Has Radiohead gone bonkers?

My wife and I are huge fans of Radiohead (she turned me into one). Here is a picture from the fourth row from their Boston concert to prove it. 

 

(My wife has much better pictures from that concert. In fact, she used one of Thom Yorke from that concert as the background for her laptop until I got jealous and complained.)

So it was great to learn that the band's new album will be out soon (from Greg Mankiw, of all places!). Greg also mentions that Radiohead has an interesting pricing strategy for the new album: you can pay as little (or as much) as you wish for it:

“IT’S UP TO YOU,” the rock band’s site informs customers pre-ordering the digital download, which will be available Oct. 10. Doubters get a second assurance: “NO REALLY. IT’S UP TO YOU.”

As proof, the order form’s section for price is blank — and it will accept the lowest possible amount for the site: One British penny (about two American cents). After a perfunctory credit-card charge, Radiohead, one of the most popular and innovative rock bands of the past two decades, will gladly hand over a copy of the whole album for less than a dollar, PC World concluded in an article noting that Apple’s iTunes Music Store was left out of this deal.

There is no maximum price, nor any other guidance, setting up what is may be the biggest experiment in digital-era music-industry pricing to date. What are people willing to pay for music? How many will pay full price? How will the average price compare to what a typical record company would likely have charged? Will people pirate it anyway?

When I told my wife the news about the new album making its appearance, she was thrilled. Then I told her about the pricing, and her first reaction was "they've gone bonkers!" (its equivalent in Turkish, to be precise). 

I asked her how much she would pay for it. Specifically, I said that iTunes would probably sell it for $9.99 (if it could), and wondered how much she would be signing up for in light of that. She said, "of course more than that!"

Before you conclude that my wife and I should have a few more economics conversations around the dinner table, you should know that she is an industrial-organization economist, working (among other topics) on pricing strategies in network and other R&D intensive industries.   

So has Radiohead gone bonkers? Not at all.

Comments

[Justin Rietz]

Being of the economic bent, you and your wife realize that if you short change your favorite band now, they won't be around in the long run to produce more albums.

However, from a game theoretic approach, I expect the general result will be different. While I may value the Radiohead album at $20 and wish to see the band live long enough to produce another album, there is a significant risk that most people will pay the minimum possible. In this case, paying more than the required amount gains me nothing (besides a clean conscience, perhaps).

Basically a case of the Tragedy of the Commons.

[TheophileEscargot]

Could be a good move.

The money in music these days seems to increasingly come from live performances and merchandise. I suspect the future model will be giving away digital music for free, as a way to get people interested enough in your music to come to the gigs and buy the T-shirts.

Price has also caused outrage from record company dinosaurs by giving away his latest album for free (as a CD in a newspaper)

This way Radiohead spread their music as widely as possible, but still get some money from people who choose to be economically irrational and pay/tip for it.

[geoff manne]

As I noted here: http://www.truthonthemarket.com/2007/10/01/radiohead-revisited/ I predict the average price will be $2, and the median $0. There are the rabid fans, of course, but there aren't that many willing to shell out big bucks when they don't have to--especially since the typical Radiohead fan would have copied a friend's CD or downloaded the CD illegally anyway.

It is a tragedy of the commons problem, of course, but I don't think Radiohead is in any danger of "going out of business." The real question is how much they make up in an expanded and invigorated fanbase willing to buy their other CDs, tickets to concerts (I bet the price is higher next time they swing through Boston), t-shirts, etc. Will it make up the difference? It's a risky bet, but it might work. Even if it does, however, the real danger will be drawing a lesson applicable to other bands. The typical unsigned garage band on MySpace will not be as successful with this strategy as Radiohead might.

[James]

Surely I am a statistical anomaly, but I just paid 75 pounds for the album.

Really the band would still do better to earn 1 pound for the album rather than nothing. This price structure discourages listeners from just stealing it from a P2P network, which would have happened anyways.

[Richard Pointer]

I don't think it is risky.

The payment system they have automatically charges 45p or 90c. That overcomes the absolutely zero cost. Once you get on that train of having to shell out some dough, it should be come easier to punch in a higher figure than zero. A buck here and pound there adds up to a bunch of money after a million downloads. Remember we have zero marginal costs for distribution.

A point that I haven't seen posted elsewhere is that they are not allowing for immediate download. Such a download would allow quality assessments to spread among buyers. With imperfect information Radiohead is banking on their good name to drive early sales. Later sales will be driven by goodies and bundling of the 40 pound box set.

[robertdfeinman]

Many museums have a "pay what you wish" policy with a "suggested" amount listed prominently. Apparently public pressure ensures that most people pay the suggested price. It may be the arched eyebrow of the ticket seller (or the fear of being subjected to one) that makes such behavior happen, but who knows what will happen in the privacy of one's own home.

Public Radio and TV also use the same model and it seems to work reasonably well. Why contribute when you can get it for free? Yet people do.

[corvad]

radiohead's not just doing this for themselves: Thom Yorke has stated that they wanted to change the exploitative music industry. those gosh darn socialists!

[paul]

Radiohead is not bonkers at all. On the sale of a $15.99 album with their label EMI, I doubt they would get more than $2. So if they average $2/purchase for the download (which is what I paid), they will do as well as they would with a label. Better, since a lot more people will buy the album for $2 than would for $16.

And this IS the future of music. Let's face it, music albums are available for free as it is, so radiohead is not losing that much. Good recording technology is a lot cheaper than it used to be, and MySpace and last.fm can now replace a lot of the functions of record companies. So why should bands continue to let recording companies take 90% of their revenue?

[TheophileEscargot]

Following up Geoff Manne's comment on illegal copying, I think it's important to remember that with P2P you can already get any album illegally for free with a few mouse clicks.

So, the innovation here is not that you can get it for free or you can pay. That's the case for all music.

The innovation is that you can get it for free, or pay any price. Everyone else is offering just two options: pay $9.99 or pay exactly zero.

So given that payment is already a matter of choice or honesty, this might well make more revenue than the traditional model. Some of people who would normally be ten-dollar buyers might choose to pay less for it... but also some people who are normally zero-dollar buyers might choose to pay something at least.

[Ron]

I have two software developer friends who make six figures per year on contributions from shareware they posted on download sites several years ago. The products are useful enough that users believe it's worth contributing a few bucks to make sure the software is updated.

Radiohead's experiment sounds wonderful. There is a lot of music that I wouldn't pay $10 for, but I would pay $2 for, so that the band doesn't go broke. I suspect they will make a good deal of money if the album is decent.

[Lee A. Arnold]

If Radiohead keeps a list of everybody and how much they paid, they could then publish it later, and punish the cheapskates by social disapprobation. This would be consonant with the principles of The Theory of Moral Sentiments. You wouldn't know most of the names, of course, but some might be highly revealing. Indeed, if they threatened to do it, it could become highly profitable... I don't expect Radiohead to do it: they are good guys. (But I think it's one way to start to deal with big carbon polluters.)

[RLM]

I discussed this today with one of our producers, who loves the idea. My reaction was similar: that at first the amounts will be high, as loyal fans rush to pay what they think is fair, but the mean and median will drop quickly.

With digital distribution so easy to manage, I wonder if bands will also experiment with price schemes that change over time, defined ex ante, to capture less-than-rabid interest. e.g., album price starts low but rises by $1 each week until it reaches full price, where it stays for six months, followed by a drop to a permanent, lower price.

Lee Arnold: interesting idea. Public embarrassment as a policy instrument is an under-discussed topic, usually limited to sex offenders and deadbeat parents.

[Linkt]

This move reminded me of an online music store called amiestreet.com

Here, music has a variable price: the first person (or first persons) to download a song pay nothing, and the price goes up to a maximum of .99 cents, if very popular.

[Kymbos]

This may be the first album I buy in 5 years. I've nicked the rest from the internet.

[DRDR]

Here's a simple model for why this might be good economics. For a standard album, consumers face the choice of paying $12 for the album or illegally downloading it for free. Assume people have no qualms about breaking a law with minimal enforcement. All the people who paid $12 for the album are doing it for unobserved nonpecuniary reasons anyway. Under the Radiohead scheme, these people would still be willing to pay $12 for it and some might pay more given the option. The people who previously downloaded the album illegally for free might be willing to pay anywhere from 0 to $12 for it, and Radiohead now gets these funds when it previously was not serving these people.

Now let's consider the possibility that some of those who paid $12 for albums previously did so because they had moral qualms about breaking the law. Then it's possible these people could pay less than $12. However, I would guess these people would be more likely than the general public not to drop their price to $0 given their morality or perhaps their understanding of the long run problems of breaking laws and not funding their favorite artist (i.e. believe in the concept of "voting with your purchases" -- a good analogy because as with voting, it's not obvious that it's in your self-interest to do so)

And of course the fact that people might be willing to pay more for the album directly from Radiohead knowing that Radiohead might get a larger cut only helps their cause, as many have already pointed out.

[Polymathe]

I just found this old Salon.com article about the record industry and a reference to tipping. Courtney Love was a precursor, it seems:
http://archive.salon.com/tech/feature/2000/06/14/love/print.html

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