Apologies for taking so long to get round to writing this post. That pesky life business getting in the way as usual.

In the previous posts in this series I have been waxing lyrical about copyright law and the mistakes the entertainment industry has made in adapting to a world with the internet. Over the past couple of years, people in the music industry have — belatedly — begun to tackle the issue properly.

Radiohead made big news last year with their latest album, In Rainbows. What hit the headlines was their novel pricing structure. You could choose the price you wanted to pay for it, between zero and £100.

This idea wasn’t all so novel though. Radiohead are by no means the first band to release their music for free, or to take the ‘honesty box’ approach to pricing. They certainly won’t be the last.

Prince did a similar thing this year as well when he gave away his latest album free with copies of the Mail on Sunday. This led to the odd sight of branches of HMV installing a dumpbin of the paper for one day only.

It’s worth thinking about exactly what Radiohead did by implementing a choose-your-own-price method. The record industry often likes to talk about how much it has “lost” as a result of piracy. But the numbers they use are misleading.

As Tim Worstall pointed out on his (now tabloid) blog many months ago, demand curves slope downwards. So the record industry don’t lose anything like as much as (number of illegal downloads) × (RRP of a CD) as a result of the download revolution.

The old model meant that people could basically either choose to buy a CD at its RRP or pass on it completely. So if you were only willing to pay £11.98 for a CD that was priced £11.99, you wouldn’t buy it. That is fine — that is how the market works.

But when filesharing became more common, people could choose to buy a CD at its RRP or download it for free. Those were the only options available. So if you were still willing to pay £11.98 for that CD, you would not pay £11.99 — you’d just download it for free. From £11.98 and lower, record companies were losing profits. They didn’t know how to deal with this, so used the ham-fisted techniques I described in the previous post instead of coming up with a new business model like they should have done.

The In Rainbows method tackled the problem head-on. Under Radiohead’s system, if you were willing to pay £11.98, you could choose to pay £11.98. What’s more, if people were willing to pay, say, £80 for the album, they could choose to pay that as well.

Chances are that most wouldn’t. You could legally download it for free, so lots of people will have done this without feeling any sense of guilt. Radiohead aren’t releasing any figures, so we can’t tell. But reading between the lines of the interviews Radiohead have given, they seem quite happy with how the experiment has worked out and most estimates suggest that Radiohead have made more money using the honesty box approach than they would have done with the old way — mostly because all of the middlemen have gone.

The middlemen are a big problem. They seem to be particularly so at EMI. Recently EMI was taken over by a private equity firm, Terra Firma. They appear to be particularly clueless. In the space of a few months they have managed to piss off three of the biggest acts on their roster — Radiohead, Paul McCartney and now Robbie Williams.

Here is some insight from Paul McCartney:

“I’d started saying to them: ‘Look, we could write a thing and have it released the next week.’ And they would say: ‘You can’t do that these days.’ So I would say: ‘Well, how much time do you need?’ And they’d say six months. I said: ‘Why do you need that long?’ And do you know what they said? ‘To figure out how to market it.’ I said: ‘Wait a minute, are you sure you need six months for that? Couldn’t some bright people do that in two days?’ Jesus Christ. I said: ‘Look boys, I’m sorry, I’m digging a new furrow.”

EMI seem to be making the mistake of treating artists like widgets. They have mistaken creativity for something that can be switched on and off like a tap.

And they seem to be amazingly inefficient. Fans know all-to-well about the six month gap between the announcement of a new album and its actual release date. It surely don’t have to be that way. Indeed, one of the most refreshing things about In Rainbows was that it was announced a mere ten days before its release.

So if the middlemen are no longer needed and are actively hurting the artists and the fans, does it mean labels are doomed?

Well, Radiohead took a risk, and it paid off. A lot of people say they were in a lucky position. And they were. Radiohead are the best band in the world and probably the most popular contemporary band. They were always going to do well regardless.

But what about the smaller bands? Surely the chances are that they won’t do as well as Radiohead by adopting such an honour system.

But honour systems work. Paul Feldman the bagel salesman knows that. LibraryThing has been using such a model for a while, and found that their takings increased once they adopted the system.

A lot of music fans are extremely loyal to their favourite bands. They are just the type of people who won’t take advantage of the fact that you can get music for free. They get such a warm glow from knowing that they are rewarding their idols.

Labels and bands may still be wary. If honour systems don’t convince, the common answer to the problem is to release music for free and use it as a way of generating publicity so that more money can be made from touring. Alan McGee, manager of The Charlatans, who are also now giving away their music for free, reckons that it could even triple the size of the crowds at gigs.

Merchandise is also becoming increasingly important. There is a theory that the reason concert promoters don’t charge the market value for gig tickets is because keeping the price low attracts a younger audience. These youngsters will go on to buy loads of t-shirts from the merchandise stall, so in the end everyone involved makes more money. Some bands are even stopping selling CDs at gigs for fear of cannibalising t-shirt sales.

So the future of music is gigs and t-shirts. This is great for my wallet. I rarely attend concerts, and I am more and more reluctant to buy t-shirts.

But I think the music industry could still potentially make lots of money from selling physical copies of the music. And my wallet won’t be so happy about that. That will be the subject of my next (and, at last, final) post in the series.

There is a really interesting post about intellectual property and the woes facing the entertainment industry by James Graham. Given that I have been meaning to write about this issue for a long time, I may as well use this as the opportunity to finally get round to it.

But first, a couple of notes on copyrights and patents. James Graham says:

Both global patent and copyright laws have been extended in recent decades. The original idea behind such laws appears to have been forgotten and pure greed has taken its place. Globalisation means that the earnings potential from a new idea has massively increased; yet at the same time we’ve artificially increased it further still, and long lives will extend this still further. To take one example, J.K. Rowling, a rich woman who can afford the very best in healthcare, is likely to have a very long life. Let’s assume she lives to 100, in 2065. The copyright on her books will stay with her estate until 2135. That means that her great-great-great grandchildren will still be profiting from their ancestor’s books. Is there really any justification for that?

I quite agree. The traditional justification for strong copyright laws is to encourage innovation. You come up with a great idea, and we’ll make sure nobody else can profit from it.

Sound enough at first. But how long should this monopoly last? Is “life plus 70 years” or even “life plus 50 years” justified? Is 50 years even justified? Hardly.

Copyright was big(ish) news in the UK last year when there was a push by artists such as Cliff Richard, Paul McCartney and Bono (where’s his “altruism” now?) to get copyright extended from 50 years. Coincidentally (or not), Cliff Richard’s and Paul McCartney’s most successful recordings are soon to enter the public domain.

And let us bear in mind that this was for copyright on the recordings. So the copyright extension would have meant artists earning even more money from something that they did once, over 50 years ago, regardless of whether or not they even wrote the song. If only the rest of us could earn so much money for so long from doing a job just once!

So do strong copyright laws encourage innovation? It is difficult to imagine that Cliff Richard entered the recording booth in 1958 thinking about the money he’d be making from it in 2007. He will have been most concerned about the money he’d make from it in 1958 and a few years after that. Nobody but the most egotistical and talented musicians would imagine raking it in for any longer than 50 years.

Having copyright lasting “only” 50 years didn’t stifle innovation in the 1950s and 1960s — the rock n roll and beat music booms happened regardless. And looking at the subsequent careers of these early innovators of pop music, it is difficult to argue that these strong copyright laws have done anything but stifle innovation. After all, why would you bother to make more great music if you are still making money from 50-year-old music?

That makes sense when you think about it. Copyright laws essentially ensure that an artist has a monopoly. And monopolies are detested because of their effects on social welfare.

Cliff Richard isn’t concerned about innovation. His only incentive is to get his grubby hands on even more money. What a relief that the government rejected the proposal in the end.

So what is the optimal length of copyright? A paper by Rufus Pollock suggests that it is approximately 15 years. A far cry from the life plus 70 years for some works, or the 95 years that Cliff Richard called for.

It is a similar story with patents. The justification for patents is more or less the same as that for copyright laws. But research (PDF) by James Bessen and Eric Maskin (who I wrote about a couple of weeks ago) suggests that protection of intellectual property should be more “balanced”.

The ideal patent policy limits “knock-off” imitation, but allows developers who make similar, but potentially valuable complementary contributions.

Empirical evidence backs this up, as an extension of patent protection into the realm of software in the USA in the 1980s did not lead to an increase in innovation.

An interesting point about Rufus Pollock’s research is that he suggests that copyright laws should be weakened as the costs of production and reproduction decrease. And the past decade has seen a massive reduction in the costs of production due to advances in technology — particularly the internet.

And it is the entertainment industry’s complete inability to adapt to this reality that has left it in the mess it is currently in. That will be the subject of my next post in the series.