Great moments in rock history and great moments in economics rarely coincide. But they did on Oct. 10, when Radiohead sidestepped the record industry, not to mention the entire market economy, by releasing their new album, In Rainbows, on the Internet, allowing fans to download it for whatever price they wanted—including nothing at all. Like farmers who leave corn at a roadside stand, trusting that buyers will drop money into an unmonitored "honesty box," Radiohead hoped that fans would return the favour of their free music by filling up their guitar cases with donations.
And fill them up they did. Estimates drawn from polling data and Internet traffic indicate that Radiohead made at least $2 million and perhaps more than $10 million from downloads during the first few weeks. With no record company or distributor to take their cuts, all of that money went straight to the band. This is a remarkable feat, and other acts, including Nine Inch Nails, Oasis and Prince, are now said to be exploring similar models. Even Madonna has dumped her record label in favour of a deal with a concert promotion company. The traditional music industry is dead. Long live music! Welcome to the Radiohead economy.
The dawn of this new era should not come as a surprise. After all, it can be argued that virtually all music has been freely available for years. There is also very little risk, especially in Canada, of any kind of legal repercussions for surreptitious file-sharing. Yet people have continued to pay for music both online and in record stores. Could it be that consumers are just shockingly honest? It certainly seems as if many are.
Issa, the artist formerly known as Jane Siberry, has been quietly using a pay-what-you-want system for her music since 2005; statistics on her website show a huge majority of users choose to pay, averaging $1.18 per track—nearly 20% more than they would pay through iTunes. Still, it's easy to write off her experiment. After all, Siberry had not only changed her name, she had also given up most of her possessions, including her house, keeping only a few essentials like some Miles Davis CDs. Neither her, nor her fans, were to be relied upon for displays of economic rationality. Radiohead's venture, however, suggests that a no-fixed-price model works for consumers other than the aging hippie variety.
But so far, economists don't understand much about what motivates people to make payments voluntarily—and those of us doing the paying don't understand it, either. When it comes to restaurant tipping, for instance, a "gifting" practice that continues to baffle economists, research indicates that the actual quality of service doesn't make much of a difference to the tips a server receives. Although patrons invariably cite service as a major factor in how and why they tip, research data show that it only accounts for a 1.5% difference. What makes a greater impact, according to studies done by Professor Michael Lynn of Cornell University, is the degree of interpersonal connection we feel with a server. One subject in the study who made the simple change of introducing herself to diners by name saw her tips increase from 15% to 23%. Tricks such as touching customers on the shoulder, writing "thank you" on the bill and crouching beside the table to take an order were shown to generate even greater monetary rewards.
