Why Taylor Swift Doesn’t Understand Economics Part 2: Supply & Opportunity Cost

Last week, I suggested that by pulling her music off Spotify, Taylor Swift doesn’t clearly grasp consumer preferences, specifically those of her fans’. She overestimates the value listeners place on her music.

But Taylor’s extraordinary first-week sales are glaring in my face as I write this. At nearly 1.3 million albums sold, Taylor is definitely doing something right. However, I still believe it is her superfan base that helped her reach those numbers, not her decision to pull her music off of the most popular streaming service. For someone who is so concerned about the payout Spotify has to offer, I’m surprised she has chosen to skip out on the opportunity to earn even more money.

After sharing my last post on Facebook, my friend Austin commented and we had the following conversation:
 I just clicked on Taylor Swift’s Spotify profile.  At the time of writing this, her track “Safe & Sound” from the Hunger Games soundtrack has over 33 million plays. In the 2 1/2 years since that song has been released, it has earned TSwift somewhere around $200k. Given that crazy number of plays, that doesn’t sound like a whole lot, especially considering she raked in somewhere around $4.5 million from 1989 its first week alone.

I’m not going to sit here and try to argue that Spotify can make a musician rich. But that can’t mean it can’t help artists out financially. In just about every article about this whole debacle, Taylor keeps bringing up this “album price point” that she believes consumers (music listeners) and producers (record labels, artists, stores) can one day agree on. In her world, the music industry looks like the graph below:

In case you have no background in economics, this is a very simply supply and demand chart. On the y-axis (the vertical one), you have a $ for price. On the x-axis is quantity, or in this case, number of albums. The blue line is the demand. It basically says that given price Y, consumers will buy X copies of Taylor Swift’s album. Notice that as the price is high, the quantity is low. The purple line is the supply. This is what it costs the producers to make and sell an album. As quantities rise, so does price. TSwift is hoping that consumers and producers will find that sweet spot in the middle.

The only problem is this is a very, very, very simplified view of general economics. And the music industry is a very complicated place these days. As we saw last week, every individual values Taylor’s music and music in general differently, meaning that blue demand line is going to have some funky curve to it (like it does below). On top of this, albums are sold in a variety of formats–vinyl, CD’s, digital downloads, even streaming.

As you can see, Taylor isn’t doing herself any favors by picking one specific price point. Right now, we could argue that her album already is available for two different prices: $13.99 for a physical copy and $12.99 for the iTunes digital download. Those two versions alone give Taylor the purple and pink bars of revenue above.

Spotify claims that 16 million users listened to Taylor Swift on their streaming service I am going to take that to mean that, if her album were free, 16 million people would listen to it. As you can see, 1.297 is only a small portion of Taylor Swift fans. Had she left/put her music on Spotify, she might not be able to match the revenue gained from album sales, but she certainly could make a decent chunk more money as my friend Austin and I chatted about earlier.

And you see all those happy faces? Those are the smiles of 16 million satisfied Taylor Swift fans, from the super fanatics to those who require Swiftamine. By only selling her album to fans, look at all the joy she is taking away from the world :(. (I’m only kind of joking. Taylor’s music is essentially her business. She can’t make her decision solely on the feelings of her fans, although she does need to keep them happy if she wants to continue to sell merchandise and concert tickets as well as product endorsements which all helped her reach $40 million in earnings in 2013)

Spotify also offers more than just a paycheck for many artists. Besides those smiling faces that could later turn into concert-ticket-and-merchandise buyers, Taylor is missing perhaps the most crucial element in Spotify that isn’t available from other music providers. Pop artist Catey Shaw said it best in her op-ed piece for Component:

“Spotify does one thing that many don’t take into account (or don’t take seriously enough), which is apply the social aspect of music to the listening process.”

In economics, there is often talk of the opportunity cost of a good, or costs that are incurred but aren’t included in the price. For instance, Taylor Swift’s new album costs $13.99 in-stores at Target. However, fans have to pay for gas or transit to get to Target. They spend valuable time getting to the store, finding the album on the shelves, and then waiting in line to pay. Even downloading a digital copy has an opportunity cost: you need bandwidth to download the album, a place to store the files, and time to enter your payment information or approve the download.

For artists, Spotify has what I am going to call an opportunity retribution. On the surface, artists place their musics on the streaming service and are rewarded the $0.006 per play. What isn’t included in that $0.006 payout is the element which Catey Shaw so deeply values: exposure. Spotify’s social aspect allows for users to pass along songs and tracks that they love, essentially allowing listeners to do the hard work of marketing tracks and albums.

It’s easy to see why superstar Taylor Swift, who was basically raised in the recording industry, never having to worry about being discovered, would not be able to see the value in the exposure Spotify brings to its artists.