music available now, but less new music in the long run. But while some artists may indeed stop creating music because of filesharing, filesharing is not likely to result in less new music overall. First, while filesharing may decrease potential artist royalties, its indirect effects may put money directly in the hands of more artists. Second, even supposing the effects of filesharing indirectly deter some artists from creating new music, filesharing lets an unlimited number of other artists distribute music-—music that would not have been made available without filesharing.

II. Fewer Sales ≠ Fewer Financial Incentives for Artists.

Filesharing has likely played some role in this decade’s falling music sales, though the extent of its impact is debated. But, despite music industry claims (and the claims of some artists), this doesn’t have to mean fewer financial incentives for artists to create music. In fact, filesharing may ultimately provide more artists with greater financial opportunity than they would have had before filesharing.

Most artists don’t become rich from sales-based royalties. The vast majority never even sign with a label. For all but five percent who do, the label never “recoups” its advances—money that needs to be paid back before an artist can begin collecting royalties. The royalties these artists receive typically amount to a few cents per sale—literally, pennies compared to the retail price. The great part of the retail price goes to people other than the artist: retailers, producers, and--most importantly--the label, which uses the money to invest in new artists, pay its employees, and cover numerous other overhead costs.

Historically, artists had little leverage to change the way they made their money. Record labels had the recording and production equipment, the manufacturing plants, the nationwide distribution networks, the access to media. So not only could labels pay little royalties, they could also demand large shares from other areas of artist revenue, including merchandise sales, live performances, and commercial licenses. Without access to large-scale manufacturing and distribution, artists could earn far less from such areas of revenue.

Filesharing has greatly reduced the label’s leverage against artists. Individual listeners supplant the roles of distribution networks and manufacturing plants, putting music in more hands than any label could have with no marginal cost. Along with cheaper recording technology and a more diffuse mass media, this change has greatly reduced the role of the label in creating music. Artist can make money without signing to a label; when they do, they can demand more.

Consequently, even if artists receive less royalty-based revenue, they now have access to other forms of revenue. Instead of contracting all their rights to one label, they can enlist one company for merchandising, another for live booking, another for commercial licensing. Artists can thus assign their rights as they deem best, not merely as a cost of large-scale distribution and manufacturing.

So while filesharing may reduce royalty-based revenues, it will likely give more artists better access to other forms of revenue that are potentially more beneficial than royalties. Consumers might also be inclined to spend more money in these areas if they know that a significant portion will go directly to the artists.

III. Even Without Financial Incentives, Artists Will Still Create Music.

Even without financial incentives, many artists will still create music. Countless artists already do--no doubt most realize that they have a slim chance of getting rich from their music, but this doesn't mean they'll stop playing.

But even if the effects of filesharing do deter some artists from creating new music, this does not imply any net decline in the amount of new music available. Historically, only a limited number of artists could achieve widespread distribution. Most importantly, the costs of a label's investment in an artist were high, while artist success rates were low. But other barriers also stood in the way of new artists becoming well-known: limited shelf space at retail stores, limited space in music magazines and other media, FCC airplay regulations, illegal "payola" practices, to name only a few. Filesharing and other technology now makes music-making and distribution available to virtually anyone (itself an incentive to make music). So even if some artists are deterred from making music, there will no doubt be countless other artists who won't. These artists have far greater access to audiences now than they ever could have had.

Similarly, there’s little reason to assume musical quality (however determined) will suffer without financial incentives. Not only does filesharing and other technology widen the pool of potential artists, it also allows for music unconstrained by physical limits (e.g., album length) and less constrained by label-constructed limits (e.g., minimum tracks per album, content restrictions). While labels might stray away from "risky" music because of high investment costs and low rates of return, such taste regulation is unnecessary in a world of filesharing. If the music fails, it fails. The cost of distributing it is zero either way.

IV. Conclusion

Not only the RIAA, but also many artists and smaller labels argue against filesharing by pointing to its effects on the financial incentives of artists, who stand to lose royalty revenues. However, the argument overlooks the fact that more artists potentially have more financial incentive to make music in a world of filesharing; it further overlooks the fact that new music will still get made absent financial incentives.