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Does piracy have a catastrophic effect on how music, movies, and books are distributed?

Paul Matzko
Tech & Innovation Editor

Joel Waldfogel was previously the Ehrenkranz Family Professor of Business and Public Policy at the University of Pennsylvania’s Wharton School, where he and had served as department chair and associate vice dean. Prior to Wharton, Waldfogel was an associate professor of economics at Yale University.

His main research interests are industrial organization and law and economics, and he has conducted empirical studies of price advertising, media markets, the operation of differentiated product markets, and issues related to digital products, including piracy, pricing, and revenue sharing. He has published more than 50 articles in scholarly outlets, including the American Economic Review, the Journal of Political Economy, and the RAND Journal of Economics. He also has published several books, including The Tyranny of the Market: Why You Can’t Always Get What You Want (Harvard University Press, 2007) and Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays (Princeton University Press, 2009). He has also written for Slate.

Waldfogel received a BA in economics from Brandeis University and a PhD in economics from Stanford University. He grew up in South Minneapolis, graduating from Washburn High School.

As the cultural economy (music, movies, television, and books) digitized around the turn of the 21st century, many critics worried about severe negative consequences, including declining creative output because of piracy and decreased aesthetic quality. Joel Waldfogel joins Paul and Aaron to discuss why those fears were wrong. Digitization has actually stimulated a renaissance in the cultural economy as both the number and perceived aesthetic quality of film, television, and books have soared. It has been a triumph of technological innovation enabling an expansion of the marketplace for the ultimate benefit of producers and consumers.

Are we overproducing movies because of digitization? Are we consuming culture too fast? Is piracy a customer service problem? Does the business model of Spotify prevent piracy of music? Why did music take such a huge hit from piracy when TV and movies took a much smaller hit in comparison? Do we want ownership of products or the ability to have access to stream of service? Why are people unbundling their cable services? Should we get rid of all copyright?

Further Reading:

In the Economy of the Future, You Won’t Own Your Kitchen, written by Pamela J. Hobart

Intellectual Privilege, Free Thoughts Podcast

Is Netflix Ruining Culture?, written by Pamela J. Hobart reviewing Joel Waldfogel’s book Digital Renaissance



00:01 Paul Matzko: It’s Christmas time, which means millions of households around the world are participating in a new annual tradition, watching those Netflix‐​produced Christmas movies that are seemingly written by a crazed elf with a penchant for genre blending. Do you want to watch a 14th century knight be transported to suburban Ohio where he falls in love with Vanessa Hudgens? Well, Netflix has got you covered, you lovable weirdo. But for those of our buildings for our listeners who could not care less about the Netflix’s Christmas movie shlock, there’s a broader lesson about the shape of the digital economy illustrated by this trend. When the digitization of film, television, and other forms of cultural production first became a mass phenomenon two decades ago, technophobic critics worried that doing so would destroy cultural innovation leading to lowest common denominator film and TV projects. Studios would push out stuff that had global appeal and stop financing innovative projects. And to an extent they were correct. Major studios have been risk‐​averse, financing sequel after sequel, preferring live action remakes of ‘80s cartoon nostalgia to new intellectual property.

01:10 Paul Matzko: But streaming services like Netflix, Amazon Prime, Apple TV and the like have unleashed a torrent of innovative, experimental, and just plain weird content that never would have seen the light of day a generation ago. Digitization has given us peak TV in the burst of innovation in film and television. So when your significant other asks you to join him or her on the couch to watch another Netflix Christmas movie, now you can appreciate it as a marker of the radical innovation unleashed by digital technology. It’s also the subject of an interview that we recorded earlier this year with economist Joel Waldfogel about his book, Digital Renaissance: What Data and Economics Tell Us about the Future of Popular Culture. We’re rerunning the episode today, but we’ll be back with new content in the new year.


02:01 Paul Matzko: Welcome to Building Tomorrow, a show about how tech and innovation are making the world freer, happier, and more prosperous. Today we’re gonna talk about really actually an interesting topic. If you are a user of a streaming media service, so Netflix, Spotify, Kindle Unlimited, so books, film, television, music, you are a participant in the transformation of media culture today. And we have with us a special guest, Joel Waldfogel, who’s a professor at the Carlson School of Management at the University of Minnesota, who wrote a book on what he calls the Digital Renaissance, and he’s gonna come talk with Aaron and I about this digital renaissance, about this transformation. I think you’ll be really interested in what he has to say. Welcome to the show, Joel.

02:54 Joel Waldfogel: Thank you. Happy to be here.

02:56 Paul Matzko: Now, Joel, I think there’s been a lot of… There’s been some criticism over the last decade or so, in some circles about the rise of digitization and its effects on culture. People who are concerned about Netflix, Spotify, these kinds of services changing culture and cultural production for the worse. What is that conventional wisdom that you’re responding to?

03:21 Joel Waldfogel: Well, I think the conventional wisdom is that the way we have traditionally gotten our cultural products is that many people pitch these ideas to a group of wise men and women, the curators, the gatekeepers who decide which one’s the green light and send them forward. And it’s their taste and their investment and their nurture that then delivers us wonderful, wonderful pieces of cultural production. And there’s some truth to that, that’s the way we’ve traditionally gotten our books and our music and our movies. And so what digitization has done is it’s made it possible for creators to bring their work to market without the permissions, without the assent, without the investment of these traditional gatekeepers. And I think the concern is that we will find ourselves awashed in mixed metaphors here, but awashed in some pile of silt as opposed to the carefully curated gems that we supposedly used to get.

04:10 Paul Matzko: We all have that, know that phenomenon of what’s on Netflix and you’re going through, you’re like, “I don’t wanna watch any of this stuff,” but there’s a lot of it just the sheer quant and silt concerns, I think that folks have. Okay, so that’s the conventional wisdom, that we’re producing stuff that is of low quality, is replacing more desirable television, film, music, books, etcetera. That’s one of the topics you touched on in Digital Renaissance. What have you seen… I guess actually before we get to the argument of the book, what was the motivation for you in writing this piece? Throughout it you mentioned a couple of studies you did assessing people’s consumption of culture, what point did this bigger project, this book project really take hold in your mind?

05:02 Joel Waldfogel: Well, it’s interesting. So when piracy rolled around, I, like a lot of people, started studying the impact of piracy on the revenues of the, in particular, the music industry and I studied the film industry as well. And at the time that was quite an important challenge. It remains an important challenge. And my big concern was, and I think most of the research at the time, the main concern was,” Well, what’s the revenue implication of piracy and how is this going to jeopardize continued production of cultural products?” After I did that for a while, it occurred to me that piracy and its impact were important but really what we were about, if our concern is copyright policy working, the concern ought to be what’s happening to the quality of new products and whether we’re continuing to get a high number of quality new products. Now that’s a hard question to try to assess. But again, I began to try to assess that. And I guess, onto the question of how do the book arise, what happened was I started assessing that in one industry and then another and then another and realized there were some patterns because of the common element of digitization. And so that’s what got me, once you find yourself pursuing a list of related questions that sort of lends itself to rewriting itself as a book.

06:16 Paul Matzko: Back in the early 2000s, I was a high schooler, and then in college, and I had a friend, shout out to Timmy, who he… One day, he came to class and he showed me his brand new first‐​gen iPod and I don’t know there was like 500 megabytes or something on it and he said, “Paul, I can get any song that exists onto this iPod,” and this is post‐​Napster but he had gone to some kind of sketchy Russian website where you could pay some fee and access, you could torrent [06:51] ____ pre‐​torrent, but you could download all the music, anything you want, of course, 500 megabytes could only hold so much, and the idea of giving someone in some random person in Russia your credit card information seemed utterly a bad idea, it was a bad financial decision I felt on his part, but I always think of that story whenever I hear about digitization and piracy and it reminds me of a quote by Gabe Newell, who’s the CEO of Valve, which owns Steam, a big PC gaming retailer, who said in 2011, that piracy is almost always a service problem, and not a pricing problem. If a pirate offers a product anywhere in the world, 24/7, purchasable from the convenience of your personal computer and the legal provider says the product is region‐​locked, will come to your country three months after the US release and can only be purchased at a brick‐​and‐​mortar store, then the pirate’s service is more valuable. Do you agree with Newell? Is piracy a customer service problem?

07:57 Joel Waldfogel: Well, I think that when Napster came along the traditional players hadn’t yet had the opportunity to think about what digitization could do for them and I think clearly everything available for free is attractive compared to almost anything else. You know I think that… But I’m not in the camp of blaming the victim here. I mean, I think piracy is, at least in principle, and in many ways, in fact, a real problem. I think what’s interesting about digitization, it started with piracy and that was everyone’s obsession but rightly so in 2003, 2004, 2005. But the other side of digitization is not just loss of revenue, but a change in the cost structure of bringing things to market, and so between the changes in cost and the development of business models that have made it easier or at least more feasible for the right holders to try to get revenue, and that brings us back frankly to Spotify and Netflix and bundled options like that, there is unbalance, a bunch of good news amid the bad news of piracy or the bad news of digitization, which consist both of piracy and the loss of control by gatekeeping elites.

09:00 Aaron Ross Powell: Did piracy have a noticeable and anything close to catastrophic effect on content? I mean, not creators, necessarily, but those distributors and kind of the people who were paying and enabling the distribution of content?

09:16 Joel Waldfogel: Well, certainly in music, I mean, it’s amazing, in music, recorded music revenue had risen essentially for quite some time, and after 1999 when Napster appeared to began to fall and continued to fall frankly, until about two years ago, it’s only with the development of paid streaming and the real growth of Spotify that it’s finally rebounded a bit. It’s well below where it was in 1999. So there really was, I think, one has to say there was a catastrophic collapse of revenue in recorded music. The only other industry and it’s not an industry in the book that looks a lot like this is the newspaper industry, where also revenue just collapsed after about 1999. Now there it wasn’t Napster, it was something else, but digitization has really done a number on some of the cultural and news industries.

10:05 Aaron: One of the things… So I was an undergrad, my freshman year of college was 1997, so that was when I first got broadband and that was right around when Napster was first a thing, so I was in that first generation of real music piracy.

10:25 Paul Matzko: Don’t indemnify yourself on the air, Aaron.

10:27 Aaron: And one of the things that always struck me was that this was… I mean, we can have debates about whether intellectual property is actually property, whether that metaphor makes sense and whatnot, but you are when you’re pirating something that you would have paid for otherwise, you’re in a sense, taking revenue away or stealing from people but it never felt like that like you didn’t… If you would have said, hey, it’s pretty easy to get away with walking into a CD store and stealing… And just stuffing these things into your jacket and walking out and you’re probably not gonna get caught and it doesn’t take any time to do it, do you wanna do it? Most of us would have been at least unlikely to ’cause it felt yucky. But the digital privacy like was it… Is that kind of cultural notion that we could just do this, that at one point, like BitTorrent traffic made up some extraordinary amount of overall internet traffic and I’m sure most of that was not downloading Open Source Linux distributions.

11:34 Joel Waldfogel: Right.

11:36 Aaron Ross Powell: That kind of just immediate embrace was… Do you have any thoughts on that, like is it just because it’s not physical and so it doesn’t feel like stealing?

11:44 Joel Waldfogel: Well, I think it’s two things. I think partly it’s that I don’t have to sort of put stuff under my shirt or under my jacket and walk out, but partly, there’s a sort of higher‐​minded justification which is that many of the things I steal I was not going to purchase. And so that’s a victimless crime. If I was not going to purchase it, then me taking it gives me benefit without depriving the seller the revenue.

12:08 Joel Waldfogel: Of course that’s not a very good blanket justification for the practice, because there was so much stealing much of which, but not all of which, would have resulted in purchase that but it was depriving the industry of revenue, and even… Putting aside business considerations just thinking like a policy maker or the enlightened planner, the challenge here is that if revenue falls enough then maybe people will stop making stuff. And that was a legitimate worry in 2003, 2004, 2005, maybe even today, although I think what I’ve found provides some tonic for that concern, but that was a legitimate worry, particularly when you look at an industry like music, where revenue fell so remarkably.

12:47 Paul Matzko: So in the book it’s very clear that music takes the biggest hit in terms of falling revenue compared to film, and television, and even books. Though, I think books also took quite a hit, but you do an e‐​book section there. Why the difference between industries, like why would music and books be hit so much harder than film and television?

13:14 Joel Waldfogel: I think a couple of things. One is that music was first and so there was… There really wasn’t other response in place. So music was first. Files were small and easy, therefore, to download and steal. Movie files, in the early 2000s, were still pretty hard to steal, in a sense that they were big. I mean, in some ways, stealing was more harmful in movies just because, per instance of set, if I steal a movie, it takes me two hours to watch it, just like if I paid for it. And that’s gonna display some of my ability to do paid consumption in a way that music didn’t. But the volume of stealing was a lot lower. In television it’s pretty interesting that the TV networks saw this stuff happening. YouTube went up in 2005. People started uploading the shows. There were lawsuits but the television networks very quickly decided to put essentially all the good new stuff online.

14:05 Joel Waldfogel: And so they did a business response that adapted in the technology. I’m not sure they would have wanted it to happen in that sequence, but nevertheless, guys who went post‐​music were able to adapt their strategies in light of the challenging experience the music industry faced.

14:21 Paul Matzko: Which, I mean, this makes sense. My understanding is that the rate of piracy fell quite drastically once iTunes essentially, iTunes launching, giving people a convenient, easy way of purchasing music or accessing music, that didn’t involve sketchy Russian websites giving your credit card information.

14:41 Paul Matzko: Right, and I think even more so with Spotify. The challenge with iTunes, although it was a radical… A wonderful radical change, but still even there, you had to pay a dollar for a song, and many songs turned out to be turkeys. And so it’s nice to have a business model that takes my willingness to pay only a penny for this song, and five cents for that, and a dollar for that one, and add it all up into my willingness to pay a monthly subscription fee.

15:06 Aaron Ross Powell: So that business model, the streaming business model, say Spotify has clearly cut into piracy. And I have not pirated songs since college, because this is much easier. You pay 10 bucks a month, and you know you’re gonna get the right thing. You don’t have to sort through weirdly‐​titled stuff online, wire, and not know what you’re gonna get. So that’s a new business model that has removed a lot of the incentive to pirate. But how has that business model, as a whole, compared to the one that piracy took down as far as revenue to content creators?

15:43 Joel Waldfogel: Well, you hear different things from different people. So the top line numbers have finally begun to improve in the past couple of years, because enough people are paying the subscription price, and so the total payments to these right holders… Rights holders, have actually risen in music, which is astounding after over a decade of decline. But there are some switches about who wins and who loses, so it was pretty well known that Taylor Swift refused to put her album 1989 on Spotify. And when it first came out and that’s because she felt she could make more money selling it off of Spotify. I mean she may have had some other justifications, as well. But I think the issue is that if you can sell your product on your own, you might be better off going alone.

16:25 Joel Waldfogel: The other thing is the old model, you got paid when your product got sold, when a person bought a permanent download or bought a CD. In the new model you get paid when people listen to your music. Now, here’s… A consequence of that is that take a lot of old catalog music, which isn’t being purchased much now, or might not be purchased much now, but it’s being played a lot on Spotify. Well, a bunch of middle and older‐​aged artists are now getting some checks where they wouldn’t have gotten checks in the past. In many cases, they’ll say things like, “Oh, I got a small check. And that’s kind of irritating.”

16:55 Joel Waldfogel: But, what’s interesting is that in the US, the owners of sound recordings don’t get paid when their song gets played on the radio. The song writers do but the owners of the recordings do not whereas on streaming services, they do. So there are bunch of payments happening that wouldn’t happen before. Now again, there are many artists who say these payments are too small and that maybe right, but nevertheless, positive is bigger than zero. And the other thing I think is that there used to be a small number of artists, who got any real crack at success. Now, many, many, many more artists can find their way to consumers.

17:29 Joel Waldfogel: Now, some people say that consumption is still very concentrated in the head and that’s true. But there are quite a lot of artists who’ve broken through now, and who wouldn’t have broken through before, who’ve become consequential in the sense that they end up in bestseller lists, and in the right tail of sales and streaming distributions. So there really is, there’s a change in who wins and who loses.

17:53 Paul Matzko: We ran a review of Mike Munger’s book, Tomorrow 3.0, which I’ll have to put the link in the show notes, where he talks about how the economy of the future will focus more and more on streams of service, versus property ownership, ’cause for many goods, we don’t really need or want ownership per se. We just want access to that thing. And so Netflix as an example, we don’t own any of the movies on Netflix. You just subscribe to a stream of service. You can watch the movies as they appear if you want. Ownership is not as important to as many people. And so, as we transfer things from the realm of ownership to stream of service access, there’s a real potential for revolutionizing how people… Do people consume content only if they own it?

18:50 Paul Matzko: And I can imagine that’s a problem for producers as they shift remodel where you pay people based on purchases, versus paying people based on a stream of service which is why here when you talk about Spotify, people don’t need to own the music, they just want to listen to it. I think the other thing that sparks my mind is okay, so you’re on… You have your music on Spotify… Well, actually no there’s a whole community of folks. So let’s say back in 10 years ago I bought a bunch of music on iTunes, I own a bunch of Kindle books, I technically own this property. My understanding is with digital goods, I don’t actually have real ownership, I can’t transfer my Kindle book to someone else, I can’t resell it. There was a whole controversy recently with Apple and iTunes with people buying movies, and then Apple disappearing those movies and saying, “Hey, look, if you look at the terms when you bought this movie, you don’t actually own it, you just own access to it”. So is there… Are we dealing with the ramifications of this new category of property that while on the one hand, we consider it legally property like stuff in the real life, it actually isn’t. I mean, It’s property, but it’s not… Could you speak to that, Joel?

20:15 Joel Waldfogel: Yeah, sure, so there are a couple of things. So there are some of these products that people wanna use repeatedly. And so in the case of movies, most people don’t wanna watch them repeatedly unless they’re children and it’s the Lion king or something, whereas with music, people do tend to listen to it repeatedly. And so, although I think Spotify is a wonder… Or a bundled selling is a wonderful deal for most people. You can imagine people for [20:36] ____. Let’s suppose you’re gonna decide that there are 100 songs that you like and you’re never gonna like any more songs again. Well, if you knew which 100 songs those were, you could have bought them for $100. But if you subscribe to them, that’s $120 a year, at $10 a month, you’ve gotta keep paying $120 a year for the rest of your life. Now, I think most people tend to discover new things that they like, but it’s not completely obvious unless you’re bringing new songs into your library or things you use that you’re gonna wanna pay a subscription fee as opposed to owning.

21:10 Joel Waldfogel: The one other thing that’s important is that under the first sale doctrine, the law in the United States is if I buy a book or a movie, physical, I can resell it. And so, no, even though it might have a high price, I can resell it and so effectively, I’m really kind of renting it at the price minus what I sell it for. But the new sales, the digital products can’t be resold and so that’s actually great news for the seller ’cause they no longer have to compete with the resale market.

21:38 Paul Matzko: To think all things being equal, that would accrue to the benefit, digitization should actually make it easier for sellers to maximize profitability and revenue because you can control, you can avoid the resale issue. So if you can sold…

21:53 Joel Waldfogel: Exactly, except for the piracy thing which is not trivial, but except for that, and I think in many ways that’s been combated successfully. Digitization allows, because the cost of providing another unit to another person is essentially zero, and so you can put together bundles, it doesn’t cost you any more to put together a bundle of good stuff, and you can charge people for their willingness to pay, and so that does seem to be responsible for the big success that’s happening in Spotify and Netflix.

22:22 Paul Matzko: So we have all these new bundles, Netflix, Spotify etcetera and yet the conversation about cable television has been all about unbundling so there’s new services like Sling and others which are about allowing people to kind of buy smaller and smaller packages of channels. So why do we see in one industry, cable television, we see a process of gradual unbundling and yet these other industries we’re seeing new re‐​bundling, if you will.

22:55 Joel Waldfogel: Well, that’s not really obvious to me. I know that there are people who don’t wanna buy particular channels, but they’re… Traditionally this quest for ala carte has been kind of funny because ala carte is not the French word for inexpensive if you want ESPN alone, it’s not gonna be your cable bill divided by the 500 channels, it’s gonna be about half your cable bill for the basic subscription. I mean, the other, I guess, I don’t want to entirely script the question but look at how we’ve seen… We’re seeing all these people cord cutting, and then going over to various platforms, whether it’d be Netflix, Hulu, HBO, now Disney is coming along, I wouldn’t be surprised to see a re‐​bundling arise because it’s in the next 5 to 10 years just ’cause it’s rather inconvenient to have five different platforms. So I don’t know, I’m not convinced that unbundling is the way of the future. I suspect bundling… We’ll see some re‐​bundling.

23:56 Paul Matzko: To return to something we were talking about earlier. So there are folks who advocate for the wholesale abolishment of copyright. I think you call them in the book Copy Leftists at one point, but I can actually also imagine a certain variety of kind of left libertarian, more of an anarchist‐​bent who would also advocate for this, why are they wrong? Why is just… Hey, copyright is messed up. Therefore, we should get rid of all copyright, all property and intellectual property.

24:32 Joel Waldfogel: Well, so first, let’s make the case for the sense in which they’re right, think about stuff that already exists. For stuff that already exists putting particularly stuff, let’s think about cultural products that are being distributed digitally, the marginal cost of serving another consumer is zero, so if we charge a price above zero, we’re gonna prevent some valuable instances of consumption. And so there’s the kernel of an argument why for stuff that already exists, it would be really nice just to make it freely available to everyone and that would be a great argument full stop, except that we do also care about the continued creation of stuff and to the extent that that requires revenue, and certainly making Spider‐​Man 17 is gonna require revenue ’cause it’s an expensive movie to make, we can’t just give it all away, we need to have some revenue and some incentives for people to create stuff. So I think that’s where the copy left or Libertarian view breaks down. It makes perfect sense, but only for stuff that already exists.

25:19 Aaron Ross Powell: What does it make… The other difference between say songs, people making music, and posting it on YouTube and Spider‐​Man 2 is just… Spider‐​Man 2 costs hundreds of millions of dollars to produce and a song costs, if you’ve got your guitar and a decent microphone, it ends up costing practically nothing. And so is this copyright really only, does that problem of stuff that doesn’t exist, it seems like, might only apply for the stuff that’s really expensive, because the business models already exist for… Copyright not really being necessary for the cheaper stuff. So, songs I can… I don’t need to… I put the song up on Spotify and if I’m the artist who put it up, people are naturally gonna listen to that and if there’s… Spotify can say, “Well, we’re not gonna have random other copies of this because it makes our catalogue look bad, if there’s lots of copies of the same song.” Or, if I put it up on YouTube, other people can put up the same video, but they may not have the same audience I do and so naturally people gravitate to the original. And if it’s selling ads alongside them, I’m still making money. So it’s this really… Would getting rid of copyright maybe just only kind of push out the extraordinarily expensive stuff?

26:45 Joel Waldfogel: Well, so let me… This is actually great opportunity both to make the traditional argument and to make the central argument of the book. So the music guys actually would say and do say that they’re the most investment intensive, or one of the most investment intensive industries around. They say that it costs them a million dollars to bring an album by a new artist to market, and more than two million to bring a new album by an established artist to market. And they’re not, they’re not lying, what they’re… ‘Cause their way of doing it continues to be that you bet on a small number of promising seeming artists, you invest in professional studio engineers and studio and producers, you invest in videos, you invest in what it takes to get the music on to the radio. And so it literally, I think they’re not lying when they say it costs them a million dollars to bring an album by a new artist to market. So they would say, no, they need copyright protection everybody as much as the movie industry ’cause their total investments even though it’s only a million per album as opposed to $100 million for a movie, but their total investments are enormous and they have to finance both the failures and the successes with the revenue from the successes.

27:54 Joel Waldfogel: So that would be the standard argument. Now, I think, to get to the sort of central argument of the book, the argument is that although there have been, in some industries, revenue reductions, there have been these cost reductions that have made it possible for a lot of creators to come straight to market. And it is really, as you suggested, I can make music very cheaply. So my iPhone has on it a music studio, it has… Garage Band is on that, it’s on every Mac, I can upload my music and make it saleable either traditionally through iTunes for almost nothing, and now through Spotify. They don’t seem to be a very selective filter. And so I can get distribution and the potential to make revenue with very, very, very small investment. Now the thing is, that’s not enough to give you a digital renaissance. And just think about this for a second, there’s a really important feature of cultural products which is that it’s very hard to predict which ones will be successful at the time that investment occurs.

28:54 Joel Waldfogel: Now to see why that’s so important, let’s pretend for a second that it was perfectly predictable. If it were perfectly predictable which products would win, then if something happened call it digitization, that reduced costs and made more products get the green light, all those products would be pretty low value. It’d all be worse than the traditional worst product. But in a world where it’s hard to predict and we live in that world. What’s gonna happen if you have digitization which reduces the costs of bringing things to market is a big growth in the number of new products. But then more importantly, a bunch of those product, well, certainly a lot of it will be crap to use the technical term or unappealing to many people, but some of it because of unpredictability will end up being very successful and will end up in the right‐​tail of the sales distributions. And if that’s true, then digitization could deliver us a digital renaissance instead of just delivering us a big pile of cultural silt.

29:50 Joel Waldfogel: Now, if that story is true, it has a bunch of implications. One, the obvious one there should be more stuff, but the more important implication is that when you look at stuff that’s bestselling these days, whether it’s bestselling books, or most streamed music, or bestselling movies that we should see a high and growing share of that stuff, should be stuff that would never have made it through before. Now, that’s a little hard to measure, but I think there’s some pretty obvious ways to think about it. In music, it’s music from indie labels and self‐​released stuff. In books, it’s self‐​published books. In movies, it’s movies not from the traditional major studios. Ditto for television it’s the stuff not from the traditional major distribution channels. And what’s true in all of these industries has been not only a great growth in the number of things but a big growth in the share of bestselling things that really would never have made it to market in a meaningful way before and that’s really the kernel of empirical evidence for the digital renaissance.

30:50 Paul Matzko: So to kind of put this in context for our listeners like when you talk about unpredictability, just for sake of argument, let’s say the movie studios under the old system could perfectly predict which 10 films would be the 10 most popular or most highest grossing, the best, the 10 best films they could, every year, predict what those 10 best would be with perfect accuracy, then if what you do, they can only afford the top 10, but that’s okay, ’cause they picked the top 10. But then if you… Because of a change, like digitization you can now produce 20 movies every year. Well, yeah, there’s a little bit of additional value but you’re only, you’re producing 10 more substandard movies, right? But what your point is is that actually they don’t know, they can’t predict which will be the top 10. They might hit one out of the top 10, or two or three. Since that’s true, since they can’t predict it, if you expand the pool to 20 movies, well, some of that numbers 11 through 20, should belong on the top 10 or will if they’re allowed to be made. So as you expand that pool effectively you’re buying more lottery tickets, am I thinking about that the right way?

32:02 Joel Waldfogel: Yeah, I like the way you’re saying it. Yeah, yeah, that’s exactly what’s going on. And so a lot of this stuff that you can say starts out in left field ends up among the bestsellers. One of my favorite examples is in books. So the USA Today has a weekly Bestseller List, the top 150 books of the week and it’s particularly reliable in the sense that it’s always included self‐​published things. They don’t exclude self‐​published or electronic books. And before the arrival of the Kindle, which is the main platform through which people both publish and also consume self‐​published e‐​books, it was essentially 0% bestsellers that were books that had originally been self‐​published…

32:41 Joel Waldfogel: But by about 2011 it was over 10%. And in some categories, in the Romance category, it was over 40% of titles that had originally been self‐​published. I mean, that’s astounding, this complete circumvention of gatekeepers.

32:55 Aaron Ross Powell: Will this also, this move, it seems might bring a re‐​definition of what success means within these artistic spheres? Because we talk about… So we’re talking about bestsellers, chart toppers and all of that, and the way that we tend to take the music industry, the way we think of the popular music is made by people who are now because of the popularity of the music, extraordinarily rich. And so the result of the distribution in this… The costliness of production is that you end up with a handful of people who are extraordinarily rich making most of the popular music, and then most artists can’t make a living because they just aren’t… They’re not getting enough sales, or they’re too risky to put any investment into. But with the radically declining cost of both production and distribution, we may end up with fewer multimillionaire artists, fewer Taylor Swifts, but a lot more people who… The dream of every artist is to make a living off of their art, and making a living is a number much much lower than the amount of money that Taylor Swift makes.

34:05 Paul Matzko: The newly cultural middle class.

34:07 Aaron Ross Powell: Right. So I’m thinking of… There was an article years ago and I can’t remember who wrote it, but it was about… The phrase from it was, I think, was it 1000 true fans was the phrase, that if you were an artist and you could get 1000 true fans who were people who were defined as, they would spend x number of dollars a year buying your stuff whether that was buying your book, or buying your t‐​shirts, or subscribing to your email list or whatever, but if you could just find 1000 people, you could make a living. But that 1000 people is a vanishingly small number from the perspective of centralized content creation farms and the big producers, and so they wouldn’t care about your 1000 true fans. But as an artist, if you can get 1000 people on Patreon kicking in a buck to you, or a 1000 people buying your t‐​shirt, you can make a living. And if we can get a lot more of those people that seems like a radically better world than a world where we will just have a handful of very rich rockstars.

35:10 Joel Waldfogel: I tend to agree with that, I think just to be fair that there are folks in the content industries who have been complaining, raising the concern that their incomes are falling. And I think what it tends to be, it tends to be the incumbent players, the non‐​star but the established incumbent players who find or at least claim that their incomes are falling in the face of a multitude of forces, whether it be initially piracy, but I think a lot of it’s now competition from an enormous number of entrance who can’t be prevented from entering the market. So I don’t wanna be unsympathetic or sound unsympathetic to some of the creators who are seeing themselves maybe earn less than they used to, but there are a whole bunch of people who now earn something and provide a product and get the joy as well as the revenue from participating in the market. And so it’s just… Content creators will all tell you, every one of these industries will tell you that they are suffering, but the odd thing is, they’re creating so much stuff so it’s hard sort of the evidence we would usually use for public policy to say, “Oh gosh, they need relief because they’re not producing any more.” Well, that’s not what’s happening. There’s an amazing amount of production including very high quality production.

36:19 Aaron Ross Powell: Would we expect with this… So the amount of money available for production decreases if these kind of big players are earning less, but also the amount of money it takes to produce something is much less, that that would have the effect in the long term of like changing the aesthetics, in a sense that like… So in music, what we’d end up with is less music that was of the heavily produced, very expensive variety, and more like the stuff people are listening to because it’s what’s available, and where all the dynamism is is like garage punk rock, which costs practically nothing to produce, or we stop seeing these CGI fest superhero sorts of movies and it’s more filmed people talking kinds of movies because those don’t cost anything to produce. And so we just gradually genres shift based on production?

37:25 Joel Waldfogel: Well, I think the distribution of total stuff produced is very much the way you are describing it, but I also think that it’s not that the traditional kind of stuff doesn’t get made. What the traditional players can now do is they can look and see what happens when these people who release their own stuff, or release a low‐​cost stuff and see which of those things succeed, and then they can jump on that and invest in it. In the case of books, they’ll literally republish a self‐​published book with a traditional publishing house. In the case of movie‐​makers or filmmakers and musicians, there’s just this Minor League system where you succeed making your first little movie with a credit card, and then you get hired up by a studio to make a bigger movie. Same thing with the music labels, the major labels are still very much in this business of producing things, but they tend to be less in the business of discovering new talent. Instead they can discover talent that’s proven itself, because the number of streams people have done in YouTube or whatever, and they can invest in more predictably successful things.

38:22 Joel Waldfogel: So on the one hand, yeah, there’s a whole bunch of kind of minor league if you… Not on a pejorative way, but sort of self‐​done or low scale stuff that’s probably not gonna have expensive car chases in it if it’s a movie, but once you’ve proven yourself, then the big dollar guys can go ahead and invest in you and you can have big car chases in your next movie.

38:39 Paul Matzko: I’ve always been intrigued, I think Planet Money did an episode on Blumhouse Studios which has that lottery ticket, low‐​cost spread your bets, the film production company, and they’ll buy rights to a bunch of cheap movies, the cheaper the better. They love the horror genre because the costs are very, very low. And if you make a bunch of $5 million, $10 million movies, you can make 20 of those for the cost of 1/10 pull franchise. Well, one of those might hit and the one that hits whether it’s… What’s a famous Blumhouse one, the one where there’s… Paranormal Activity. So one of those will make $300 million. The other 19 will not make anything, but that’s okay they’re buying lottery tickets. And then once it makes a bunch of money, then you can spend $50 million, $100 million on the sequel, if they’re into the sequels.

39:40 Joel Waldfogel: Yeah, right.

39:40 Paul Matzko: Right. So, again it’s the idea of you’re letting these small‐​scale new directors who might do a little indie film, or there’s a whole… They’ll do the production, they’ll do the discovery process, and then once you see what hits, the bigger studios can latch on to and make more money from. So, I think that’s quite interesting. Now, on this point about… So, we’re producing more stuff than ever before. You talk about that at length in the book. There were concerns and you quote a few critics of digitization, like Andrew Keen, who were worried that, “Okay, we’re producing more stuff, but it’s gonna be low quality stuff,” and Keen had said something like, “If you democratize media then you end up democratizing talent.” He was all very worried about cultural flattening. So, he wrote this back in 2007, complained a bunch about blogs because that’s a very 2007 thing to do, is complain about blogs.

40:40 Paul Matzko: And I think intuitively most of our listeners are gonna get why that’s wrong. We not only have more stuff never before, but every cultural critic is now currently talking about the golden age of television, the golden age of… There’s a… Weird stuff gets made that wouldn’t have been made a decade ago. I don’t know. I just watched Velvet Buzzsaw on Netflix. There’s no way arthouse dramedy meets horror film would ever have been greenlit a decade ago. But stuff like that is getting money thrown at it by the big major streaming services. So, I think, intuitively people get, “Okay, Keen was wrong,” but why was he wrong? And maybe you can push that out beyond just Netflix, and how do you see this happening on a global scale?

41:24 Joel Waldfogel: Yeah, no, yeah, I think there are two senses in which he may be wrong, although he’s not obviously wrong. But the one sense in which he’s potentially wrong is in the commercial sense. Because of this unpredictability business we’ve already talked about, and if we let everybody do stuff, yes, we get a big pile of bad stuff, but we get a few gems. Commercial gems. But that leaves him still potentially right about whether we get cultural garbage. So we could… One could make a distinction. I’m an economist so I tend not to, but as a human, I can understand the distinction between commercially successful things and artistically important things. And here I have a little bit to say about this, although again, aesthetics is not really my thing, but some of my assessments of the quality of new stuff are based on consumption and some of my assessments of the quality of new stuff are based on what elites think, what critics think.

42:15 Joel Waldfogel: And I think, in movies, for example, it’s kind of stunning. If you’re willing to trust these aggregators of movie critic information, like Rotten Tomatoes et al. It’s a 100‐​point scale and if you look at the number of movies that get over some particular high grade, it’s just skyrocketed over time. It used to be there were maybe 10 movies a year that had, I forget the exact number, a 90 or an 85 on Rotten Tomatoes, and now it’s 100 per year that are getting a score like that. And that’s based on aggregations of the views of professional critics. Again, one could always quibble about whether the critics know anything, but I think even from the standpoint of culture, digitization has tended to be good. And let’s even take it one step further. Books are, in some sense, a more serious art form. I mean, personally, I’m a movie guy, but books, I would concede, literature may be more vulnerable to these concerns.

43:10 Joel Waldfogel: And many critics look at both the production and consumption of 50 Shades of Grey and they say, “Gosh, this is the end of the world.” But I mean, in books, you don’t see any reduction let’s say in how much the New York Times notables are, what share of sales they’re accounting for. You don’t see… What you see is that there’s growth in the share of sales that are attributable to these self‐​published or originally self‐​published books, but what it seems to be displacing is kind of that mass market fiction category. So it’s not like we’re losing our souls to digitization. I mean, some people would say we should wait a generation and see and maybe that’s right. But at least, the early reviews on digitization show it’s been a commercial win and there’s really no evidence of a critical loss. In many ways, there’s evidence for this being a critical bonanza.

44:04 Paul Matzko: We’re a libertarian think tank here at Cato, so our listeners are going to be, I think, interested in thinking about this from a free market standpoint, and as I was thinking about whether or not this is a free market or freer market success story, is there any difference between, say, this process of digital technology making creation and distribution cheaper, which widens both the number of creators, as well as the pool of potential consumers? Is that any different from, say, how the invention of the steam shovel allowed canals to be widened, or transportation networks to expand making it cheaper to distribute goods, widening the market for both producers and consumers? In the sense, it’s just an old story about broader, freer markets.

44:56 Joel Waldfogel: I think, in many ways, it is. It’s a story about entry barriers declining. It used to be, it was really hard to enter these markets. You needed permission from gatekeepers and you needed investment from gatekeepers, and now you don’t. And so there’s just so much more entry and a lot of it’s bad, but some of it’s good. And so it’s really just a story, almost out of Ec 1, where you get a bunch of entry and a bunch of new consumer surplus, you get some current incumbent players feeling pain because they face competition. And again, I can just imagine them screaming, “Wait a minute, you forgot about piracy.” And piracy is different, piracy is cheating, but putting that aside for a moment.

45:31 Joel Waldfogel: There’s a lot of competition now for many new products that’s putting some pressure on incumbent players, and so… But I think from a competition standpoint and a libertarian perspective, you’d say, “No, it’s just good if people wanna enter. That’s gonna just drive prices down and increase variety.” But I think one thing to note, looking forward at threats to the continued renaissance is that we do have great concentrations of power now in some platforms. It used to be like, take music. It used to be there were a few labels, a few major labels, and then there were literally hundreds of independent radio stations and literally hundreds of independent record stores and they were all influential, but there were hundreds of them. Well, now, the Spotify and Apple Music and a handful of others play the role of both the record store and the radio station. Now, I don’t see any evidence that they’re behaving badly, but we certainly wanna be keeping an eye on this if we’re thinking about impediments to free markets.

46:31 Joel Waldfogel: These are some very, very powerful gatekeepers. And again, I see them mostly… I see them doing a lot of good things, so I’m not saying they’re doing bad things, but I’m saying if we wanted to keep our eyes open, these are some things to keep her eyes open about.

46:43 Paul Matzko: Well, it makes sense that if one of the sources of this transformation, of this renaissance is that the barriers to entry are lower and cheaper, while the barriers to exit also are. So if you get bad behavior from these platforms, yes, there’s not… They’re often kind of very industry dominate in a way that was harder in other sectors of the economy earlier, but it’s relatively… It might be easier to leave them if they really, if they behave badly. So I think we probably will draw things to a close here. Thank you so much for your time, Joel, we really appreciate you coming on the show.

47:19 Joel Waldfogel: Oh, it was my pleasure.

47:20 Paul Matzko: And for our listeners, I’ll quote from the last sentence of Digital Renaissance of Joel’s book, “Sit back, relax, and enjoy the Renaissance.” Until next week, be well.


47:34 Paul Matzko: Thanks for listening. Building Tomorrow is produced by Tess Terrible. If you enjoyed Building Tomorrow, please subscribe to us on iTunes, or wherever you get your podcasts. If you’d like to learn more about libertarianism, find this on the web at www​.lib​er​tar​i​an​ism​.org.