A columnist once wrote that economics is really good at studying the unforeseen consequences of taking specific actions. A good example of this is legislating requirements for better safety equipment on jetliners. The intention is to save lives, but may in fact cost more lives than it saves. How can this be possible?
Suppose you require all airline companies to upgrade their fleets with the latest safety equipment, costing say $100 million per airlines. Companies will not absorb the entire cost of this upgrade, and will attempt to pass the costs along to their customers in the form of higher ticket prices. As long as the producer isn't totally inflexible on their pricing or production, they will be able to pass at least some of the burden along to consumers.
Consumers will see higher ticket prices and like with any ordinary good or service, will decrease their consumption of it. But the people who would have flown on a plane still need to get to wherever they were going - whether it be for vacations or business or whatever. So maybe some of them take trains, but certainly some will decide to drive. Dying in an automobile accident has a much higher probability than dying in an airplane accident. So if you take people off planes and put them in cars, chances are more of them will die.
The policy never intended to cause deaths - on the contrary, it intended to save lives. But an unforeseen consequence of the higher standards may be higher prices which may in turn lead to fewer flyers and more drivers - and thus more fatalities. Granted, this is a long chain of what-ifs, but it is certainly a possibility.
A major issue from the late 1990s in Internet policy was the growing digital divide, the fact that poor people did not have as much access to the Internet as rich people did. Although public libraries and schools offer some access to those who are not wealthy enough to purchase computers, such facilities in poorer areas are less likely to have computers than in rich areas. So you have the double whammy of poor people not being able to afford computers for themselves and poor governments (because their tax bases are poor) unable to provide computers at public expense. Either way, you have rich people online and poor people not.
This poses an interesting question because it is always claimed that the Internet reduces transaction costs a lot. The implication is that due to reduced transaction costs, prices for final goods and services are lower online than in traditional retail settings. But wait, these online options are only available to those who are relatively wealthy (because they have computers or live in rich areas whose governments can provide computers). So the savings are going to rich people, not poor people - this would seem to make the wealth distribution even more uneven. Lowering prices and costs for rich people relative to poor people is effectively the same as making the rich richer and poor poorer. Is this what we want the Internet to do?
This is a pretty indirect wealth effect based on access. Nobody is changing their behavior in ways that will be worse for poor people than without the Internet; this is a case of some people getting something good, not some people dodging bad. It is pretty easy to continue the logic along that route though, and one example might be the case of music and movie piracy online.
In the early stages of computer technology, piracy was not a big deal because very few people could do it. CD recording technology in the early 1990s was very expensive and few had access to it. Even fewer had the distribution channels to make a profit from it - so all you had to do was shut down the few big distributors with massive duplicators and underground distribution channels. Typical piracy operations churned out thousands of illegal discs for sale using industrial duplication machines.
This changed with the introduction of affordable final consumer CD-R technology. What did the companies think people would use CD-R technology for? Very few people have legitimate needs for storing that much data even now, with bloated file sizes. Most scanned pictures are illegal copies of artwork or photographs, most video is of illegally copied movies or TV shows, and most audio is of illegally copied recordings - and CD-R technology was introduced even before MP3, DivX, or even affordable scanners were available. What was the most obvious thing to copy using writable CDs? Well, you would think copying regular audio CDs would be the most obvious choice.
The problem with this is that now the piracy is decentralized. Who do you arrest? How do you catch them? Before you had maybe a few thousand large operations that had to be based somewhere they could be caught. Nowadays, almost every new PC sold comes with a CD-RW drive, so practically every PC owner becomes a potential pirate. Is it worth it to spend the resources to catch and prosecute someone who burns a couple of audio CDs for themself illegally? Probably not - the lost revenues to the legal copyright holder is likely to be in the tens of dollars while it might cost thousands to hire legal counsel, gather evidence, and prosecute. It simply doesn't make sense from a cost-benefit analysis to bother prosecuting the millions of little pirates out there.
But there are millions of them. Suppose there are just 1 million pirates out there who burn 1 CD for themself each year and the average audio CD costs 15 dollars in the store (or online or wherever). Then the total lost revenues to the music companies would be 15 million dollars from these 1 million CDs that are no longer sold. One clever argument is that the pirates would not have bought the CD for 15 dollars anyway, so there is no "lost sale." Do you believe that every pirated CD is such a case where the pirate would not have bought the thing? How many are such cases? One fourth? One half? Three fourths? This 1 million CDs is certainly a lowball estimate, judging by the thousands and thousands of songs available for download on the various filesharing networks.
It is actually quite difficult to find any user on any of these networks with a significant portion of their shared files being of certain legal status. It's probably safe to say that at least half of the traffic on these networks involve illegally shared files (though it's probably closer to 80 or 90 percent). At 10 to 15 dollars per CD, and typically only a handful of desirable songs per CD, the traffic in illegal songs on these networks could represent fairly sizable chunks of revenue.
And this is not to mention video, which is only possible today because of high speed broadband to residences. With the typical DivX movie being 600 to 1200 megs in size, you really need some kind of high speed connection to distribute or download entire movies or TV episodes. The problem here may not be as severe as with music because video quality suffers when using compressed formats. Though DivX movies look pretty good, they are not quite as good as full MPEG2 DVD and thus quality conscious buyers will choose to still purchase movies even if they have a pirated copy. With music, it's hard to argue that there's significant quality dropoff after you go above 160 or 192 kbps MP3s.
Of course, to partake in this free for all, you need to own a computer and you also need to have some kind of Internet access to get the widest range of files. In addition, you need to understand where online to get these illegal files and how to burn them onto CD-R or DVD-R media. Admittedly, it is extremely easy to do so, and enterprising individuals out there are making it even easier. One of the first obstacles to massive piracy was the fact that few people really knew how to use FTP or IRC to get the files. Now that easy to use clients are being developed, illegal piracy is accessible to less and less sophisticated users. So really, skills are vanishing as a barrier, leaving just the entry cost of having a computer.
Will movie and music companies just sit there on their hands and say "Oh well, we are losing sales but that can't be helped"? Of course not. They probably realize they have lost a particular consumer base - people rich enough to own computers who have Internet access and are willing to pirate. Since the probability of being caught and punished is basically zero, we're really talking about anyone rich enough to own a computer and have Internet access. If music companies know they can't sell to this audience because it will pirate the CDs upon release instead of buying, do they care if their products appeal to those people? Of course not. What music companies ought to do is target their products to appeal to people who cannot afford piracy technology and are therefore constrained to actually buying the CD.
Given the kind of payola schemes in place to determine what gets played on radio and thus becomes "popular," it isn't difficult to imagine this happening. Especially since music is becoming less about the talent or quality of the music itself and more about the personality and image of the performer who more often than not does not even write their own music. Anyone who complains about the "manufactured" music that follows formulas should recognize that this is an intelligent strategic decision on the part of music companies: If you know who your captive audiences are and you know what they will buy, then of course you produce that.
Who are the captive audiences? Poor people and young people, and the really captive ones are the poor young people. So if gangsta rappers are going to appeal to relatively poor inner city youths, then it makes sense to promote as many of them as possible. Through market research, you can figure out what the most desirable characteristics are, and all the music companies probably know this, so they all should be promoting performers that all look, sound, and act alike. Is there really a substantial difference between Nelly and Jay-Z? Who else might you want to target? Young teenagers who are still under parent monitoring. A great example here would be boybands - if you know what kind of sound and image will sell, it makes sense to put out variations on it. To a non-fan, does N'Sync appear any different than the Backstreet Boys? Or you could try the white female vocalist pop singer category with Britney Spears, Mandy Moore, Jessica Simpson, and all the other clones. It's easy to identify these subcategories and if you look at the target audiences they will tend to be young and poor.
Okay, so you're making music designed to appeal to captive audiences. Now what? Well, if you're the only game in town (most entertainment venues are oligopolies with a few giant producers), then you can hike up the prices on these people to make up for the lost sales to all the rich pirates. This is terrible - in a way, the rich are reaping a benefit at the expense of the poor. Is this certainly what is going on? Of course not, but it is a possibility. Just the fact that this scenario is even possible should be a red flag and worry people. There's no reason this couldn't also happen with mediums like video - just that it's probably happening with audio first because it was the easiest and had small file sizes.
In the end, what is this scenario about? It's about shifting the burdens of something (piracy) that creates losses onto the least flexible party (the poorer consumers). Even if the direct impact of the piracy is on music company revenues, they are powerful enough to pass it along to someone else the way a monopolist would simply pass along a tax burden to buyers. The next time you wonder to yourself why all the music on the radio and TV sucks these days, ask yourself if you're in one of the poor captive consumer groups it's designed to appeal to. Of course, if you reading this, you certainly are not.
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