Rockonomics

Chapter 1

Prelude

Somebody said to me, “But the Beatles were anti-materialistic.” That’s a huge myth. John and I literally used to sit down and say, “Now, let’s write a swimming pool.”

—Paul McCartney

“What walk‑on music would you like?” It was a question I had never been asked before or since. I was about to give a speech at the Rock and Roll Hall of Fame, and my hosts wanted to know which songs to play before I took the stage.

No, I wasn’t about to be inducted into the Hall of Fame. I’m not a musician and I can’t even carry a tune. I’m an economics professor at Princeton. I was then the chairman of the President’s Council of Economic Advisers. I had been invited to speak because I had the idea of using the music industry as a metaphor to draw parallels with the U.S. economy--in particular, the financial struggles of middle-class families and the growing gap between the wealthy and everyone else. The key theme was that the U.S. job market had become a superstar, winner-take-all affair, much like the music industry, where a small number of top performers did fabulously well, while almost everyone else struggled to make ends meet.

The speech used the term rockonomics--meaning the economic study of the music business--to explain why this was happening, what it means for everyday Americans, and what should be done to bring about a fairer economy that works for everyone. I had a list of bold ideas to restore our national hopes and dreams. What better venue to give this speech than the Rock and Roll Hall of Fame in Cleveland?

My boss at the time, President Obama, liked the idea. Even better, he liked the speech. I sent him a copy when he was flying on Air Force One, and he subsequently announced at a meeting that “everyone should read Alan’s speech.” Soon I was getting requests for a copy from the labor secretary and commerce secretary.

This book expands on that original rockonomics metaphor to tell the story of how the whole U.S. economy has changed in recent years--and how each of us can prepare for the changes in store in the twenty-first century. In my career I’ve found, and psychological research supports, that we learn best not from abstract principles or equations but from stories. And music is all about telling stories.

Economics is also about telling stories, although the field has acquired the unfortunate and misleading reputation as “the dismal science.” Economic models, statistics, and regression analyses are all tools used for the purpose of telling stories with rigor and precision. We economists just don’t tell the story very well or clearly. This is one of the reasons there was such strong rejection of expertise and basic economic concepts, including gains from trade and the value of impartial, objective economic statistics, during the 2016 U.S. presidential election. We need to find more convincing ways to share the lessons of economics. A broader audience might be willing--even eager--to listen if the story of the economic forces disrupting our world is told through the prism of the music industry. After all, music is one of the few endeavors that unites us, whatever our backgrounds or interests. Almost everyone has a connection to the music industry in one way or another. I call this a theory of “one degree of separation,” since we are intimately connected to music and the music industry in one way or another through friends, family, and associates.

To investigate the economic forces shaping the music industry, I conducted dozens of interviews with musicians and music industry executives, from up-and-coming performers and struggling singers to legendary members of the Rock and Roll Hall of Fame, from executives at Spotify and Amazon to those at Universal Music Group, the largest music company in the world--as well as the owner of my local record shop. (Yes, the Princeton Record Exchange still exists and is thriving, despite a challenging environment for retail stores.)

I’ve interviewed iconic figures who have helped shape the music industry, including Gloria Estefan, the most successful crossover artist of all time, and Quincy Jones, the famed music impresario and performer who produced records for virtually every star from Frank Sinatra to Donna Summer and Michael Jackson. And I met often with Cliff Burnstein and Peter Mensch, the co-founders of Q Prime, which manages Metallica, Red Hot Chili Peppers, Cage the Elephant, Eric Church, and other successful bands. Marc Geiger, the swashbuckling head of music at William Morris Endeavor, shared his optimism for the future of the music biz with me, and top music industry lawyers Don Passman and John Eastman tutored me on music rights and record company contracts. To gain a bird’s-eye view of the work and effort involved in putting on a show, I tagged along with musicians and their crews to a number of gigs, and interviewed ushers, vendors, and executives at Live Nation and Ticketmaster.

Answering questions about money and contractual arrangements is always difficult, especially for artists. A disagreement over money helped break up the Beatles. Money can be a treacherous topic. I am thus especially grateful that so many artists, executives, and industry participants were willing to share their experiences, financial data, and perspectives with me. In the pages that follow I have tried to faithfully reflect their stories to explain the economics of the music business. Most important, I try to convey their passion for creating and sharing music. Perhaps the most powerful lesson that I learned is that it is their love for creating music and entertaining audiences that drives most musicians, rather than expectations of earning a fortune (or even a living).

As an empirical economist, I believe that theories, observations, and anecdotes must be evaluated in the cold light of objective, representative data. In researching this book, I analyzed data on hundreds of thousands of concerts collected by Pollstar magazine, which gave me unprecedented access to its Pollstar Boxoffice Database. I analyzed data on billions of music streams, millions of record sales and digital downloads, hundreds of thousands of concerts, and thousands of musicians. To fill the gaps, I conducted my own survey of 1,200 professional musicians. By melding firsthand observations from those on the front lines of the music business with Big Data on the industry as a whole, I developed a richer, more reliable, and more representative picture of how economic forces shape the music industry.

Fortunately, there is also a burgeoning research literature on the music industry by economists, sociologists, psychologists, and computer scientists. Other scholars, too, have found that the music industry provides fertile ground for research, and a scintillating way to inspire and engage students. To provide a forum for researchers to exchange ideas and to support research on the music business across disciplines, in 2016 I helped form a non-profit organization called the Music Industry Research Association (MIRA). This book draws on findings from the innovative social science and related research literature on the music industry.

Although music listeners may not realize it, economics lies at the heart of the music that is created and produced. Economic forces profoundly affect the music that we listen to, the devices on which we hear it, the genres that are produced, and the amount we pay to attend a live performance, stream music, or buy a recording. When Dick Clark asked Sam Cooke on American Bandstand why he switched from gospel to pop music in the late 1950s, the singer smiled and replied earnestly, “My economic situation.” And Paul McCartney recently explained to Howard Stern that the Beatles were not trying to create a revolution. “We were just kids from a poor area in Liverpool who wanted to make some money.” Even if musicians do not personally feel that they are motivated by economic incentives, economic forces quietly orchestrate success and failure. In his book In Praise of Commercial Culture (Harvard University Press), Tyler Cowen has likewise argued that “economic effects have had stronger effects on culture than is commonly believed. The printing press paved the way for classical music, while electricity made rock and roll possible. For better or worse, artists are subject to economic constraints.”

To truly understand and appreciate music, you need to understand economics. To take one example, you may have noticed that many more songs today involve collaborations between artists, often where a mega-star is featured with other artists trying to break in or cross over to reach a new audience. “Despacito,” the most-streamed song in 2017, is a good example: it is by Luis Fonsi and Daddy Yankee and features Justin Bieber. If you listen carefully to songs that feature other singers, you will notice that the star normally appears early in the song, within the first thirty seconds. This is logical because streaming services only pay royalties for music that is streamed for at least thirty seconds. In other words, economic incentives of streaming are directly affecting the way songs are written, composed, and performed.

Careful economic study of the music industry can shed light on where music is headed, and why. Music and the music business will change over time, but a small number of timeless economic insights can be applied to understand the industry, as new genres and apps are created. More important, understanding the economics of the music industry can yield insights into how economic forces affect our daily lives, work, and society in a myriad of ways.