Musicians + Cross-Subsidies

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Traditionally, musicians earn very little from CD sales, thereby making it reasonable for them to sacrifice these miniscule royalties for a larger audience, which will in turn generate more income through cross subsidies, or external sources of income—often concert ticket, merchandise, and licensing profits.

The value of cross-subsidizing is already well-known and accounted for in the music industry. Through the typical standard distribution deal agreed on between most musicians and labels, the musician agrees to a smaller amount of profit from album sales in exchange for a higher return in cross subsidies. In economics, cross-subsidizing means earning less on ‘Product A’ in order to promote ‘Product B’, where in the end overall earnings exceed the cost. Wal-Mart does this by offering DVDs below cost in order to lure you into their store (Anderson). They assume people will buy other products while in the store, thereby eclipsing the loss taken from the under-priced DVDs.

To draw a parallel, musicians can under-price their album— or give it away for free, as I’m arguing—and assume people will buy other products.


5 Comments so far

  1. Dan April 9th, 2008 11:31 am

    Applying Walmart’s business model to a musician is not only a bad analogy, but it wouldn’t work. Walmart does this because it’s a calculated risk they can take. On the other hand, the risk for a musician is gigantically larger. This is like hiring someone to mow your lawn and then telling them, “I won’t pay you, but someday I might need my hedges trimmed.”

  2. Chris Castiglione April 10th, 2008 11:18 am

    Dan, but the chance to mow lawn and be a rockstar don’t compare, and besides there is a much larger pool of applicants struggling to become musicians than cut your lawn.

    The idea of cross-subsidies for musicians is somewhat similar to doing an unpaid internship (which is widely accepted as a valuable part of entering a new career). If there were hundreds of people vying to cut your lawn then it might be a good deal for them to work for free and prove to you that they are a valuable investment.

  3. Dan April 10th, 2008 7:10 pm

    so musicians have to prove themselves to deserve payment? It’s interesting that you describe musicians as ‘struggling’ but yet you expect them to be able to make the same financial risks of Walmart and at the same time, be an ‘unpaid intern’. Interesting. Explain how this works again?

  4. Chris Castiglione April 11th, 2008 12:27 am

    Of course musicians are “starving artists” and of course (financial) risk is almost always necessary if you expect higher returns.

    So I don’t agree that it has anything to do with taking on the “financial risk of Walmart”. Rather it’s the concept of giving something away for free and hoping for a higher return. Interns do it and new businesses do it – and now more bands should try it.

  5. [...] be selling cheaper music with the hope that you will buy something else in their online store. Wal-Mart has been doing this for years by offering DVDs below cost in order to lure you into their [...]

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