Living Economics

Social networking websites, such as MySpace.com and Facebook.com, have propelled many relatively unknown bands into instant celebrities through word-of-mouth publicity. Their free tracks have in turn boosted the sale of their independently produced CDs and download.

By eliminating the need for major music labels to promote their works, bands can sell fewer CDs and still come up ahead. For example, a band normally gets about $2 per CD sold. So an album that sells 500,000 copies earns the band about $1 million. But if the band can get half of the $13 sticker price for its CDs, it can earn just as much by selling only 1/3 as many CDs.

The Internet not only pulls the rug from under the music labels' feet in promotion, it also provides low-cost online distribution. Digital technology also greatly reduces the cost of production. So the traditional middleman role of the music labels is fatally compromised. Even those artists who still go with the music labels are now in a better position to negotiate better deals.

Many established artists have chosen to bypass the music labels by signing exclusive deals with big-box retailers such as Target. Their vast network of stores provides maximum exposure to the artists and their loss-leader pricing of CDs at $9.99 ensures wide circulation. Exclusive distribution only in the form of CDs also helps to reduce mass piracy.

By reducing the cost of promotion and distribution, the Internet and digital technology have thus transformed the music industry from one with high fixed cost in promotion and medium marginal cost of production and distribution into one with low fixed cost in promotion and very low marginal cost of reproduction and distribution. The fixed cost of producing the master copy might still be high, though.