Game Theory and "The Race to the Bottom"
A recent Fader Magazine article reports on a recent move by Spotify, giving artists a new option for promoting and earning royalties for their music.
This story combines two things I love:
Behavioral Economics
Droning on and on about Behavioral Economics
The crux of the issue is this: Spotify offers artists a chance to boost their music in the algorithm that decides when and how frequently listeners encounter them in Spoitify’s radio and autoplay features. At first glance this may seem like no big deal.
Artists have a new option:
fewer listeners at a higher price per stream,
or
more listeners at a lower price per stream.
This may appears to be a simple calculation to calculate a break even point, and make a choice based on your volume to best maximize your pay out. Except for the main problem, which is: there’s no way of knowing what your newly increased volume is.
Let’s walk through the decision many artists must now face:
More streams via radio and autoplay mean more new listeners with the potential to become fans who contribute to more profitable revenue streams to which the artist has a higher share (concerts, merch, etc) when compared to the $0.006-$0.0084 per play rumored to be paid out by Spotify.
For emerging artists, maximizing their reach is obviously most important to their long term survival, since 100% of nothin is, pencils down… nothin. This is a VERY strong nudge towards taking the exposure at the expense of earnings.
The Prisoners’ Dilemma. If you’re not familiar with this game, give that Wiki entry a skim, but the TL;DR is this:
Prisoners A & B, unable to communicate, have the power to determine both their sentences based on the combinations of their decisions to inform on their fellow prisoner, or remain silent. Potential Outcomes are:A & B stay quiet and both receive 1 year sentence on lesser charge.
A informs and goes free. B receives 3 year sentence.
A & B inform on each other and both receive 2 year sentence.
A stays quiet and receives 3 years. B informs and goes free.
You’ll find in the article, and many others covering this classic experiment that someone faced with this choice has only one move to secure the best possible outcomes, and it’s to be a snitch.
In this instance, such behavior plays to Spotify’s hands. With no way of knowing the decisions of all artists in aggregate (aside from unionizing), the logically sound choice is to take the offer (inform), dilute your share of the take for the promise of extra fans, anticipating that your peers will do the same and you will end up with an audience size that is slightly larger (reduced sentence). The risk of keeping the higher rate per stream, and being buried beneath similar artists who took the offering, is too great a disadvantage, particularly to someone who is not already a household name.
The impact of so many artists doing this will result in lower rates per stream, while their audience is unlikely to change significantly, since the other artists will all opt in as well. To make more money off the deal, and increase their share of the pie, the artist must rely on their competition to make a choice that is not in their best interest. Knowing that’s not likely to happen, steers everyone towards taking the lower rate option. Supply and demand functioning as they always do, these rates will continue to decline until radio and autoplay features suffer from too many irrelevant suggestions, or not enough variety (because upset artists leave for other platforms).
The effect on rates is the same for any group of competitors trying to win on price: A Race to the Bottom.
You’ve all been told trying to be the cheapest is bad, but turning business away to protect rates is scary, for the same reason as staying silent in the game: you’re relying on your competition not to take advantage of your willingness to cooperate. The alternative is to be resolute in your conviction, stand by your rates, identify a genuinely unique offering, and then, to quote Cal Newport quoting Steve Martin, actually be “so good they can’t ignore you”.
This is not an attack on Spotify. There is no shortage of examples of this type of fee structuring. Many companies that rely on large numbers of independent contractors behave similarly.
Should ride share drivers continue to drive when their per/mi rate is reduced, in hopes the platform raises it in order to draw them back? If they all stop, rates have to climb back up, but being on the road when everyone else is home, is too tempting to pass up.
Casting websites that deliver auditions to talent in exchange for annual yearly membership fees use this to their advantage as well. Artists bid (privately) on auditions which are sent to the client for consideration. This type of business model is commonly referred to as “pay to play”, since the actors are paying the platforms to provide them auditions.
The trick comes in when deciding which tier of membership to purchase (because of course there are tiers). Bronze, Silver, Platinum, Diamond, Diamond +, etc. More expensive plans promise a higher volume of auditions, delivered earlier, granting you an edge over the competition and increasing your potential earnings. It’s the same reason you’d gladly pay an SEO wizard to land you on the front page of Google. Like the prisoner or the Spotify artist, the most rational move is to “take the deal”. Upgrade your plan to the extent to which you’re financially able, and maximize your return on investment. To anyone weighing the option to pay hundreds of dollars more without a guarantee of what you’ll receive in exchange, "caveat emptor” .
So what’s the solution? I don’t claim to know exactly what that is. Less than a month ago, I was praising the virtue of acknowledging where one’s expertise stops, and I think I can see mine drop off from here. I will say, though, evaluating marketplaces where you do business is a must, if you are serious about preserving your reputation as well as the future of your profession in the long term, rather than realizing short term gains at the expense of others in your field, and perhaps the industry.
In other words: Snitches get stitches.