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BOB GARFIELD:
On October 1st, the website of the band Radiohead revealed the name of the group's new album, listed its tracks and also its release date and invited fans to place preorders. The drama, though, was in the details. One of the most critically acclaimed and popular bands in the world has chosen to release the album not only independent of a major music label but also at whatever price the customer is willing to pay. It's a deal between you and the band, and all Radiohead is asking is that you divulge some personal information and let your conscience be your guide.

Tyler Cowen is an economics professor at George Mason University. He's been looking at the implications of this new model, and he joins us now. Tyler, welcome to the show.
TYLER COWEN:
Thank you for having me on.
BOB GARFIELD:
What does Radiohead stand to win or to lose with this gambit?
TYLER COWEN:
Radiohead is trying to sign a new recording contract. Its old recording contract just ran out. So what they want to do is generate as much positive publicity as possible and bring new fans into the fold. They've never had a single go higher than number 34. So they're famous, they have a high critical reputation, but they want more people to be curious about them.

It's also worth pointing out if Radiohead sells a CD through a recording label, maybe they would capture two dollars from that sale. If you look at the way the offer is currently structured, there's an automatic one-dollar processing fee for the system of donations. So at a bare minimum, they're already reaping about half of what they'd be getting anyway.
BOB GARFIELD:
I've read in your blog, and from other economists, as a matter of fact, about the consumer behavior behind voluntary payment - philanthropy or tipping or what have you. What can we expect Radiohead fans to do?
TYLER COWEN:
I think the first time they're asked they're going to pay quite a bit. I'll predict an average payment in the range of five to ten dollars, which is more than Radiohead would have earned anyway. But over time, people are less interested in paying. And if all the musical acts asked for voluntary payment, probably none of them would get very much at all.
BOB GARFIELD:
I can certainly understand why somebody would pay zero, or near zero, but some people are sending in substantial sums, like 40 pounds, which is more than 80 dollars, for what is essentially a fancy package to go around the digital tracks. Why would somebody do that?
TYLER COWEN:
It's about signaling. It's about proving to yourself that you're really a fan. It's as if you would sleep on the pavement to line up for tickets in advance. It's about conspicuous consumption. So it's a way of identifying yourself with Radiohead, a cool band, more than ever before.

So if someone this time around is paying 40 dollars for the new Radiohead, if Radiohead were to try the same business model next time, the same person might feel they had already signaled and not pay anything at all or pay a very small amount.

And if consumers felt that every time they wanted music they were asked, how much are you donating?, how much are you donating?, this would get on their nerves. It would be a kind of overload. And what people then tend to do is just shut the whole thing out and they do what they want, and they don't tend to give very much at all.
BOB GARFIELD:
And what do you think the major labels will do when confronted with this situation? Their business model, as has been amply documented ‘til now, is in some jeopardy. Will it change the way they do business?
TYLER COWEN:
Well, the major labels are shrinking. They already have been shrinking. But, again, when you go back to this core function of discovering new music, lending the money to the people who produce that music, taking the chance and then getting their product out there and publicizing it, the labels offer very important value and the Internet is not a substitute. Where the Radiohead model works, again, is for bands which are already famous and don't need the record companies.

One other thing I'd note about Radiohead is, except for possibly their first album, all of their albums have been good, and this is quite unusual in the music industry. So they have a reputation with their fans that even though you pay in advance, the fans expect they will get a quality product. In general, this is not the case, and it's one reason why this deal makes more sense for Radiohead than many other acts.
BOB GARFIELD:
It seems to me that the big loser in all of this, however it turns out, is going to be new acts that don't have a built-in fan base.
TYLER COWEN:
New acts aren't losing out altogether. To the extent that Radioheads secede from the major companies, the major companies have nothing left but to push the new acts. And that is how they make most of their money.

The problem is they're less willing to spend a lot on a new act, so a new act will have a better chance of making it at all but a much worse chance of making it big because they're not going to get that big dollar support from the major labels.
BOB GARFIELD:
I must say I have a similar arrangement with my employer. WNYC pays me what it thinks I'm worth and [LAUGHS] it hasn't worked all that well [LAUGHS] for me. Tyler, thank you so much for joining us.
TYLER COWEN:
Thanks a lot.
BOB GARFIELD:
Tyler Cowen is professor of economics at George Mason University. He blogs at marginalrevolution.com and is author of Discover your Inner Economist, published by Dutton.
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