You’re Right, No One At The Guardian Does Understand Economics

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So, Spotify has added a button that allows you to donate money directly to some starving hipster. Sorry, musician. Presumably the Berlin Philharmonic needs the cash or summat.

About which the Guardian’s music editor says:

Spotify’s ‘tip jar’ is a slap in the face for musicians. It should pay them better

Ben Beaumont-Thomas
Fans can now donate to their favourite artists via Spotify, but this feature is a tacit admission that the firm undervalues the musicians that make it viable

We’re unlikely to gain good economics from what appears to be Carrie Marshall in drag but still, this is a new low even for The Guardian.

For the economics here is really rather simple.

The aim is to maximise revenue. Whatever price we set there are some people who are willing to pay more than this. So, how do we stop them enjoying that massive consumer surplus by freeloading on the backs of those only willing to pay a little bit?

It’s called market segmentation. The Bentley, VW and Skoda are all built on the same platform, using the same parts (largely), in the same factory by the same people. They are not all the same price – those who can only spell to the second letter of the alphabet are willing to pay more for a motor so we charge them more. We can’t do this if all the cars are exactly the same, so we modify them a little bit and we can. We now maximise revenue.

What is Spotify doing? Revenue is maximised by charging everyone a tenner. But there are those willing to pay more and we’d like to dig that more out of them. So, add a button which says “If you’d like to pay more, pay more here!”. In which manner revenues go up. More than if we tried to charge everyone £11 because we don’t lose those who will only pay a tenner.

In this revenue maximisation process Spotify give that extra revenue direct to the producers – in a manner the car companies don’t to the people who build the cars. That is, Spotify’s behaviour here is better than the average profit maximising capitalist.

And for which they get grief.

The Guardian, wrong about everything. Always.

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Phoenix44
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Phoenix44

I believe the Guardian’s position on this is that music should be extremely cheap because its students and cool people (non-Tories) who consume it, and people who make music should be at least as rich as useless bankers. How the obvious gap is filled is not their problem now is it?

Spike
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Spike

Hear hear, the state Lottery should not be the only one turning a buck on the ignorance of the common man.

Quentin Vole
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Quentin Vole

I don’t think Bentleys are actually built in Czechia, but your point is well made. I remember the days of mainframe computers, when manufacturers produced one or maybe two models with a hidden internal ‘switch’ that slowed them down by increments to produce half-a-dozen different levels of performance. Some people (not economists) thought that was an outrageous con trick.

jgh
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jgh

There’s the classic story of adding user-mode MFPI (Move From Previous Instruction space) instruction to the PDP11. “Well, I found this spare NAND gate, and if you cut this wire…”

Mr Womby
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Mr Womby

My first programming experience was on the PDP8. Did anyone else produce a 12-bit machine?

Quentin Vole
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Quentin Vole

I see your 12-bits and raise you a 36-bit G(E)COS machine. Although my very first programming (at school) was on a Ferranti Sirius which had 40-bit words, coded as 10 digits.

Spike
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Spike

The difference between two models of the IBM 1130 with vastly different performance was a cut jumper. Everyone got the performance he elected to pay for; nothing says that a product sold for 30% more has to cost 30% more to make.

At one point, “high-speed” microprocessors cost no more at all than the garden-variety ones. They were simply the units that didn’t fail under manufacturer test when they revved up the clock.

Bloke in North Dorset
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Bloke in North Dorset

Telecoms equipment suppliers have been operating that sort of model for years, with the knowledge of their customers. With hardware being so cheap and most of the work being done by software anyway, they build the equipment to full capacity and then limit it by software. Operators can then make the initial purchase quite cheaply and buy upgrade licences as and when they need them. This has the added benefit of not needing to send engineers to site with new cards or in the case of microwave links one to each end to do a coordinated upgrade. As some operators… Read more »

Bloke on M4
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Bloke on M4

Spotify doesn’t make a profit. The money comes in and most of it gets shovelled out to artists. It’s trying to float in the classic VC way “look at how many people use our service!” bail out and some other mug picks it up. The only way to fix this problem is raising either adverting or subscription costs, neither of which work. The problem with music is competition. Not only that there’s over 80 years of recorded music on Spotify, but that it’s now really cheap to make a piece of music and get it onto these services. £200 of… Read more »

Bloke in North Dorset
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Bloke in North Dorset

Spotify’s IPO wasn’t a traditional money raising affair so VCs could exit at top dollar and they weren’t selling new shares. Underwriters weren’t used to set the price so the initial prices were expected to be quite volatile.