Saturday, October 06, 2007

Fighting piracy with ads and getting 'free' CDs...

I have a proposal. Put ads in music or movie CDs/DVDs, then give them away for free. That way, privacy rate will go down to zero.

I was having coffee and reading one of those free magazines you find in coffee shops or cafe. I noticed that such magazines are getting better and better. Yet, they were free. So it must be the advertisements that covered all the costs plus some margin (maybe handsome, too) for the editorial and production staff.

After the coffee, I went to the CD store, bought my new New York Voices (liked it, but I guess it's the Manager's posting area). Then suddenly I thought: hey, why don't they run music business the free-mag way?

I mean, think about it. If you can get some company advertise in your album and for that ask it to pay all your dues plus some profits, your label doesn't have to ... sell the CDs. Just distribute them for free. Yes, just like the cool free-mags. And the best part is, because the selling price is zero, nobody will have the incentive to pirate it.

The only problem, maybe, is that music (or movie) CDs (or DVDs) are meant to be long lasting. Who wants to listen to an ad over and over again? (Yes, if you are in my age cohort and lived in Indonesia, you would remember that back in those 80s, we had LCLR - Lomba Cipta Lagu Remaja or Song Writing Competition - sponsored by a famous radio station, Prambors. Then they produced the cassette. Then, in the middle of your listening to the songs, there were a couple of ads (if I remember correctly, one was Teh Botol). But the cassettes were best sellers).

I know this is just a wild idea (I'm ready for your calling it stupid). So help me improve it. So we can also do this maybe to books and softwares...


  1. Then, within six months, you'll have CD/DVDiVo that skips through all those ads. ;-)

  2. True, but who's gonna do it? If pirates, then it is irrelevant to the labels/singers or original producers, because they have sold their CD/DVD/DiVo at zero price. No threat whatsoever.

    If some music or film purist wants a clean, ad-free CD/DVD/DiVo they can try find them through some vendors who offer ad cleaning service for some fee. Which is good for everyone.

    Maybe the only unhappy party is the companies who advertise. Because cleaners limit their spread. If we can not find a way around this, in the next stage, they are discouraged to place ads anymore. And things are back to where it was.

    The other possibility is that some software company creates a supercleaner and register the patent. Soon, it will enjoy a supernormal profit. But chances are, many will follow suit, or the super software is pirated -- within six months, hahaha.

    Any idea?

  3. people still go to cd stores? Amazing :D

    check this out, an ad-supported music download


  4. btw, i think an ad-supported cultural products (books/cds/movies) is problematic because of the following reasons:

    1. ads presumed that a lot of people see/watch/hear the products. however, even industry insiders think tha game of trying to figure out which product will success is a "crap shot"

    so without a guarantee that a product will reach a lot of audience. it's hard to making the argument for displaying ads in the products.

    2. this problem is especially true for newcomers. it would be very risky for companies to put millions of dollars to untested products.

    if you wait until a product is proven to be popular then put some ads, then it is mere TV broadcasts.


  5. Hendra Setiawan10/07/2007 10:13:00 AM

    The telco industry has been seriously mulling over this same idea. Imagine in the future, you would receive sms that contains, say, Coca Cola ads in its footer. The great news is you don't have to pay for this sms service nor the sender but the Coca Cola would gladly pay for it. You don't have to pay anything except letting the provider to give you ads (in your sms, your voice call, etc). It's like having free gmail service on the phone.. or gphone. I think this is the next big thing in telco industry. I know there are a lot of active researches on how to deliver the correct ads to the correct audiences. Surely, Coca Cola is unwilling to pay ads delivered to people with diabetes, right?

  6. Hendra, I didn't know about that. Very interesting, thanks!

    Roby, you're right, this is risky business. But I wouldn't be surprised if it is materialized someday, given the ever-increasing capabilities of pirates. And yes, people "buy" advertisements.

  7. Aco,

    how about market discrimination? like selling the first 100 editions full with ads. then after 3 months, sell the "cleaner" edition with (much) higher price along with another 100 editions. on and on, with some variation. Let say free basic CD/DVD/software and high-price premium CD/DVD/softwares.

    by selling your CD/dvd/softwares in several batch, you allow advertisements to change. then as the seller of ads space, you can also discriminate the price of ads. depending on the rate of success.

    that sounds to complicated, i know.

  8. That might be too costly, dHani. But it's not impossible, especially if the album hits the top charts.

  9. Whay don't you try what Radiohead did: selling online at 'whatever-you-like' price?

    Even him, him, and him are discussing about it.

  10. Aco, the CDs/DVDs with ads are not really the products I want. Even I won't wear a free original 501 with teh botol ad in the butt. Anyway, it depends on the ad though. If it's cool, then sweet as. (It's okay if JD in the butt that may give a good signal) Sorry, I just want ones without ads.

  11. Ape', frankly, I don't see anything spectacular in Radiohead's way of promoting its album. And I'm surprised that Rodrik sounds surprised.

    Pengamen (street buskers) also do that -- the only difference being they are paid afterward, while Radiohead upfront. But, sometimes one pays a (terrible) pengamen as early as possible so she can get rid of him and be safe from noise (while hopefully having a false feeling of altruism). This is parallel to the "negative price" said by Borjas: Radiohead has to pay some people to listen to them. In the 'pengamen' case, they don't have enough money, so it's you who pay them ... to not singing. (Remember that guy who is banned from singing in the Asterix comics? The other guys should have just paid him to stop)

  12. Anymatters, let's assume that the industry accepts my proposal. Don't worry, there will be someone who offers an ad-stripping service with a fee. I bet you are willing to pay him.

    Better yet, someone will provide a cracking software and sell it at some price.

    But then somebody else offers an open-source version of the crack. Then someone in the industry (or someone who is hired by advertisers association) hires a new tech guy to devise an anti-crack... This can go forever.

    But that's market...

  13. But curbing piracy is only a means to an end -- of increasing the label's (monopoly) profit at the margin. How do you think will it be a marginal improvement on the current arrangement from the labels' point of view?

  14. if the ad-supported business model is really good for magazines, why not all magazines are free?


  15. Arya, I think it's a matter of striking a nice deal between labels and companies that advertise in the albums. Yes, some label might extract a monopoly rent but my guess, it's only so long as it can retain good companies that commit to advertise in (i.e fund)its albums.

  16. Roby, that's a good question. But it has its evil twin, namely: If ad-supported magazine is NOT a good idea, why are such magazines mushrooming?

    I think we would expect that at the end of the day we will see multiple equilibria. That is, there will be some kind of albums that are successful with ad-supported way of business, while others continue with the traditional way. Maybe...

  17. I'm a bit surprised by the your answer. Because, it seems to me, you accept the importance of structure. Individuals occupy different position within social structures and thus they don't respond uniformly to one type of incentive.

    Therefore understanding the incentive is not enough because you need to know social structures to know the correct incentive to be deployed.

    Isn't it a heresy for economist to think that incentive is not everyting?


  18. Rob:
    In this case, it's still mainly about incentive: it's called price discrimination. Profits from people with different preferences are exploited by offering 'incentives' so that those who prefer to suffer through ads would pick certain albums, while those willing to pay, would pick another.

    We don't need to care about the actual structure: The incentive mechanism (hopefully) will separate the two in equilibrium.

    In thinking about the incentive mechanism, we make assumptions about "the structure" of the preferences -- but there is nothing new there. Economists do that all the time.

  19. Aco:
    What I meant was how, do you think, would CDs-with-ads improve the profits of labels at the margin relative to their current practice of revenue per CD sold? (The same question from the advertiser's side).

    If a case can't be made for this, labels (and artists) are unlikely to take this idea up, because a world with pirated CDs may be better than one with lower profits.

    But Roby's question is interesting: Why does the free-mags business model work (for some)? I suspect, it's due to its low initial fixed-cost (most are local, so distribution cost is low -- right? or is there a nation-wide free magazine?).

  20. arya: ah i see.

    i think it's similar to the inverse scattering method in physics: we don't have to know what's inside an object. by showering the object with radiation or particles we know the characteristics of the object by measuring how the radiation/particles are scattered.

    the scattered radiation/particles "reveals" the inherent property of the object.



  21. Arya, you're right, this wouldn't work when the marginal net benefits from engaging in an ads-supported music business are lower than its counterpart from working in the old system.

    Roby that's an interesting approach in physics (damn it, I flunked that subject). I can only add that, yes, we are only interested to what happens at the margin. That is, when someone is about to make a decision.

  22. Interesting discussion! I'd like to chip in some ideas.

    As far as I know, The Grateful Dead has been circulating free CDs, even ads-less too. Their strategy is to charge live perfomance of their music. But as can be imagined, such a method has to overcome geographical constraints and inter-local and inter-national barriers. It's still too costly to be effective.

    Business can run as long as profit is made, but--contrary to what seems suggested by this discussion--the margin does not have to be large, as larger profits come with more volumes.

    This is the only conceivable way that singers/artists can hope for to make profit out of their labels at higher margins relative to that under conservative marketing.

    But this volume does not automatically apply to advertisers, since their profit/loss mechanism lies elsewhere, namely in the actual demands/volumes of their good/service sold.

    Still, if the original aim is strictly to bring down piracy rate to zero, it CAN work--although only for as long as the merchandise can be transformed into its ‘non-economic’ state, i.e. at relative abundance at no cost for consumers.

    What cannot be made sustainable, however, is the effort to keep it that way--specifically from the advertisers’ viewpoint.

    (This may well illustrate that economic laws do rule independent of our will. Or that, since all our action is economic, it can only come true, with no one person being deprived of his or her well-being, when in harmony with economic laws.)

    To come back to the free merchandise, not only is it feasible, it will be prone to something more monstrous than piracy.

    In fact, our discussion has neglected the role of significant intermediaries: owners of CD stores.

    As they would only distribute free CDs for a fee, they would simply ask for an infinite stock of it.

    But economics is always about scarcity.


  23. nad, thank you for the useful observation. Not only Grateful Dead, but also Prince has given out album for free a couple of months ago. But I would think they will not (assuming they're still producing) continue doing that. The free ones might as well be part of their promotion. Or, maybe they are so damn rich already, they just need to redeem some self-actualization -- which of course is not without price (here being CDs given to listeners to make sure the band/singer still exists).

    But if Grateful Dead compensates their free CDs, like you said, with charged live performance, then it makes sense. This is another way to get around piracy, of course. I know, Dave Matthews Band does the same thing, only that they just their albums on the internet and compensates them from live performance.

    I agree with your issue on sustainability. Yes, I doubt if this ad-supported free DCs business is going to stay very long. (See my response to Roby, too). Unless, companies, ad firms, and labels found a mutual long-lasting agreement.

    And that leaves us with the CD stores. I think, if this idea is materialized and many subscribe to it, CD stores will vanish. People will get CDs in cafes, coffee shops, even bus terminals...

  24. Seems like even techno-people is also discussing it recently. See Mike Arrington's opinion and Yahoo Music Ian Roger's

  25. Amir, thanks for the info!

  26. oh i'm too late for this yummy topic!

    definitely spending a lot of money on music cd's are on the way out. i don't remember where i read it, but most musical superstars earn their money from promotional appearnces, live performances etc, not from the actual CDs. so the CDs are already an ad for them, why make people pay? And indeed, stars like the guy formerly known as Prince is giving away his CDs free.