Magnatune and Double Moral Hazards

I just read a very inspiring article (part 1 and 2) by Umair Haque on why the business model of the music industry–which still is about selling records–is seriously flawed. Haque applies a theory in microeconomics referred to as Moral hazard to analyze the current market of labels and consumers.

In short, he concludes that we, as music consumers, are finding new ways to compensate for the value lost when we buy music that we realize we don’t like. Labels traditionally act as “quality assurance” agents, but it’s evident that these agents provide too little information to us as consumers about the products they are selling at a (more or less) fixed price; hence creating a typical moral hazard situation. Haque argues that p2p file sharing is mainly about a radical form of risk sharing; we eliminate the costs of buying music that we don’t know if we’ll like.

In part two of the article, he then proposes a number of solutions to the problem. One way to tackle it is to let consumers listen to a piece of music in its entirety before buying. Another way is to provide variable pricing, either on the buyer’s end (consumers get to choose how much to pay), or by the use of some clever algorithm that figures out the demand/value of a particular track or record and then chooses a price accordingly.

Now, Magnatune uses a combination of the above techniques to provide more information to its customers; one can listen to a full album in high quality before buying it to a price one gets to pick ($5-20). In this way, customers can reduce the risk of a “bad experience” by carefully listening to–and then choosing the price for–the music that they buy.

All good? Well, Magnatune’s way may be good enough, but in fact–just as Haque warns–some of the solutions to the problem can give rise to a double Moral hazard! In this case, it’s the listen-to-the-full-track feature that is problematic. Being the hobby hacker I am, I wrote a script that extracts all the mp3-files from the m3u files that Magnatune uses for their track preview feature. In a very short time, my computer had downloaded over 2GB of copyrighted music (Don’t worry, Magnatune, I deleted it again). And the servers over at Magnatune just think that I’ve previewed a lot of tracks, which means that now I’m the one responsible for the moral hazard!