joegratz.net

Bubblegeneration has a really good piece applying principal-agent principles to music consumption. The point (though stated slightly differently) is that music consumption suffers from an information problem. You can’t know if you’ll like the music until you have it, but if you can have it before you pay for it, you’ll never pay for it. (That’s moral hazard #1.) But since you don’t know if the music is any good until you buy it, you have to buy whatever the record companies put out. They act as your agent, going out and finding music you might like then selling it to you. But since you’ll buy whatever they come up with, they may as well shirk and put out mediocre music. (That’s moral hazard #2.)

The solutions proposed in the article focus on the traditional economic response to such uncertainties, which is to purchase insurance. But a better solution, though one with its own agency costs, is subscriptions. Rather than taking a risk on each album, I can pay a fixed fee for access to all albums. In fact, I do. The agency cost here is that the subscription service has a limited incentive to spend money on growing the pool of available albums. The only reason they’d do so is to win customers away from competing subscription services. Happily, now that there’s competition in the subscription market, both subscription services are likely to maintain large and growing catalogs.