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Do the Math

The music industry says online piracy's killing the biz. Stan Liebowitz says otherwise.

A press pass, reporter-turned-novelist Gregory McDonald once said, is good for one thing: It allows the journalist to ask very smart people very stupid questions. Certainly that's how it feels after this 45-minute drive from downtown Dallas to the Allen home of Stan Liebowitz, professor of economics at the University of Texas at Dallas and a very smart man long regarded as the expert in the field of "network effects," which just means that whoever makes the superior product will make the most money, which made Liebowitz a powerful supporter of Microsoft during the software behemoth's ongoing legal battle with the Justice Department. "People choose what they want, and what they want survives, at least for a while," Liebowitz and co-author Stephen Margolis wrote in their 1999 book Winners, Losers & Microsoft. In other words, may the best word-processing program win. Period.

On this stormy summer afternoon, Liebowitz wears short pants and sits at a table in the kitchen of his new home, built on what was pastureland not long ago. Way out here, in the shining sprawl of a new strip-mall suburbia that exists not far from grazing cattle, lives a man whose research could prove that the recording industry is, as many always suspected, nothing more than a moneyed thug wielding the billy club of litigation.

In recent weeks, Liebowitz has become the journalist's go-to guy on the issue of online music distribution -- a sexy topic, especially if you're a college student with a broadband connection and a CD burner, a record-label exec terrified of losing your job or a politician taking big bucks from the music industry. In May, Liebowitz published a widely circulated and much-debated study on the subject, and his forthcoming book Rethinking the Networked Economydeals extensively with how the widespread circulation of "pirated" MP3s is -- or, rather, isn't -- damming the music industry's revenue stream. His study, published by the Cato Institute, garnered him considerable attention among fellow academics, industry folks on both sides of the issue and the mainstream media.

Liebowitz's is a straightforward reading of a complex issue: Despite the industry's claims to the contrary, the downloading of music on the Internet is not, at this moment, hurting the record industry. It might one day; it just ain't happening yet.

"The record industry is sort of sitting in a position where -- and you can understand their position -- they're saying, 'We don't want to take any chances. We don't want any technologies that might hurt us,'" Liebowitz says. "And I can even see their point. But I have often claimed that the new technologies they said were going to hurt them didn't hurt them."

But just try telling that to the Recording Industry Association of America, the music-biz trade group that, so far, has sued out of existence several music-swapping outlets, including Napster and AudioGalaxy, without offering any viable solutions of its own. Try telling that to the major labels that keep offering pricey and ultimately unsatisfying alternatives to file-sharing systems such as KaZaA and Gnutella. A few weeks back, Pressplay, a joint venture between Vivendi Universal and Sony, announced you could download and burn all the content you wanted for $180 a year -- even though you'd have access to the back catalogs of just the two labels, and even then not all their artists.

And try telling politicians such as Representative Howard Berman that file-sharing isn't bad for business. Berman, a San Fernando Valley Democrat with financial backing from the music business, recently introduced legislation that would give the recording industry the right to hack into computer networks if it thought someone was "stealing" copyrighted material. He has the support of the RIAA, which long ago started treating consumers like thieves anyway. Never has an industry had such contempt for its patrons.

"But my work is not purely altruistic," says Liebowitz, who made his name in the early '80s writing about the impact of photocopying on the publishing industry. "I came back to this subject for largely selfish reasons, because this is a hot topic. I've always liked technology, so that was a good fit. I used to have a stereo system -- that was the only thing I spent money on. I had this old beat-up car, and then for a while I had only my bike and no car at all. But my stereo was a big deal; it was my one biggest expense. Then the stereo got replaced by a computer ... and the 'network effect' stuff came along, and it was, like, "Whoa, I can write about my favorite subject.'"

Liebowitz, an affable and engaging man with a love for classic rock (more Jefferson Airplane than Black Sabbath), is the rare economist who actually tries to make his research applicable and accessible outside the stuffy, rarefied world of academia. He came to academia through the side door: In 1971 he graduated from Johns Hopkins University, where he'd been an economics major, only to sell ice cream in Brooklyn and Staten Island after another vendor was stabbed. He had long hair, no suit, an unemployed girlfriend and no idea of what to do next. Next thing he knew, Liebowitz was at UCLA studying economics, and he was born again -- a convert to the faith of Keynes and Smith. Now he's the kind of prof every college student prays for, the economist who speaks in everyday language; he has little use for charts and graphs, because they're meaningless in the real world, and preaches the religion of economics primarily to help consumers understand how the marketplace really works.

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