Expert Witness: Basic Economics of Music for Attorneys and Musicians

By John F. Sase, Ph.D.
Gerard J. Senick,   Senior Editor
Julie G. Sase,    Copyeditor

“One of the major contributions of economic analysis to law has been simplification, enabling enhanced understanding. Economics is complex and difficult but it is less complicated than legal doctrine and it can serve to unify different areas of the law.”
— William M. Landes and Richard A. Posner, Economic Structure of Intellectual Property Law, (Belknap Press of Harvard University, 2003)

Periodically, our column in the Legal News has focused on economic issues for attorneys and musicians. Since many members of our audience are or have been performing musicians, we feel that this subject is important enough to warrant a revisiting and an updating.

Many of us have experienced the joys and frustrations of producing recordings of our own compositions. Through this, we learned the value of a buck and the fickleness of the market. In part, these experiences drove me (Dr. Sase) to the study of Business and Economics. At the root of my motivation were the needs for self-preservation and for an intelligent defense against ruthless and often unscrupulous booking agents, bar owners, and other depraved mountebanks of the music industry.

My collaborators and I have provided the following information on the creation of music and its communication to the listener in live, electronic, or simultaneously combined forms. In order to explain the Economics of Music for Law, I have drawn on my studies of Economics, Accounting, Finance, Marketing, and a little bit of Entertainment and Copyright Law. In addition, I have relied upon my own gut-level knowledge and bone-rattling experiences to explain this subject.

The Economic Factors for Producing Music

First, let us center on the definition of Labor. Labor is the musician, who sometimes performs as an employee or, in most situations, practices as an entrepreneur. Music remains one of the most labor-intensive and entrepreneurial art forms. Labor entails not only the actual performance of the music. It also includes moving equipment, such as carrying a 310-pound Hammond B-3 organ-console up and down three flights of stairs at a frat-house gig (my bandmates and I kept telling our keyboardist to take up the piccolo).

Now, let us turn to Capital and Technology. These are the instruments that the musician plays, be it a $3.5 million Stradivarius (stradivariusviolins.org), a $3,800.00 Les Paul Standard electric guitar (gibson.com), or a hand-me-down tambourine with half of the bells fallen off. Of course, there are those musicians—vocalists--who may need nothing more than their own voices, though the maintenance and upkeep of a good set of vocal chords may be expensive. The separation of the essential productive capital from the range of technologies that a musician may use proves arbitrary. In the case of a street performer, the technology that extends beyond his/her actual instrument may be nothing more than a legendary five-watt battery-driven Pignose amplifier.

At the other extreme of gigging, a musician may rely upon stacks of high-powered amplifiers by Marshall, Fender, Hi-Watt, and others and a virtual wall of sound in the form of their PA (Public Address) system. In the case of the Grateful Dead who just completed their fifty-year career, the band stacked speaker cabinets into towers that stood fifty-feet high and fifty-feet wide. In all, the Dead’s sound system put forth 26,400 watts of continuous power via ninety-two amplifiers through 586 five-, twelve-, and fifteen-inch JBL loudspeakers and fifty-four ElectroVoice tweeters, all of which weighed approximately seventy-five tons.

In respect to broadcast sound, a musician may rely upon anything from a personal laptop computer running programs such as Propaganda or ePodcast Producer to a fully equipped multi-million-dollar broadcast house capable of beaming a signal across town, across the world, or beyond. Of course, a good microphone is at the heart of any recording or broadcasting. Regardless of whether the musician is playing Baroque (and on the street), polkas, Heavy Metal, ethereal Jazz, gut-bucket Blues, or whatever, a decent microphone, be it a hundred-dollar workhorse Shure SM57 or a $16,000 Neumann Digital, is the first link in the signal chain to the listener.

Intellectual Property

For a musician, Intellectual Property is that creation of one’s own mind, whether it makes it to paper or simply passes from the depths of the creative soul and out of the body via an instrument of improvisation. If recorded, that Intellectual Property may pass through the Air and move directly through electronic technology to a hard drive, to a CD, or to the Cloud. More often than not, the music emanates from inside and passes only through Air to become one with the infinite sound that reverberates upon itself in the creation of the Cosmos. However, this second alternative poses its own unique set of problems in defining and enforcing Intellectual Property Rights.

In their book Intellectual Property in the New Technological Age (Aspen Publishers, 6th ed. 2012), Robert P. Menges and Peter S. Menell explain that a different philosophical approach to Intellectual Property Law is taking root. This approach builds upon German philosopher Georg Wilhelm Friedrich Hegel’s emphasis on the possession of property as a mark of a free man. As a result, some jurists have argued that perhaps Intellectual Property should be inalienable in the same way that freedom is inalienable. The doctrine of droit de suite, the “right to follow” granted to artists or their heirs in some jurisdictions, forms a step taken towards this conclusion. This doctrine allows artists to receive a fee on the resale of their works. It also gives the author or composer an indefeasible right to royalties even if s/he assigns his/her copyright to another.

In their book Economic Structure of Intellectual Property Law, in which our opening quote appears, William M. Landes and Richard A. Posner develop a model for copyrights. In addition to technological, cultural, and legal factors, the authors note that economic elements determine the quantity and characteristics of “expressive” works created. In our rendition of their model, we will focus upon the expressive works of music and lyrics and the composers and authors of such works. These expressive works are the material that is the candidate for copyright protection in our culture.

Intellectual Property is the music and/or lyrics that a musician performs. The artist or some other author/composer may have written the works previously. Alternately, they may spill forth from the musician in separate improvisation or during a jam session with other musicians. Most essentially, Intellectual Property remains unique among all of the inputs. It is the creation of a person’s own mind. That person may put it into a form useable by others.

In addition, Intellectual Property works in conjunction with another basic input--Air. Quite simply, the raw material in the creation of music is Air. Musicians move Air, either acoustically or with the help of electronics. Even if most of the chain of transmission of sound is electronic circuitry, that final impulse of vibration that touches the human body, in the ear or elsewhere, remains, with rare exceptions, Air.

Since Air is not “used up” in the process of creating sound, it has more in common with Intellectual Property than with other inputs. In considering the commonalities, we also must consider the differences between Air and Intellectual Property. The economic principles of Excludability and Rivalry in Consumption reflect these differences.

Excludability and Rivalry in Consumption

Excludability refers to that property of a good whereby one person can prevent another person from using this good or input. In the case of music, a venue may exclude a listener unless s/he pays an admission fee or otherwise merits access in order to pass through a constructed barrier.

Rivalry in Consumption refers to that property of a good whereby one person’s use diminishes other people’s use. Passing music acoustically through the Air can cause a rivalry among listeners. However, transmission by radio signal generally will not, with the exception of the actual point of listening through a loudspeaker.

Excludability in the use of Air largely is the result of acoustic barriers that prevent persons in another room or outside of a building, such as a club or a concert hall, from enjoying the sounds. In a higher-tech form of excludability, a listener may not be able to enjoy music or other sounds on an airplane or in waiting areas without renting a pair of proprietary headphones from the purveyor of the entertainment.

In the matter of Excludability, Intellectual Property does share the stage with Air. Laws protect both music and lyrics and make them excludable. A series of copyright acts and conventions have ensured excludability. This series includes the Berne Convention of 1886, the Universal Copyright Convention of 1952, the United States Copyright Act of 1976, the Berne Convention Implementation Act of 1988, the World Trade Organization-administered Agreement on Trade-Related Aspects of Intellectual Property Rights of 1994, the Sonny Bono Copyright-Extension Act of 1998, the Digital-Millennium Copyright Act of 1998, and the Family Entertainment and Copyright Act of 2005. The World Intellectual Property Organization (WIPO), a specialized agency of the United Nations, monitors these agreements.

The Cost of Production

The cost of producing music and lyrics has two components. Since many musicians act as author, composer, publisher, producer, and engineer of their works, we will refer to this person as the “creator.” In doing so, we will elide, at least partially, a number of economic links and questions in the chain of distribution of the creation. Specifically, we recognize that most of the rights of assignment and their reclamation as well as the inalienable droit de suite remain with the creator of the work. As a result, we will explore this model through the unification of the multiple personalities at play in the mind of such a creator.

The two components of cost are the Cost of Expression and the Cost of Producing Performances and Copies. In respect to the Cost of Expression, the cost of creating the work is a fixed cost. Likewise, the cost of editing, producing, engineering, and otherwise preparing the work for conveyance to the public represents a fixed cost. Furthermore, these fixed costs are sunk costs that remain unrecoverable if the creator does not make a performance or a copy. The Cost of Producing Performances and Copies of the work represents the variable costs of moving the music and lyrics to an audience. These costs include the expense of producing a concert or a media broadcast as well as the cost of making and selling sheet music or recorded copies of the work.

The Cost of Expression

Now let us consider the Cost of Expression. In respect to reclamation of assignment and droit de suite, Landes and Posner state that, though contrary to intuition, economic analysis suggests that these laws reduce the incentive to create because they prevent the creator from shifting the risk involved in the creative process. The risky component of expected remuneration may well increase in respect to one or more components of these laws. If the creator must share any future speculative gain from his/her music and lyrics with another in the chain of distribution of the work, a risk-averse creator will be worse off as a result. In this sense, the economic denotation of the term “risk” implies uncertainty and variability to the income stream of the author.

Furthermore, the timing and conditions in the passing of droit de suite may have further impact on the incentive for the risk-averse creator to produce new works. If applied to works created before the law passed, the droit de suite would favor established creators at the expense of new ones because the new protection would increase the value of the existing works in contrast to the newly created ones. For the risk-averse creator, the legal construct imposes a negative externality upon the creator. Therefore, the incentive to create new works, rather than rearrangements and derivatives of existing works, diminishes.

However, a schism arises within the creator in respect to risk. The author/composer remains risk-averse while, in contrast, the publisher side of the creator tends to be risk-neutral. Landes and Posner raise the question of why an author/composer is “usually compensated by royalties [a percentage of sales] rather than paid a lump sum [a guarantee upfront].” We agree with these writers in their assertion that tying the compensation of the author/composer to the realized success of the work rather than to the anticipated success increases the incentive for the creator to produce a commercial hit. However, when an author/composer receives a nonrefundable advance against royalties from a second-party publisher, the level of risk imposed upon the creator diminishes, thus increasing the incentive to create new works. For this reason, musicians who also author and compose tend to collateralize the risk (variability and uncertainty of income) against steadier gigs such as live performances, studio session-work, or practicing the Law and Economics of Music.

The Cost of Producing Performances and Copies

Due to several factors, there is variance in the number of performances by an artist or in the number of copies of a creator’s work that the audience will consume. These factors include the following:

• The amount of pleasure or enjoyment that the audience gains from the creator’s work 

• The price of the creator’s work, in terms of admission to a performance or the amount that an audience will spend for a recorded copy of the work

• How much time/money the audience has and is willing to spend

• The existence of works by other creators that are capable of providing a comparable level of pleasure or enjoyment

• The price of these substitute works in comparison to the creator’s work, relative to the income of the audience

• Other items, such as food and beverages at a live performance or the hardware needed to listen to a recording, which the audience needs or wants in order to enjoy the creator’s work

• The prices of these other items relative to the prices of the creator’s work, a comparable substitute work, and the other complementary items that the audience desires
All of these variables are conditional upon one another. We will consider them in a holistic manner.

The Cost of Consumption

Unabated consumption of music only is obtainable at the times in our lives when we have the money and, perhaps more importantly, the time to indulge our tastes for that element, which bridges the space between Heaven and Earth. As uttered repeatedly and constantly in recording studios around the world, “Time is money and money is time.” Like the energy and matter that is transmutable through Albert Einstein’s equation, we usually find ourselves constrained by having a limited amount of each. Therefore, these finite barriers of time/money preclude any attempt to maximize our sense of pleasure through our enjoyment of music. No longer are we the masters of our fates. In a material world, we become subject to the constraints that our limited possession of time/money has upon us.

Therefore, we must ask this question: how much time/money does an audience member have to spend and is willing to spend, given the price of the musical recording or performance? The price that a music-lover is willing to pay is relative to how much time/money s/he has in his/her possession. In addition, this factor is relative to the price of other pieces or performances of music that one may enjoy as much as the musical recording or performance that is considered. Price exists as a quicksilver substance. Its monetary amount is the result of whatever current bidding determines the price. In addition, the monetary amount is determined by whatever the market, which is filled with music-lovers, will bear. Since music is a fleeting ride upon the Air, there can be little, if any, intrinsic commercial value to it. Its value rests only in the momentary pleasure that it creates and conveys to the listener. Therefore, we can say that the value of music rests upon its existence as Intellectual Property and the rights attached to that property.

The music-monger may set the price in accordance with the amount of pain that the market will bear at any given time. First, what the market will bear is subject to what disposable income that music-lovers possess and are willing to relinquish. The music-lover makes this decision, often subconsciously, in respect to and in deference to all of the other necessities and comforts for which s/he must allocate a portion of said budget. Secondly, what the market will bear remains subject to the desire that can be aroused in the listener. This optimization is a two-way process. The music must draw the listener into giving up the portion of said budget that s/he originally allocated to music. Furthermore, it may seduce the music-lover into reallocating his/her budget from the purchase of other goods and services that s/he may need or want.

Therefore, it becomes the task of the creator or associate purveyor of music to arouse a great desire in the listener. The purveyor should do this in such a way as to narrow his/her focus on the music that may grant the greatest pleasure available to that person. In addition, the music-creator or associate purveyor must lead and interact with the listener in order to elicit a sense of knowing, a sense that a specific recording or performance is the one that will bring forth that pleasure. On the other side of our proverbial two-headed coin, this pleasure must be obtainable, given the listener’s willingness to relinquish a portion of his/her wealth to satisfy this desire. Due to the transitory pleasure derived from music, this knowing in the listener typically develops cumulatively, based upon repeat exposure to a specific artist or piece. This is in comparison to other artists or pieces that the listener might take as substitutes and for which s/he offers their time/money. Therefore, this transaction between music-creator and listener, usually conducted through an intermediary purveyor such as a concert promoter, a record store, or an online vendor, must be done with honesty and respect. It must be void of any chicanery or manipulation because such malfeasance will not endure over time. This relationship motivates us to continue to attend concerts or to replace our CDs with newer technology, such as downloads or reissued twelve-inch vinyl. The value of music comes through the repeated interaction between the creator and listener and the relation sympathique that develops between the minds of the two, augmenting over time.

Of course, transitory “sales” of music continue through other means. For example, the music industry parades lines of manufactured One-Hit Wonders in front of us like cattle. However, due to the enormity of underlying fixed costs involved in the creation and communication of music to the listener, these fleeting relationships produce little long-run net-value, either financially or pleasurably. Furthermore, what the dominant forces of the music industry fail to understand is this: For the listener, such connivance develops and sustains an air of distrust. It eventually drives the listener elsewhere in search of his/her satisfaction. At its core, the conveyance of music from creator to listener always has remained a matter of Relationship Marketing rather than Product Marketing. Where the nurtured relationship exists, the listener comes to trust specific creators. S/he looks to them for the sounds capable of heightening his/her level of musical pleasure. Hence, Relationship Marketing inherently involves repeat business.

The temptations of our Consumer Culture continue to challenge most of us. However, the lessons that I (Dr. Sase) have learned from the world of music continue to prove invaluable as I grow in wisdom and knowledge. What I have learned from the practice of music has translated into my practice of Economics, such as going from reading orchestral scores to reading spreadsheets of multiple time-series data. I am sure that similar lessons have helped my fellow musicians, who have pursued careers in Law, to build and to sustain their practices. Controlling costs is vital to achieving our goals. Years of textbook study of Economics, Accounting, Finance, and related courses can help us to refine our skills. However, the core ability in the matter of cost-control remains intuitive and stays based in certain fundamental beliefs, traditions, and a philosophy of life.

In this time of continuing economic uncertainty and instability, lessons learned early in life can help us to survive and to persevere. The lessons and values from my family and early musical career have provided me with a foundation to survive in this economic climate. I hope that my collaborators and I have bolstered the spirits of our reading audience through these reflections. I also hope that our audience will look inside themselves to find similar strengths at the cores of their beings. My desire is that, by imparting what I have learned, I have helped to give everyone some of the tools necessary to survive in our current culture. To paraphrase the Beatles and Joe Cocker, we’ll get by with a little help from our friends.

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Dr. John F. Sase has taught Economics for thirty-five years and has practiced Forensic and Investigative Economics since the early 1990s. He earned an M.A. in Economics and an MBA at the University of Detroit and a Ph.D. in Economics at Wayne State University. He is a graduate of the University of Detroit Jesuit High School. Dr. Sase can be reached at 248.569.5228 and at drjohn@saseassociates.com. You can find his educational videos of interest to attorneys at www.youtube.com/saseassociates.
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Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a Supervisory Editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication and gives seminars on writing and music. Mr. Senick can be reached at 313.342.4048 and at www.senick-editing.com. You can find some of his writing tips at www.YouTube.com/SenickEditing.
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Julie G. Sase is a freelance copyeditor and proofreader. She earned her degree in English at Marygrove College and her graduate certificate in Parent Coaching from Seattle Pacific University. As a consultant, Ms. Sase coaches clients, writes articles for publication, and gives interviews to various media. Ms. Sase can be reached at sasej@aol.com and Quill2Keyboard.com.