Thoughts on Tech, Deals, and Markets

Meritocracy vs Randomocracy

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Interesting article on paidContent discussing the huge upfront payouts and aggressive revenue shares demanded by major music labels of digital media companies.  These economic arrangements obviously have stifled the growth of digital music.  Apparently the major labels feel like they gave away the house to Apple–they only get a paltry 70% revenue share–and don’t want to repeat this mistake.

Many before me have made the relevant comparison between the music industry braintrust and the flat-earth society, so I won’t belabor it here.  It’s amazing how an industry can repeatedly make such obvious strategic blunders.

There are lots of good theories of general group irrationality as well as irrationality in business.  I have my own pet theory that I’d like to share.

I think the more random is the success of an actor (a person or a group), the more unpredictable they will behave once they have achieved success.  By ‘random,’ I mean that if that situation happened 100 times, the actor would not predictably achieve that level of success.   They succeeded in a randomocracy.

The corrollary is that the more an actor’s success is predictable based on objective conditions, the more predictable they will behave.  Their behiavior will stem from a continued reliance on the conditions that led to success.  If success is achieved in a meritocracy, where rational decision-making rules, expect the actor to be extremely rational.  On the other hand, when the conditions surrounding an actor’s success are random, the person or group will have nothing predictable to fall back on.  So, their behavior will degenerate into unpredictability–which is by definition irrational.

The logic doesn’t work both ways, but it does correlate.  That is, just because someone successful is irrational does not  mean that their success was random.  Though it makes it more likely.  Just because someone successful is rational doesn’t mean that their success was predictable.

But if there is a person or group whose success has been a fluke–that is, you would not expect the same outcome in an alternate history–it’s safe to expect them to be unpredictable and irrational.

In the case of the music industry, success of an artist or a band is extremely unpredictable.  There is a well-documented body of psychological research on the randomness of popularity for music.  If there is anything that predictably leads to success in popular music–and I think it makes a relatively small contribution at that–it’s acting unpredictably.  Hence the typical behavior of pop music artists.

Music executives, held accountable for the unpredictable outcomes of their musicians, enjoy success from similarly random factors.  Why should they be expected to act rationally?

Applying this theory becomes most useful when industries and social constellations that masquearade as meritocracies are revealed to be randomocracies.  I’m sure you can think of many of those.

Written by sandykory

February 18, 2009 at 8:18 am

Posted in Uncategorized

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