Digital downloads remaking music industry

The British rock group Radiohead has found a business model that Priceline pitchman William Shatner could appreciate: name your own price.

Radiohead’s latest release, “In Rainbows,” went on sale this week as a digital download via the Web site inrainbows.com. The band’s contract with EMI having lapsed, Radiohead is cutting out the middleman. With no pesky record label in the way, Radiohead can sell its music however it wants.

And right now, Radiohead wants its fans to decide for themselves what they think the band’s music is worth.

I bet Radiohead makes a mint. In fact, with no record label to take a cut, I bet the band will make more from “In Rainbows” than from its previous releases.

Unlike Metallica, which waged war on the music-sharing Web site Napster in 2000, Radiohead is embracing the Digital Age. If you don’t want people pirating your songs, you’d better give them a reasonable alternative.

Radiohead gets it. The rest of the recording industry doesn’t. The Recording Industry Association of America persists in suing its customers, most recently a Minnesota woman ordered last week to pay an outrageous $222,000 in damages for downloading and sharing 24 songs on her computer.

The RIAA claims illegal file sharing is bankrupting the American music industry and costing people their jobs, although at least one study, by Felix Oberholzer-Gee and Koleman Strumpf published in The Journal of Political Economy, disputes that.

More to the point, the people sharing music online probably are improving the country’s overall economic welfare.

Writing recently at his blog, Marginal Revolution, George Mason University economist Tyler Cowen said, “In the past most people didn't much like or listen to most of the music they bought, or in any case most of the value came from their very favorites. ... So if people can sample music in advance, and know in advance what they will like, music sales will plummet. This will be a sign of market efficiency, not market failure.”

Even if file sharing is costing the music industry the hundreds of millions of dollars the RIAA claims, it’s because most of its music isn’t worth paying for. People sample songs online and download their favorites so they don’t get stuck paying for compact discs containing only one or two good songs.

If the music industry is worried about its profits, it would do well to lower the price of CDs. And musicians would do well to make better music, not just one or two hits per CD for every 10 duds.

But if the RIAA’s member labels are slow to learn, others are eager to drag them into the 21st century.

Amazon.com has joined Apple’s iTunes in selling legal music downloads online. And while Amazon doesn’t have as extensive a music library, it has overtaken iTunes on two fronts. First, Amazon’s music is less expensive. Second, and more important, all of the songs at Amazon are available without Digital Rights Management.

DRM, embedded in most of the music iTunes sells, limits what you can do with your own music files after you’ve paid good money for them. Apple’s Steve Jobs says he wants to do away with DRM, but so far he hasn’t forced the issue. So, the only label to offer DRM-free music via iTunes is EMI, Radiohead’s former label.

But there is still a catch: iTunes charges more for EMI’s DRM-free music.

Still, with competition like Amazon around and bands like Radiohead going directly to their fans, I bet Apple will get the message. Apple isn’t as slow on the uptake as the RIAA.