Tuesday, November 20, 2007

All Bands Are Liars

(A short primer on the economics of scarcity)


According to economics, one of the most valuable things you can control is scarcity. If you are in possession of a scarce resource – that is, something of limited availability that people wish to buy – you can offer it at a higher price.

For example, say you have the only 100 diamonds in the world. Maybe there are 90 people who would be willing to pay £120 or more for a diamond. Unfortunately, if you charge that much, you won’t be able to sell all the diamonds. The level of supply will be higher than that of demand and the price will have to come down.

When the price is lowered to £80, there are an extra 20 people willing to shell out. Now you have 110 people all trying to buy 100 diamonds. The balance of supply and demand has shifted and you now have scarcity power. Now you can raise the price.

Somewhere between 80 and 120 pounds is the price that 100 people are willing to pay (let’s say £100) – and, without interference, this is where the market will settle. This will be a perfect market. The value of the commodity will be determined at a level that reflects the truth about the participants’ intentions. Everyone knows that you want to sell your diamonds for as much as you can. Everyone knows how much they would, ultimately be willing to pay for a diamond. The market tells everyone the resluting price of diamonds and everyone can then make a decision about whether they want to proceed or not.

For a potential buyer who would be ready to spend £90 on a diamond but not £100, the market will give her all the information she needs. If the market says that diamonds are worth £100, then she knows that other people value diamonds more than she does and she can spend her £90 elsewhere. She is not being ripped off, mistreated, or lied to – she knows the truth and is able to make a well-informed decision.

And that would seem to be that. Except that, right at the start, you knew that 90 people would be willing to pay £120 for a diamond and that you had 100 diamonds. In the end, you sold all 100 for £100 each and made £10,000. But what if you’d just sold 90 diamonds for £120? Then you’d have made £10,800. More.

You couldn’t have sold 90 for one price and 10 for another: if you had, then the first 90 would have refused to pay the higher price. No, if you want to get the most out of these diamonds you’re going to have to start putting some lies into this little exchange of truths. That’s the only way to turn scarcity to your advantage.

The simplest thing to do would be to destroy 10 of your diamonds. That way, supply would meet demand at the £120 level and you’d make your extra £800. There are better ways though.

You could do what clothes shops do – sell the first 90 diamonds for £120 then, in January, announce a SALE with BIG DISCOUNTS on all goods, bring out the diamonds that you had previously hidden and sell the last 10 for £100 – then you’ve got £11,800: even better.

You could invent a number of diamond seasons and cycle from one to the next every time you get a new shipment of diamonds. Sell at the high price at the start of each season, then sell off the rest in a SALE. Now, you have a profitable diamond business.

The point is the control of scarcity. You can get more if you have less diamonds because you can change the place on the price scale where marginal customers make their decisions. When there were 100 diamonds, the 20 people willing to pay between £80 and £120 for a diamond got to decide the price. If they had, on average been willing to go to £105, that would have set the price at £105. If they had only been ready to spend £95, that would have cost you £1000. By altering the number of diamonds you make available you are pricing these skinflints out of the market and moving the marginal area. With 90 diaomnds available, the people who set the price are those, perhaps, who would spend between £100 and £140 on a diamond. Those other losers can wait for the sales.

Even better than the sale strategy, though, you could invest a little bit in some of these diamonds and get to work on BRANDING. With branding, you are no longer restriced to controlling scarcity bluntly. Now you can have different levels of scarcity, all of which allow those who are willing to piss their money away on diamonds to pay as much as you can get from them while obscuring their true market value and still being able to sell the rest at the highest possible price.

Say you take 10 diamonds and put them in little presentation boxes. You include a little can of diamond polish and write the numbers 1 –10 on little pieces of card which you slip into the boxes along with a booklet explaining where the diamonds were mined. You now have 10 limited edition super-elite-collector’s diamonds, which, market research tells you, you can sell for £200. You have manufactured scarcity, moved the marginal area and put a bit of untruth into the market. You now have ten £200 diamonds, eighty £125 diamonds (the price went up when you reduced the number from ninety to make the special ones) and ten £100 discount sale-price diamonds. After spending £50 on the boxes and cans of polish, you have made £12,950 - £2,950 of which came entirely from putting lies into and distorting the market. Well done. Now let’s form a band.


Music, the ability to make music, recordings of music, lyrics, lyrics set to music and all related commodities are not scarce resources. Talent is not a scarce resource.

Guitarist A might, technically, be the most accomplished guitarist ever seen. When measured using high speed film and a team of trained observers he may be able to play the riff from Sweet Child O’ Mine faster than a hummingbird beats its wings. He might be able to go from low E to top G in a faultless blues solo before Eric Clapton can fingerpick a chord. This is all impressive. But, without the knowledge of what is happening, the experience of seeing guitarist A live or buying and listening to Guitarists A’s album (On The “A”-Train: Guitarist A comes alive, on CD and download) is no different to that of seeing/listening to the plethora of guitarists that guitarist A is better than.

People don’t buy music because of skill. Mostly, they experience music as a loud, rhythmic noise that causes them to dance, or to relive past memories, or as atmospheric background, or to experience emotions other than those directly caused by their situation. Sometimes they experience it as literature, as collections of words that tell stories or offer new ideas. The market for skill – that is, the market with knowledge enough to genuinely recognise skill when they hear it - is not big enough to exploit.

The market that is big enough to exploit is the first one – the people who just want something to cause dancing, reliving, atmosphere, or emotion. Music that can fulfill these functions is not a scarce resource. Half the girls in your school could sing as well as most singers. There are barely any kids with guitars so inept that they can’t play guitar as well as most guitarists. Even when you raise the bar to a level where only regularly rehearsing live acts who are capable of producing an hour’s worth of listenable recordings are admitted – you still have an abundance of music. Take a glance at the live listings for london in any newspaper. Every single band is capable of producing music to the satisfaction of the majority of the market.

You probably have opinions about the music industry. But the sale of music by Industry to public is not the only transaction involved. We call it ‘getting signed’ or ‘being discovered’ (because we’re liars) but what actually happens in such situations is that a transaction occurs between a band/artist and a company. The company purchases music from the artist at a price dictated by the market.

The problem for bands as salespeople in this market is that they have no scarcity power. They have one of a hundred thousand bog-standard diamonds to sell and only a handful of people willing to buy diamonds at all. Supply so far outstrips demand that the commodity of extremely low value. Additionally given that a record company buys music to sell on at profit, that it can only afford to buy a certain amount of music and that it can only control scarcity by restricting the total amount of music available in a conveniently packaged form – there is a threshold which must be crossed before there is even the slightest chance of making a sale. If your commodity is valued below the level at which a company can make profit by its resale, your commodity’s real-world value is zero.

When you were in the diamond business, you were in a far better initial position. Before you did anything, you owned something that was worth £10,000. You injected some lies into the market and managed to add nearly three grand of value – but you were basically honest, just trying to make your way in the world.

Now you’re in the music business and the commodity you own has no value. How then, can you start selling your music? You need to start manufacturing some scarcity.

Everything that a band does to get signed is an excercise in the manufacture of scarcity:

A band in your normal clothes is valueless, but maybe a band with a silly gothy coat on is scarcer and is worth £100; maybe a band with drainpipe trousers is worth £150.

A band that has never played a support slot for a band with significant market value is valueless, but bands that have are more scarce and have more value.

Good guitarists are ten-a-penny, but a guitarist with a press release explaining how a team of scientists measured his fingers while he played Sweet Child O’ Mine and how they pronounced them faster than hummingbirds’ wings is really very scarce indeed.

A band who have not been reviewed by their mate on the internet is scarcer than a band that has. A band with a self-released single is scarcer. An artist whose father is an actor is scarcer. A band with a singer who writes essays on economic theory and posts them on the internet is scarcer.

Perfect markets work because they let free people decide the value of the things they buy and sell cooperatively and without governance. The process of turning your worthless rock into a limited edition super-elite-collector’s diamond is entirely one of branding, of controlling scarcity, of distorting a market, of lying.

And that is why all bands are liars.

Especially Joe Lean and The Kim Jong Il or whatever it is they’re called. They are very bad liars indeed.

Stay tuned, pop kidz


Unknown said...

I'm beginning to think I should start paying attention to this blog...
PC x

Daniel Hitchens said...

I hope this isn't the last post you're making, but if so, then congratulations nonetheless: it's really changed my way of thinking about music. Thanks a lot.

B23 said...

I only quibble with your title really, but I realise that 'Most Bands Are Liars' doesn't quite have the same effect.

Keep up the economics lessons though!