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What's the frequency, Radiohead? - December 9, 2007

In their first extended interview since they started offering their latest album, "In Rainbows," for download on  name-your-own-price terms, the members of Radiohead refused to tell the New York Times how many people had downloaded the 10-track collection or what, on average, they had agreed to pay.

"It's our linen," manager Chris Hufford is quoted as saying in the lead story of Sunday's Arts & Leisure section. "We don't want to wash it in public."

Pity, because the industry could use all the data it can get.

Part of what's roiling the commercial music business today is classic market failure. Markets are supposed to process all the available information about a commodity and its supply and demand to come up with the optimal price.  But with the rapid pace of technological change, many long-established data points have become unreliable indicators. As a result, the market is having a hell of a time trying to fix a price for recorded music.

The explosion of illegal P2P file sharing of music seems to point to a market valuation for recorded music of zero. But the fact that Apple's iTunes Music Store has grown in a few years to become the third largest music retailer in the U.S. suggests that convenient and certain access to individual tracks has a non-zero value.

Much of the current tension among the record labels, distributors on listeners, Media Wonk suspects, could be assuaged if the market were doing its job and fixing the natural price for recorded music. But the unreliability of the old data points, coupled with uncertainty about the new ones, leaves the market without the information that classic economics says it needs to set a price. The result is market participants suspicious and fearful of getting jobbed (so to speak) and seeking redress through litigation, legislation and a refusal to negotiate.

A similar phenomenon is at work in the writers' strike against the Hollywood studios and networks. With neither side able to trust the other's valuation of future distribution platforms, due to a lack of reliable information, agreement on an equitable distribution of that future value is impossible.

Radiohead's experiment with "In Rainbows" was hardly a perfect test of market pricing. The issue has become so politically fraught that many buyers were no doubt motivated by factors that had little to do with supply and demand. The band itself, moreover, suggested to the Times that "In Rainbows" was sui generis, and unlikely to set a pattern even for its own future work.

"This was a solution to a series of issues," Hufford said. "I doubt it would work the same way ever again."

Maybe not. But in an information near-vacuum, even non-recurring data can be helpful. Giving adequate information, markets are pretty good at distinguishing relative values among a class of similar but not-identical commodities. That's why a Mercedes costs more than a Ford. Even if "In Rainbows" can only happen once, the market can still use information about its perceived value constructively.

But not if it doesn't know what that value turned out to be.
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