Taylor Swift, Apple and Free Markets

By P.K. Kannan

SMITH BRAIN TRUST -- A recent feud between singer Taylor Swift and Apple should help government regulators realize that digital music is not a public good like electricity. Swift taking Apple Music to task for not paying artists royalties for songs streamed during a three-month free trial attests to the power of a few strong artists to dictate to the channels. It also illustrates free market dynamics. Swift pulled her music, and Apple reversed course -– likely to avoid losing Swift fans and alienating like-minded artists.

But consider that conspiracy-based complaints recently triggered an antitrust investigation into Apple’s strategy to forego a free-tier in its new streaming service. Similarly, should regulators be suspicious that the back-and-forth concerning Swift is a publicity scheme conspired unfairly against Apple rivals to keep Apple in the headlines and its forthcoming streaming service in the minds of consumers? Not likely, even taking into account Apple’s 2013 e-books price-fixing judgment that the company continues to dispute.

When government investigates a music streaming strategy with a quick trigger, and directly oversees the distribution of e-books (an extension of Apple’s penance), such content is not being accorded the same standards as other creative products, as evidenced in the broader scope of antitrust actions by the government. There’s no issue if General Motors or Ford creates designs of cars and prices them at whatever level they want and sells them through their own dealers. The same is the case when smartphone manufacturers come up with new creative designs and sell exclusively through a telecommunication channels.

Antitrust scrutiny based on digital music and books signals that these forms of creative content are being treated like a public good. Government should recognize such and shouldn’t hyper-regulate the market distribution of creative work like it does to electricity.

Digital entertainment that’s distributed like a public a good diminishes the earning potential for the artists as well as their incentive to create at peak level. Their fans then lose out, too.

Apple’s initial move to not pay artists in a free trial period may seem uncharacteristic for a company that’s been generally benevolent to artists. But the company in its drive for profit has shown that it aims to satisfy both artists and fans. Apple's forthcoming service is priced competitively with Spotify’s premium, for-pay service. And, by not including a free-streaming tier, Apple is demonstrating a commitment to protecting artists, publishers and recording labels from getting squeezed. Concurrently, the free iTunes Radio service targets a global audience, which might increase the reach of Apple, build an audience base and provide a stage to launch new services in the future. The platform nicely connects artists with their fans.

Apple’s pay-only streaming makes further sense when you consider fans tend to be less price-sensitive toward their favorite artists’ music. Radiohead demonstrated this when it marketed its 2007 “In Rainbows” release directly to its fans as a one-time, “pay-what-you-want” model. It was a resounding success.

New York and Connecticut attorneys general have investigated, but haven't found, whether Apple conspired with music industry labels to withdraw support for competitors like Spotify and its advertising-supported, free tier of music streaming. Such manipulation is unlikely when considering artists and their labels can simply price their product higher and force distributors to take it or leave it. Such was reflected when Swift removed her music from Spotify. She did so because, in her own words, "I’m not willing to contribute my life's work to an experiment that I don't feel fairly compensates the writers, producers, artists, and creators of this music. … And I just don't agree with perpetuating the perception that music has no value and should be free.”

The market, after all, is one of monopolistic competition. Products are well-differentiated and customers can choose accordingly. Furthering the car market analogy, if consumers find Tesla too expensive, they can opt for a Honda. And, if consumers find Taylor Swift's music too expensive, they can substitute it with other music. If on the other hand, they do want to listen to Swift's music, they should pony up the dollars. Isn't this what the free market is all about? 

P.K. Kannan is the Ralph J. Tyser Professor of Marketing Science at the University of Maryland's Robert H. Smith School of Business. His email is pkannan@rhsmith.umd.edu.

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