Wednesday, December 31, 2003

Forget the spin, taping is not killing music

Despite its song and dance, the record industry is in rude health, says Peter Martin.

For many of us, this Christmas marked the return of the homemade gift. By that I mean the lovingly crafted personalised compact disc, a sort-of high-tech car tape filled with what the giver imagines are your favourite (perhaps illegally downloaded) songs.

A Record Industry Association survey suggests that an astonishing 40 per cent of us have received homemade CDs as gifts, typically four each during the past year.

The industry wants us to feel bad about this. It says we are guilty of theft (or at least of receiving stolen goods). When three university students were sentenced last month for their role in creating a music download site the industry claimed they should have been treated as common criminals. "Clearly, if you steal this much music from the store you go to jail," a spokesman said.

But creating CDs is different from stealing CDs from a store, and the industry's figures bear this out...

The recording industry survey was carried out by Quantum Market Research using a sample of about 1000 people. It suggests that 31 million homemade CDs are given away as gifts each year (about four for each of the eight million Australians it says receive them). If, as seems reasonable, 31 million homemade CDs are kept rather than given away, the total number created each year would top 62 million.

When something is stolen there is normally something missing. A dent of 62 million in CD sales in stores each year should be easy to spot. Except for this problem. CD sales in Australian stores have hardly ever been that high. They peaked at 63 million in 2001.

If, as the industry suggests, each of the CDs made on a home computer was indeed created at the expense of one sold in a store the entire industry would have been wiped out.

In fact while 2001 was the industry's best year on record, 2002 was its second-best year, with sales only a few per cent lower.

So don't feel too guilty. The homemade CD appears to have brought us the best of both worlds - doubling the number of new CDs in circulation, without much harming sales in stores.

(The record companies will not like me saying this. They will make the point that the dollar value of CD sales is the lowest it has been since 1998, but that is because prices are lower, thanks in part to Allan Fels. The number of CDs sold is higher than it was back then, thanks in part to Norah Jones, Delta Goodrem and now Guy Sebastian.)

If the healthy state of CD sales in the face of massive do-it-yourself competition surprises you, you are in good company. Midway through last year the Chicago University economist Stan Liebowitz was warning of annihilation. The recording industry loved him for it. He said large-scale unauthorised copying could soon make it obsolete.

Liebowitz has since had a change of heart. In a new study entitled Will MP3 Downloads Annihilate the Record Industry? he concedes that the evidence for annihilation has failed to materialise. He says that "given the enormity of the whole MP3 download enterprise [as in Australia, roughly one song is downloaded for each song sold through stores] it should be easy to recognise its impact on album sales if the impact is large".

He concludes that the impact has not been large and says his best guess is that the worst of it is over, given that most homes that would want CD burners now have them.

CD sales in the US have fallen 20 per cent, but from an extraordinary high. Liebowitz says that during the history of the vinyl LP, sales rarely exceeded two per US citizen a year. Prerecorded cassettes did better - sales peaked at about 2.5 a citizen. Sales of CDs peaked a few years back at more than five per citizen a year. Even now US citizens buy more than four CD albums each a year, roughly twice as many as they ever did in the days of the vinyl LP.

The reason is that home taping, cassettes and CDs have made music more portable. In the days of the vinyl LP you were limited to listening in one room (usually the lounge room) and you certainly could not listen in your car. The advent of the cassette tape increased the amount of minutes available each day to listen to recorded music.

As a result the demand for recorded music went up, whether in the form of LPs which could be taped onto cassettes or in the form of prerecorded cassettes. The 1980s industry sticker "Home taping is killing music" couldn't have been less accurate.

The recording industry and its brethren have been crying wolf for years. At various times we have been told that the pianola was going to kill sales of sheet music, that radio was going to kill sales of records, that photocopying would kill sales of books, that the VCR would stop people going to movies, and that cheaper imported records would stop people buying Australian music.

Along the way we have been told that the use of the latest technology was immoral - everything from the photocopier to the cassette recorder to the VCR.

Liebowitz says we are in the middle of a "wonderful natural experiment" which will determine fairly quickly whether the latest high-tech copying machine causes the sort of damage the other machines didn't. He adds that from an economist's point of view it would be no real disaster if it did. The present recording industry would be replaced by something better able to make money in the changed environment.

But all the indications are that the recording industry we know will be around for quite some time yet - side by side with homemade CDs. In Australia CD sales through stores rebounded 5 per cent in the first half of 2003. The figures for the second half may well show Guy Sebastian has pushed the industry towards a near-record Christmas.

Peter Martin, a former Treasury official, is the economics correspondent for SBS Television.


Thursday, October 02, 2003

Australian Financial Planners are shockers!

As this ASIC investigation reveals.

I discussed this with Geraldine and also reported on it for The Business Show. In July 2003 I reported for SBS on analogous situation of mortgage brokers, also the subject of a report for ASIC.

A lot of the problem is commissions, particularly trailing commissions, and in the course of preparing my SBS report I was astonished to discover that neither ASIC nor the Financial Planning Association knew what proportion of planners accepted commissions and of what kind!

I also discussed with Geraldine this fascinating APRA report on the performance of superannuation funds. The industry funds, often run by volunteers did okay, as did the employee funds run by big corporations. The bad performers were the funds run for the employees of small firms and the professional and expensive retail funds. Price is no guarantee of quality!

Later in the year for SBS TV and Life Matters I reported on the success of Do It Yourself super funds. The DIYers have a catchcry: Why pay to have someone else lose your money, when you can do it yourself?

Wednesday, September 10, 2003

Stealing money from very rich people.

It is so easy. A senior official at the Australian Securities and Investments Commission shared his theory as to why. These self-made businesspeople get rich by handshakes, one on one deals, and deals that are out of the ordinary. They get rich by letting their defences down.

We considered calling the SBS Dateline version of this story NABed because of the bit part played by Australia's National Australia Bank in the swindle.

In the end we called it The Big Sting. Read the transcript, or watch the hard-to-believe story.

Mark Davis's introduction:

The collapse of New York's twin towers two years ago tomorrow also marked the collapse of an international swindle that stole millions from some very prominent Australians. Not that many of them are keen to talk about it. Nor is the National Australia Bank, where the funds were deposited. Peter Martin reports. (Includes footage from The Profiteers, by Studio Hamburg Documentaries)


Saturday, July 12, 2003

Friday on my mind 17/3/2003

Economists have been so busy designing tests to determine what makes people happy that they have overlooked something basic:

It depends on what day of the week you ask the questions.

Mark P Taylor, at the University of Essex outlines what it is in his paper Tell me why I don’t like Mondays: Investigating calendar effects on job satisfaction and well-being.

Men and women interviewed on Friday report higher levels of job satisfaction and lower levels of mental stress than those interviewed in the middle of the week.

Fortunately he concludes that the results from earlier studies probably hold up.

On Life Matters I also outlined the preliminary results from a survey entitled: STRESSED OUT ON FOUR CONTINENTS: TIME CRUNCH OR YUPPIE KVETCH?

Evidence from Australia, Germany, Korea and the United States suggests that the more you earn the more you'll feel time-stressed. In the United States a move from the 25th to the 75th percentile of the income distribution raises time stress by half as much as an interquartile change in the amount of weekly employed work!

Gerry played “Friday on my Mind by the Easybeats.

The Prime Minister’s Home Ownership Task Force 10/3/2003

When a really good idea comes along, a lot of people immediately assume that there must be something wrong with it.

The joke goes: Two economists are strolling down the street when they come upon a $100 note lying on the ground. One economist says to the other "Aren't you going to pick it up?" The economist from Chicago replies: "No, it's a fake. If it wasn't someone would have picked it up already.

It was like that with the Prime Minister's Home Ownership Taskforce. I have outlined the idea here and here. And also to Gerry.

The ideas derived by the Menzies Research Centre for the Prime Minister hold the promise of solving a number of problems very well. Why have Do It Yourself super funds done so much better than professionally managed funds in recent years? Because the DIY funds had housing in them, and the professionally managed funds didn't as much. How could they? There is no easy way for super funds to own houses. The idea of sharing ownership between financial institutions and part-owner occupiers ("managing partners") would give the funds access to the largest asset class on earth and would give would be home owners to ability to move in.

Critics say it would force up the price of housing. So would any move that makes it easier to get into houses. The Task Force has come up with ways to increase the supply of land for housing as well, using innovative techniques to stop NIMBY's complaining. For low income homeowners there would be government loans, repayable in the good times along the lines of the HECS scheme.

They are good ideas whose time is coming.

Our love affair with Cash 3/3/2003

How much cash do you have about your person right now? When I asked Gerry shed told me the answer was less than twenty dollars. For most of us, it certainly wouldn't be $1,000. Yet according to the official figures around $32 billion in notes is out there in people's possession at the moment - that's about $1,600 for each Australian man, woman and child. That’s more than the typical American, the typical Canadian, the typical Brit, and about three times as much as the typical New Zealander.

RBA comparative figures from 1996 show Australians holding cash of $US870 each, yanks $US610, and NZers $280!

We are eclipsed by some European countries and Japan. The Japanese held at the time $US3,588 under their beds and in other places.

Which is understandable. Japan has deflation. The Japanese don't trust the banks, and for historical reasons neither do many Europeans. But how can we explain Australains love affair with cash?

Christopher Bajada, of the UTS attempts to and comes up with the conclusion that much of it is used to store the proceeds of crime.

The RBA figures suggest this may well be the case. Almost half of the cash we hold about our person is in the form of $100 notes.

Officially we each hold about as many $100 notes per person as we do $20 notes (six to seven).

You and I know this is not true, leading to the thought that perhaps most of Australia's 130 million $100 notes are stored away in suitcases somewhere unopened.

Reserve Bank figures on the life of the notes lend support to this notion. $100 notes last an estimated 70 years. $20 notes last twelve years.

Monday, March 31, 2003

Bulk billing

The Australian institution is far stronger than the government that runs it would have you believe. I did this talk on Life Matters just ahead of a Health Report special on the same subject. Anyone would think that the percentage of services bulk billed was now low. It is still not that far short of 70 per cent. Not that low at all.

In fact it is higher than it has been at any time in the years leading up to 1992.

The percentage of services bulk billed climbed from 45 per cent in 1984 to a peak of 72 per cent in 2001 and has been coming off a touch since then. It was 67.9 per cent in March 2003.

The real story is one of how popular bulk billing has been with patients and doctors. Popular with patients because it costs nothing out of pocket, and popular with the doctors that bulk bill because that is a unique selling proposition for them.

But the unique selling proposition is only available if the doctor agrees to charge not a dollar above the scheduled fee. An extra dollar and that sales proposition vanishes, patients have to hand over $26 dollars or so of real money and engage in paperwork. That doctor becomes much less attractive.

That's how bulk billing has kept down doctor's charges...

The Howard government has undermined it - first by not allowing the bulk billing payment to doctors to keep pace with rising costs, forcing many doctors to either abandon bulk billing or try to fit in as many as (a reported) eighty bulk billing patients a day in order to make it work.

And now it plans to remove that unique selling proposition for bulk billing - convenience.

Under its proposals doctors will be able to charge an extra dollar or two and offer just as much convenience - a simple swipe of the card and the handover of only the extra dollar or two. Most most-probably will.

It’s an idea that seems almost calculated to kill bulk billing.

Introduced on the largely spurious ground that bulk billing is bleeding.

It is only bleeding because the government began knifing it when it came into office in 1996.

Mmm… Removing a break on what doctors can charge… whose interest would that serve?

Thank heavens the ‘reform’ is held up in the Senate.

Monday, March 24, 2003

The US is surprisingly vulnerable. 24/3/2003

It is throwing its weight around militarily and in questions of trade, but its economic underbelly is very soft.

And, I told Geraldine, not just when it comes to being a very big debtor to the rest of the world.

Most of the US's exports are intangible, entertainment and drugs among them. I mention drugs because most of the value in them is the intellectual property.

The countries the US sells to don't actually need to buy US music, drugs, films, TV programs etc.

They could copy them.

Think about it. The bulk of exports from the US are only worth something if the rest of the world agrees to pay something.

Or the rest of the world could pay less, or less than the US wants. Against Australia's financial interest we agreed to extend the patent life on drugs a few years back. The US would like us, and the rest of the world, to extend the term on copyright.

We could refuse. And the more the US throws its weight around worldwide the more likely it is that that someone will.

The US has a very soft underbelly.

Monday, February 10, 2003


Self-control is a problem for spendthrifts and drug addicts, right? People prepared to indulge themselves in the present at the expense of their welfare in the future. These people can get around their problem by precommiting to do good: locking alcohol away and hiding the key, or paying most of their salary into an automatic savings plan.

But self-control can also be a problem for people who are addicted to not spending on themselves. The papers I discussed on Life Matters conclude that about 30 per cent of people have this problem.

I and my wife have this problem. We won't spend on indulgences on any given day because it always makes more sense to save the money up for necessities later. But a life lived this way means no indulgences ever, which can hardly be optimal.

Ran Kivetz outlines the problem is a newish paper The Joyless Consumer: Pre-Committing to Luxury to Overcome the Necessity Compulsion.

The solution he offers to those of us who find it hard to be bad is the same as the chief solution used by people who find it hard to be good: precoimmitment.

At the start of this year my wife and bought season tickets to every show put on by the Sydney Theatre Company during 2003.

That forced us to get out and to stop worrying about the cost. We wore the psychological pain of our decision to spend on indulgence once at the start of the year, and then were forced to enjoy ourselves throughout the rest of the year.

Kivetz conducts hypothetical and real lotteries and discovers that a substantial segment of consumers choose the luxury prizes over the cash prize of equal or greater value. He says most explain their choice as motivated by the need to pre-commit in order to guarantee a luxury experience and to stop the money ending up in the pool used for necessities.

Monday, February 03, 2003

Waiting for Mr. Right: Rising Inequality and Declining Marriage Rates

The thesis of this paper discussed on Life Matters is that women are waiting longer because there is now a greater potential payoff from doing so. When all the potential males earned pretty much the same income there was little to be gained (financially) in Waiting for Mr. Right.

Increasing inequality, say the authors, explains about 30% of the marriage rate decline in the US over the last few decades. They purport to show that this is not due to the labor force decisions of women in response to rising income inequality, or to the marital decisions of men in response to rising income inequality.

Tuesday, January 28, 2003

Kill the rich.

Sell them cigarettes for far half the price you charge poor people.

On Life Matters on Monday I explained that a carton of Peter Jackson Extra Mild (10 x 25) costs $60.65 retail, but only $33.50 at a duty free store. Australians can only access duty free stores if they have a ticket to travel overseas. The top 20 per cent of income earners in Australia spend five times as much on overseas travel tickets as do the bottom 20 per cent.

The Australia Institute has published an analysis of the duty-free system in Australia entitled Tax Flight from which I drew heavily. I also quoted from a long forgotten Industries Assistance Commission report on Passenger Concessions released in 1985 and not available on the internet.

The whole idea of duty free started because of enormously high tariffs in Australia. Locals didn't mind paying them (they didn't know any better) but the few Australians who did travel overseas at the time could see what was happening and so were 'bought off' by being permitted to bring in a certain amount of overseas goods "duty free", a privilege not available to other Australians.

Logic dictated that if our jetsetters were able to buy duty free overseas they should also be able to buy duty free in Australia, so DF shops were set up at airports.

Then in 1972 a group of would be downtown DF stores took their case to the High Court and won the right to operate DF stores outside of airports. The number of DF shops in Australia exploded from four (in 1972) to 50 at present.

Helping along the way in the mid-eighties was a Labor Party election promise to allow "inward duty free" stores at airports to sell booze and fags to Australians upon their return. The Industries Assistance Commission pleaded with the government not to do it finding that "Inward duty free shopping does not assist the achievement of any of the objectives of passenger concessions."

It foresaw another High Court case using the same arguments as the earlier one to extend inward duty free shopping downtown.

On Life Matters I imagined it working like this: "You've just returned from overseas and you still haven't bought your carton of Peter Jackson, please come in and do it next time you're in town."

It would, I said highlight the absurdity of what happens at the moment.

Tariffs are now low, down to five per cent, and sales tax, once 30 per cent wholesale for electrical goods, is now also low (the 10 per cent GST). The original rationale for duty free stores no longer applies, if it ever did.

The only big savings to be made are on alcohol and tobacco, they are subsidy to the well-off costing upwards of $300,000 a year, and as I said on Life Matters, we may not like the rich, but do we have to kill them?

It’s good to be back.

Thursday, January 02, 2003

Back on air January 27

Life Matters returns to life on Monday January 27, as does Monday Economics with me and Geraldine.

Two weeks after that The Business Show returns to air on SBS TV at the new time of 7.30pm Fridays.

Seasons greetings.