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Written by: Chris Castiglione
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