Can you really equate piracy to radio when you can listen to what you want on-demand? This is a big difference from radio and services like Pandora which don't allow you to listen to exactly what you want when you want.
So the challenge is 'listen to what you want' versus 'discover new music'.
People will listen to something for 'free' even if they aren't sure they will like it, but they won't pay any money for something that they don't know whether or not they will like it.
Radio was a way to introduce new music, but with an iPod/iPhone/mp3 player people can carry around days of music that they already know they like, and it has no annoying adverts in it, so they don't listen to the radio any more. Thus a source of discovery is cut off from them.
'Pirates', listening to music and then giving a copy to a friend who they think might like it, allows new music to be discovered. That seeding is required for artists to develop a following. Pandora does similar seeding, but like radio injects advertisements which are annoying to many.
The issue of compensation for the artist never seems to come up in these conversations. Neil Young can charge $75 for his cheapest concert tickets. So record sales mean very little to him. For younger artists this is not the case.
> but they won't pay any money for something that they don't know whether or not they will like it.
people bought albums for decades without knowing what songs were on the album.
I don't see how it's fair to justify the acquisition of someones property with the pretense that it's gonna be better for you. Even under extreme cases like nationalisation and imminent domain, the owners are compensated. I made this comment on the Neil Young link, but it was censored.
If we are so certain that the artist will benefit under the 'new' system, fine, but if he or she doesn't they have to be compensated to bridge the earnings gap.
Comparing music now to music in the 1930's is not fair, artists got paid almost nothing in the 1930-1950's. The whole industry was corrupt.
You know that old aphorism "If a tree falls in the woods and nobody hears it, did it make a sound?" For "younger artists" that is code for 'nobody knows who they are.' And that is a very important concept to internalize if you want to understand the economics of information.
Lets say you offer to sell someone an 800 page hardcover book about a wizard for $35 [1]. If they have never heard of the author they are going to politely decline. Why? because they can spend $35 on a book from an author they know they like and for whom perhaps their latest book was also read by their friends who liked it. As an economic actor in this transaction they act in their own self interest, to spend their earned income on entertainment for which they have some prediction of enjoying it. Give them a $35 coupon good for any book at Amazon and they might buy it on a whim, make them work half a day to earn that much and they won't.
So your observation about Neil Diamond is absolutely correct, there are a lot of people who have heard his music, like it, and will buy it. More importantly because there are a lot of people who have heard it and like it, the probability that a person knows someone directly who has bought it and likes it is higher. The the perceived risk of the purchase is lower.
So now imagine that you've got got an artist producing a product. Initially, there is this huge barrier to them selling their product because there are many known artists out there (and the new artist is initially unknown), and there are many 'purchase experience' consumers who are reinforcing the quality analysis of the known artists. So our new artist has no way to communicate their value to their potential customers.
So to overcome that lack of exposure, a new artist has to 'be heard' (if we're talking about music) and they do things like play bars, clubs, go to 'amateur night', and try to get a local group of people that like to hear what they play. If they are successful at that they might be able to 'open' for a famous act at their concerts, be the band that 'warms up' the crowd. Now they get to expose themselves to the people who like the main act (and presumably their musical style is similar so they feel they might be liked too) and if enough folks do like them then maybe they can be their own 'headliners'. Of course when you open for Neil Diamond and people are paying $75 to see Neil, not a whole lot of that is going to you, the warm up band.
This whole 'getting the word out' is a process that was filled by radio for years and years. It was so successful in fact that music labels would actually pay the radio stations to play their signed acts music. It was a huge scandal. But instead of thinking the money they paid the radio stations as 'lost profits' they considered it a marketing expense. And they were right. They knew, and pretty much anyone who has tried to market an 'art' product (which is to say a creative work), that people don't buy things they don't know about.
So you can ask what a new artist's work is 'worth' compared to an established artist. And to understand that you have to include the cost of making the set of customers who would buy this new artists work aware of the existence. That is a huge sunk cost, and one that used to be born by a book publisher or a record label. Once the artist is over that hump of course things are much easier. What Neil has recognized is that 'piracy' as defined by the record labels and book publishers is creating more artist awareness these days than the older channels. That is a really really important change, and it is one that artists, especially new artists, have to internalize.
Perhaps in the 'old' days your publisher would pay you $4K for a book, and if that book took off they would make a huge 'profit' on it and you would not see another dime. But on your second book with them you could negotiate better terms. There are many examples of 'hollywood accounting' or 'record label accounting' which show how they do this. The artist doesn't get any benefit early on, and only after being established to they have any leverage in those business negotiations. The 'new' way may be that the early works of the artist get 'pirated' like crazy and spread far and wide. People get exposed to them for 'free' and while the artist gets no monetary remuneration, they are offsetting that barrier of not being a known entity. As they develop exposure they will get more and more pricing control over their work, up to and including the point where people will pay millions in advance to be the first to get their next novel/song/movie what have you.
But the key to understanding this is understanding that 'value' is composed of two parts 'awareness' and 'quality.' And they are multiplicative. So if either is zero, value goes to zero. The thing that makes it still work is that the marginal reproduction cost in a digital ecosystem is also nearly zero.
I was listening to NPR where they said the record company made about $8m off Kate Perry's record sales, whereas they were responsible for most of the marketing expense (promoting to radio stations, etc). There was another show about how much it costs record companies to try to get a summer hit, and they didn't have much to show after [1]
There's now a trend for record companies to reposition themselves as marketing agencies (which is what they actually do) where they take a cut of the total revenue (including song writing and concert sales) called 360 contracts. [2]
It'd be interesting if the entire process of songmaking were like a creative commons non-commercial project. You start with a song writer, different people doing mixes, and then when it reaches a stage where it can be monetized all people involved get paid. The question is "how to hell do you monetize this?" iTunes? High Fidelity mp3 ? Live performances? Humble bundle $1 compilations?
The radio plays songs interspersed with commercials that thousands of people hear and a handful of those folks are influenced to go buy cars or soap or deodorant or fast food from the advertisements they heard (thus effectively paying the advertisers, thus compensating them for the advertisements, thus providing the radio station with revenue to pay the license fees which get paid to music studios and eventually to musicians). Is that really so very much better or more ethical than millions of individuals listening to music through file sharing and a handful of those folks being influenced to buy albums, go to concerts, purchase t-shirts and other merchandise which directly benefits the artists?
Edit: to add an additional punch to this: how is it that advertisements can be so enormously compelling that they can sustain 4 levels of profit margin (for the company selling the products, for the ad agency, for the radio station, for the music studios) yet the music itself is not sufficiently compelling to support even one level? The answer is that it is. The licensing fees are a token, the ads support the operations of the radio station, the music supports itself. Take away the technological need for a radio station and...
Hell, if the music industry ran Pirate Bay themselves and profited from having higher quality ads on there, you would have something a little closer to the radio experience (ignoring ability to choose what you wanted). People would be seeing/hearing ads as they explored new music, as well as buying limited edition products, physical releases, concert tickets, t-shirts and other merch.
Problem is, the big players are hanging on to the cliff edge by their fingernails, rather than locking into the harness at the bottom ready to start their climb.
So radio is only acceptable because it's bad for the consumer? Does making radio better (by allowing on-demand listening) suddenly make it illegal/immoral/bad?
Radio pays far more per song than Internet streamers do. Running a radio station is $x/song, on the web it's $x/song/listener.
(Radio stations cost lots to set up up front, web radio costs kick in when you get bigger, but until then you'd have to operate at a loss, or go ad heavy.
The difference is that with piracy, there is a chance you'll stumble upon something new. With the radio, you're stuck with the same handful of songs over and over and over again.
But seriously, I have always wondered how the radio model is supposed to work. Whenever I hear a song I like, just wait an hour, and I'll hear it again. There is simply no reason to buy the CD (or record, or digital download).
Value is, in part, driven by scarcity. When you only have 40 songs in your rotation, there is no longer that scarcity required to drive the high value. It's no wonder people were no longer willing to pay $20 for a CD.
The radio model was not geared to you (as far as I can tell). Up to the 90s, lots of people who heard a song a dozen times on the radio would then go and by the single or album. Even at $8 and $20. I don't know why they did, but they did.
I suspect the big problem with piracy (from RIAA perspective) is that it is teaching those people that its just as easy to get it online. Except that iTunes went and made it even easier to get it for $1, so most people in that market I know just buy it on iTunes.
