The Other Kind of Inequality The decline of American social egalitarianism is more worrisome than differences in how much people earn

The Other Kind of Inequality

The decline of American social egalitarianism is more worrisome than differences in how much people earn.

MICKEY KAUS

Jan. 26, 2014 5:15 p.m. ET

The problem with the Democrats’ new war on inequality (“the defining challenge of our time,” says President Obama ) is that there are two kinds of growing inequality—and the Democrats are attacking the wrong one.

When I started writing about income inequality in the 1980s, I expected to make a reassuring argument that incomes weren’t growing unequal. That article couldn’t be written. An unceasing barrage of data described an income scale that was pulling apart like taffy. The rich were getting richer faster than anyone else. But even within skill levels or professions—including journalism—the stars were making big money and everyone else was stuck or in decline.

This pulling apart has continued for more than three decades, through Republican and Democratic presidencies, including Mr. Obama’s. It seems to be driven largely by deep tectonic forces within the economy: global trade, which has devalued the labor of unskilled Americans, and technology, which has replaced labor with machines while empowering (and rewarding) those with skills.

Harsh Truth No. 1: Democrats aren’t proposing anything that comes close to reversing this three-decade trend. They got nothin’, as the comedians say. Raising the minimum wage may be a good idea, but it affects a sliver of the labor market. It’s not going to stop the top 10% from taking home 50% of the nation’s income, or 51%. The same goes for extending unemployment compensation. Even the tax increases fought for by Mr. Obama are a blip. On paper they might cut the incomes of the very richest Americans by 6%—until the rich find ways to avoid them.

If Democrats are going to get voters to play along they should maybe give them at least an idea of what they propose to do and how it will achieve their goal—without toxic side effects. A better plan is to ask why we care about economic inequality anyway. If the poor and middle class were getting steadily richer, would it matter that the rich are getting richer much faster?

There’s some confusion among egalitarians on this score. Many argue that inequality per se hampers growth, though the academic support for this theory is soft. Others argue that it hampers mobility, though if skills are now more important to getting ahead that in itself will hamper mobility, whatever the level of inequality.

Harsh Truth No. 2: If it’s not enough for everyone to work hard—if you now have to be smart enough to learn—only some people will make that jump.

When we think honestly about why we really hate growing inequality, I suspect it won’t boil down to economics but to sentiments. No, we don’t want to “punish success”—the typical Democratic disclaimer. But we do want to make sure the rich don’t start feeling they’re better than the rest of us—a peril dramatized, most recently, in the “Wolf of Wall Street” and its seemingly endless scenes of humiliation and rank-pulling.

“Whether we come from poverty or wealth,” President Reagan said, “we are all equal in the eyes of God. But as Americans that is not enough. We must be equal in the eyes of each other.” Worry about this social equality lies at the root of our worry about economic equality.

Social equality—”equality of respect,” as economist Noah Smith puts it—is harder to measure than money inequality. But the good news is that if social equality is what we’re after, there may be ways to achieve it that don’t involve a doomed crusade to reverse the tides of purely economic inequality. As Reagan’s quote suggests, achieving a rough social equality in the midst of vivid economic contrast has been something America’s historically been good at, at least until recently.

We can, for example, honor the universal virtue of work by making it the prerequisite for government benefits wherever possible. There’s a reason Social Security checks are respectable and politically untouchable—unlike food stamps, they only go to Americans who’ve worked.

We can also pursue social equality directly, through institutions that mix people from all income levels together, under conditions of equal status—institutions like the draft, for example, or national service. Do we remember the 1950s as a halcyon egalitarian era because the rich weren’t rich—or because rich and poor had served together in World War II?

The draft isn’t coming back anytime soon. But the great social egalitarian hope—mine, anyway—was that Mr. Obama’s health plan might perform a similar function, offering the poor and middle class the same care, in the same hospitals, with the same doctors—and the same respect—that the affluent get (much as Medicare already does).

The tragedy is that the Democrats readily abandoned this goal. In order to save money and extend maximum coverage and subsidy to the maximum number of the uninsured, Democrats signed off on a system in which affluent Americans sign up for totally different medical networks than people who have less to spend, while the poorest get shunted to Medicaid and the richest bail completely into a private world of concierge medicine.

It’s not easy to imagine a modern medical system that would make Americans feel less like equals, even if they get subsidized. But it is still more likely that ObamaCare

can be changed so that the nation’s health-care system will reinforce social equality than that the tax-and-transfer system will produce economic equality.

Social egalitarians always will be tempted or bullied to abandon their real goal for a more concrete, economistic type of equality—the green-eyeshade fairness of “tax progressivity,” Gini coefficients and income quintiles. Democrats have already sacrificed their biggest recent legislative achievement—and best hope of preserving social equality—chasing after the shallow democracy of what is, after all, only money. They shouldn’t make that their template for the future.

Mr. Kaus is the author of “The End of Equality” (Basic Books, 1992). He blogs for The Daily Caller.

How Constraining Are Limits to Arbitrage? Evidence from a Recent Financial Innovation

How Constraining Are Limits to Arbitrage? Evidence from a Recent Financial Innovation

Alexander Ljungqvist, Wenlan Qian

NBER Working Paper No. 19834
Issued in January 2014
Limits to arbitrage play a central role in behavioral finance. They are thought to interfere with arbitrage processes so that security prices can deviate from true values for extended periods of time. We describe a recent financial innovation that allows limits to arbitrage to be sidestepped, and overvaluation thereby to be corrected, even in settings characterized by extreme costs of information discovery and severe short-sale constraints. We report evidence of shallow-pocketed “arbitrageurs” expending considerable resources to identify overvalued companies and profitably correcting overpricing. The innovation that allows the arbitrageurs to sidestep limits to arbitrage involves credibly revealing their information to the market, in an effort to induce long investors to sell so that prices fall. This simple but apparently effective way around the limits suggests that limits to arbitrage may not always be as constraining as sometimes assumed.

Asia Hedge Fund PCA Investments, Backed by China Sovereign Wealth Fund, Has Shut Down

Asia Hedge Fund PCA Investments Has Shut Down

China Sovereign-Wealth Fund Was Hedge Fund’s Only Major Outside Investor

MIA LAMAR

Updated Jan. 26, 2014 10:59 a.m. ET

A hedge fund with financial backing almost entirely from China’s giant sovereign-wealth fund closed down last week less than three years after it was launched, according to people familiar with the matter.

PCA Investments was formed in 2011 and attracted notice for the involvement of China Investment Corp., the country’s $575 billion sovereign-wealth fund, which is tasked with investing part of China’s vast foreign-exchange reserves. PCA had operations in both Hong Kong and Beijing.

The involvement of one of the world’s largest sovereign-wealth funds with a hedge fund startup with no record of performance was unusual. CIC is better known for investing in established funds.

People familiar with the fund said CIC was PCA’s only major outside investor, adding even more opaqueness to the privately run firm, which was estimated by these people to be managing more than $500 million.

PCA was founded by Hang Hu and former Merrill Lynch executive Wing Lau, who left the firm last year.

The reason for the fund’s closure wasn’t known. A call to PCA’s Hong Kong office wasn’t returned and CIC representatives didn’t respond to request for comment late Sunday.

The sovereign-wealth fund is going through management changes, with a new chairman, Ding Xuedong, appointed last year amid China’s leadership change and its president, Gao Xiqing, set to be succeeded by Executive Vice President Li Keping.

A website for PCA describes it as a “multiasset and multistrategy” investment firm running an Asiawide equities strategy, a global fixed-income strategy and a global macro strategy, the latter a catchall phrase for funds that try to predict and profit from global economic trends.

The closure goes against the current interest in Asian hedge funds, many of which are catching the eye of investors with strong performances. Average returns for funds last year investing in Asia excluding Japan beat peers in the U.S. and Europe for the second year running, rising 13% versus an 8% average return for the industry, according to data from industry tracker Eurekahedge.

Emerging market oil groups out of favour

January 26, 2014 11:01 pm

Emerging market oil groups out of favour

By Ed Crooks in New York

National oil companies from emerging economies have fallen out of favour on stock markets over the past year relative to western energy groups, as the North American shale revolution continues to attract investors.

Companies such as PetroChinaPetrobras of Brazil and Gazprom and Rosneft of Russia all suffered significant falls in their share prices in 2013, while Chevron andExxonMobil of the US, and Total, BP and Royal Dutch Shell from Europe all rose.

The combined market value of state-controlled national oil companies’ shares fell 15 per cent, while the value of the large western groups rose 9 per cent, according to IHS, the analysis group.

The figures mark a reversal from the prevailing trends of the 2000s, when it seemed that national oil companies, with greater access to resources and government support, would inevitably eclipse the western groups.

Daniel Trapp of IHS said: “With the national oil companies, investors are asking where their priorities lie. Are they with shareholders, or will they follow the government’s priorities?”

The boom in US shale oil and gas production has created an alternative for investors concerned about the risk in state-controlled companies.

Among the best-performing companies last year, according to an analysis published by IHS on Monday, were some of the largest producers of US shale oil: EOG ResourcesContinental Resources and Pioneer Natural Resources.

The markets have also rewarded companies such asOccidental Petroleum and Hess that are moving to cut back their global exposure and focus on North American production.

The largest western oil groups were slow to develop shale production and have been paying the price, with Shell and others forced to write down the value of their assets.

However, they have been acquiring skills that should leave them better placed to develop shale resources than their rivals from emerging economies, which are generally even further behind.

Concerns about increased supplies of US shale oil putting downward pressure on prices have been a particular issue for Petrobras, which is facing the challenge of developing Brazil’s difficult deep water oilfields, and concerns about political interference. Its shares fell 24 per cent last year.

Other companies that thrived in 2013 included the large oil services groups that have the skills and technology needed for shale oil and gas production, includingSchlumbergerHalliburton and Baker Hughes.

They were hit by overcapacity in the industry in 2011-12, but markets for oil services have now tightened.

 

ESPN’s Internet Rollout Tests Television Cash Cow; Sports Channel Seeks to Profit From Demand for Online Video Without Pushing Away Pay-TV Customers

ESPN’s Internet Rollout Tests Television Cash Cow

Sports Channel Seeks to Profit From Demand for Online Video Without Pushing Away Pay-TV Customers

SHALINI RAMACHANDRAN, AMOL SHARMA and MATTHEW FUTTERMAN

Jan. 26, 2014 11:02 p.m. ET

BRISTOL, Conn.—In the control room of ESPN’s headquarters, a row of screens shows video feeds going out to cable providers for each of its television channels. But a growing part of ESPN’s future lies across the room, where a similar setup tracks transmissions to the Internet.

On a recent Saturday, technicians were busy streaming several dozen games, some at the same time as they were on television and others that weren’t televised at all. Damon Phillips, in charge of the service, used a tablet computer to monitor how many people were watching online.

“I’m obsessed with this,” he said, pointing to the usage tally, which he starts checking at 5:30 a.m. while on his exercise bike. “I look at it all day long.”

The app, called WatchESPN, is part of an aggressive push by ESPN into online services as pay television matures. ESPN pioneered sports TV on that medium and for three decades rode a steady rise in U.S. cable and satellite TV subscriptions. These now have leveled off and appear to be contracting. ESPN is at the forefront of the TV industry’s efforts to expand into Internet distribution.

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The company, which generates about 40% of majority owner Walt Disney Co.’s operating profits, sees the app as a way to cash in on growing demand for online video. But with its TV offerings still lucrative, ESPN is walking a fine line, trying to avoid doing anything that might encourage customers to drop their pay-TV subscriptions.

It is a challenge others in the business also are wrestling with. ESPN’s strategy is to allow only pay-television subscribers to stream games that air on ESPN TV channels.

The sports network has devised a complex business model. Although the app is delivered over the Internet, ESPN collects money for the app from pay-TV providers such as cable companies, which pay for the right to offer it to their customers. For ESPN, a second revenue stream comes from advertising on the app.

The WatchESPN app also includes a strictly online channel, called ESPN 3, that shows lower-profile sports such as rugby, polo and small-college athletics. For that, in most markets, users don’t need to be pay-TV subscribers.

The dual strategy results from years of experimentation and debate inside ESPN, and in the industry more broadly, over how to deal with the saturation of the pay-TV industry and thirst for online video. Time Warner Inc. TWX -2.04% ‘s HBO, for instance, has said it might offer a version of its HBO Go app to Internet users for a subscription fee, depending how the pay-TV industry evolves, though for now HBO plans to continue limiting access to subscribers who pay for the premium channel.

Most network owners, including ESPN, say the risk of cannibalizing their pay-TV businesses is too great to offer stand-alone online subscription services. It isn’t clear they could charge enough to be as profitable as deals with pay-TV providers. Revenue from mobile advertising, while growing, isn’t nearly enough to replace TV ad dollars. Media companies also would have to take on customer-service responsibilities now handled for them by cable and satellite companies.

Yet content providers face the reality of weakening pay-TV subscriptions. ESPN lost roughly 1.5 million subscribers between September 2011 and September 2013, according to Nielsen data provided by the company. Part was from dropped pay-TV subscriptions and part from downgrades to lower-cost packages not including ESPN. The company says the changes haven’t affected its TV ratings materially.

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ESPN President John Skipper calls the losses “marginal,” given that the sports network reaches into 98.4 million households. Still, he doesn’t dismiss the threat.

“Pressure on the system provides peril for ESPN,” Mr. Skipper said in an interview. “But ESPN, as long as the system doesn’t break up, is in fine position.” He said WatchESPN makes pay-TV subscriptions more valuable.

Several hurdles lie in ESPN’s online path. Professional sports leagues, which already collect huge sums for TV rights, see an opportunity in the next decade from selling their digital rights or offering games via their own streaming-video services. For ESPN, acquiring streaming rights is complicated and becoming more costly.

Pay-TV providers such as cable companies, for their part, are likely to push back as ESPN, which is already the most expensive cable-TV network, raises its prices to offer WatchESPN.

Limiting the online viewing of TV channels to pay-TV subscribers, a strategy also pursued by most other TV-channel owners, carries risks. Besides excluding customers who have “cut the cord,” it excludes “cord nevers”: sports fans, mostly younger, who have never subscribed to a cable or satellite service.

And if operators such as cable companies pass on to subscribers the fees ESPN charges them, the higher cost could prompt more to disconnect. Some pay-TV executives say rising prices are a major reason customers bow out.

Mr. Skipper, a 59-year-old former Spin magazine executive who took the helm of ESPN in 2012, acknowledged a “dissonance” between its instinct to disseminate its content as widely as possible and the usage restrictions designed to safeguard the core television business. “There’s no denying there’s a certain element of protection and defense,” he said.

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Though the company has internally considered a stand-alone broadband offering, “it’s not close yet.”

As for what ESPN’s endgame is, Mr. Skipper said the company plans a lot of online experimentation, but its priority is to protect pay-TV profits: “Our calculation right now is we’re going to ride this. We’re going to ride it as long as it makes sense.”

ESPN still has growth opportunities in TV, Mr. Skipper added, including a new college sports network it is launching this year with the Southeastern Conference and expansion in Latin America.

ESPN first tried online distribution in the early 2000s, well before most other networks. Leading the effort was Sean Bratches, who dealt with cable and satellite companies. Known for his vast cuff link collection and coordinated ties and pocket handkerchiefs, Mr. Bratches cut an unlikely figure for a technology innovator.

He came up with an unorthodox initial business model for ESPN: It would charge the providers of high-speed Internet service a per-subscriber fee to make sports available online to their customers.

The idea faced opposition internally from executives who wanted a more traditional Web approach of giving away content while making money on ads. Mr. Bratches argued that ESPN could extend to the Internet its cable model of earning money from both ads and subscriptions. He prevailed, and in 2001 ESPN launched its first broadband service.

It struggled to gain traction. Some Internet-service providers balked, not used to paying for content. ESPN executives blamed the rough start also on their website’s clunky design and lack of live events. To lift usage, they started putting online some games airing on their flagship TV channel.

But by 2010, when ESPN began a round of contract renewals with pay-TV distributors such as cable companies, the industry’s subscriber growth had slowed sharply. Both sides worried that making TV content available online could encourage more pay-TV subscribers to disconnect. In negotiations with Time Warner CableTWC -0.63% ESPN hashed out a deal to combat that with the limit on online access.

The result was the WatchESPN app. Its simple design, which grew out of a paper sketch by Mr. Skipper, allowed tablet and smartphone users to tap on-screen boxes to play ESPN channels. It launched on mobile devices in April 2011.

The earlier broadband service, by then named ESPN 3, could be accessed through the new app, but phased out televised games. It has charted a new course as a place for thousands of events that the company has the rights to but that don’t make it to TV, such as cricket and collegiate gymnastics. ESPN has enlisted some colleges to handle production of their own events, to expand offerings while keeping costs down.

Though ESPN 3 can be accessed without a pay-TV subscription in most markets, the company is careful not to market it as a product for cord cutters.

“We want to be conscientious that we don’t overplay our hand,” Mr. Bratches said in an interview at his New York office, stuffed with all manner of sports paraphernalia: books on Jerry West and Muhammad Ali, football helmets, a bowling pin, a punching bag and baseball bats.

The WatchESPN app has been downloaded 25 million times. Its viewership remains far below television’s. Some 26 million people watched college football’s national championship game Jan. 6 on television, but just 773,000 saw it online with WatchESPN.

Still, as ESPN has renewed deals with cable and satellite operators, it has cited the app as a justification for rate increases. Its flagship channel is already by far TV’s costliest, at $5.54 a month, according to market researcher SNL Kagan.

Access to the app raises the price. Time Warner Cable and Verizon Communications Inc.VZ -0.48%

‘s FiOS service, which offer the app to their subscribers, pay ESPN 19 cents more per subscriber each month than does Dish Network Corp. DISH -1.28% , which doesn’t support the app, according to papers from a court case involving ESPN and Dish last year. Dish is currently in negotiations with ESPN for a contract renewal.

DirecTV has balked so far at ESPN’s asking price for streaming video access, said a person familiar with the matter. However it is likely to negotiate for those rights when its contract with ESPN expires at the end of this year.

At ESPN, the broadband push has meant a cultural shift for a TV-centric company.

Getting software engineers to move to ESPN offices in the sleepy Connecticut town of Bristol wasn’t easy. A key hire last year was Ryan Spoon, an eBay Inc. alum and former venture capitalist, who has hired veterans of major Silicon Valley companies.

Now a team of ESPN engineers is developing algorithms to link online programming options to users’ tastes and affinity for certain teams, sports or cities. ESPN executives have taken product advice from the likes of Apple Inc. AAPL -1.82% Chief Executive Tim Cook, a fan of the Auburn Tigers, and Google Inc. GOOG -3.13% Chief Business Officer Nikesh Arora, a fan of cricket.

In ESPN’s control room, balloons on an overhead screen track how heavily WatchESPN is being used around the country, while analysts monitor bandwidth usage to make sure the video streams don’t hiccup en route to users.

Getting streaming rights can be problematic. ESPN has had the right to televise Monday Night Football since 2006 and struck a deal with the National Football League in 2010 that allowed streaming of the game to desktop, laptop and tablet computers. Yet ESPN can’t stream it to smartphones.

Mobile-phone rights to the Monday game weren’t on the table when ESPN last renewed its deal with the NFL. Verizon owns the streaming rights to Monday night, Sunday night and Thursday night NFL games, and has just agreed to a four-year contract extension that will also allow people to watch Sunday afternoon home-market games on mobile phones.

ESPN keeps having to pay leagues more. In the contract it negotiated with the NFL in 2011, the network agreed to pay an average of $1.9 billion a year, up 58% from before. And last year, ESPN and Major League Baseball reached an eight-year deal that, at $700 million a year, was double the earlier price. Streaming rights were a factor in the increase, said a person familiar with the matter.

ESPN is working on perfecting sales of ads for the app. It says it sold app ads to some 200 brands in 2013. But these haven’t been enough to fill every available ad break.

Partly that is because the technology to serve up ads into the app isn’t yet very advanced and can’t always find spots of the proper length to insert. When TV viewers see commercials, app users are sometimes shown filler material.

ESPN is talking to broadband providers about other Internet products, such as an ultra-high-definition version of its TV channels that would be offered only to people who upgrade to faster tiers of broadband.

“We innovate with the consumer in mind and with the philosophical default that we are going to adopt new things,” Mr. Skipper said. “We are not going to resist.”

 

The Surface and the Chromebook Offer Lessons on Innovation

January 24, 2014, 5:04 PM ET

The Surface and the Chromebook Offer Lessons on Innovation

By Steve Rosenbush

Deputy Editor

Well after their initial release, two devices—the Surface tablet and the Chromebook laptop—finally are gaining some traction in the market. Microsoft Corp.MSFT +2.08%’s Surface was a bright spot in the company’s latest earnings report, the WSJ’s Shira Ovide says. The Chromebook—a stripped-down laptop that is designed to be used over the Internet with Google Inc.GOOG -3.13%’s Chrome operating system and its cloud-based apps–is increasingly popular among schools, the WSJ’s Rolfe Winklerreports.

Neither product was an instant sensation, but that is exactly what makes them interesting. Conversations about innovation focus all too often on the iPads and iPhones of the world, the outliers that redefine markets and the way that people go about lives and their business. It’s great to understand the stories behind their success, but given that few successful products can match that arc—and that the ones that do tend to come about in a unique and unpredictable way—the Surface and the Chromebook may have more to teach us.  As Gartner Inc. analyst Tuong Nguyen says, “the process of progress in technology is often more evolutionary than revolutionary.”

As readers of CIO Journal are well aware, the Surface failed to live up to initial expectations in 2012. But as Ms. Ovide writes, “fresh versions of Surface went on sale in October, and Microsoft sharply discounted the first-generation Surface models. It looks like the one-two punch of new Surface models and cheap, older Surface models helped drive a surprisingly good showing from Microsoft’s hardware business.” Reviews of early Chromebooks, launched in 2011, determined that the devices suffered from basic flaws—they were under-powered and had poor screens, even given the price range of about $300. But prices have come down even more, and the quality steadily has improved.  “A Chromebook could soon become a truly viable notebook,” the Verge’s David Pierce wrote last year in a review of the Hewlett-Packard Co. Chromebook 14.

“We’re always listening to what our customers may need, and Chromebooks are always gaining new features based on that feedback,” a Google spokeswoman told the WSJ. That may seem obvious, but the fact is that businesses often don’t listen to their customers, and even if they do, then what? What do they do with all of that feedback and how do they use those insights to improve their products and bring them to market?

CIO Journal has focused on those questions for nearly two years now. As PwC principal Chris Curran wrote in a guest column back in 2012, many companies have the ability to generate or capture innovative ideas, but “a rare few have instilled the systemic organizational processes to harness those ideas and to repeat the process over and over again to sustain successful innovation.”

Innovation draws together a broad range of people and skills and flows organically from a company, from its culture, leadership and structure. As Mr. Curran notes, technology and IT leadership is a major factor in that success, which depends upon the collection, dissemination and analysis of data.

***

The innovation process should be segmented into phases and talent should be managed accordingly. Creativity fuels the idea generation phase of innovation and is necessary to identify potential breakthrough products and services. The second phase, idea exploration, employs more left-brained talent that is capable of sorting, prioritizing, and prototyping and testing ideas. Discriminating scrutiny is required to boost the odds that the innovation is aligned with business goals and has a chance of generating a return on investment. At the final stage, idea scaling, the art of innovation takes a back seat to the engineering. Corporations need to marshal the necessary resources along the innovation conveyor belt to mobilize, scrutinize, enhance, scale and implement inspired ideas.***

While it’s unlikely that this sort of prosaic work will yield the next iPhone or iPad, it may play a key role in helping save the next promising, but flawed , idea from failure. In the aggregate, those relatively minor successes are greater than the sum of their parts.

In Music, the Money Is Made Around the Edges; In Pre-Grammy Tradition, Executives Seek Ways to Boost Profits With Freebies, Interactive Videos

In Music, the Money Is Made Around the Edges

In Pre-Grammy Tradition, Executives Seek Ways to Boost Profits With Freebies, Interactive Videos

HANNAH KARP

Jan. 26, 2014 7:22 p.m. ET

LOS ANGELES—While much of the music industry was busy last week feting Grammy nominees, several dozen artist managers, technologists and record-label executives met for breakfast at a private club on the Sunset Strip to discuss a more urgent matter: how to make more money.

A pre-Grammy tradition that started several years ago known as the Big Bang Forum, the tech-focused discussion highlighted an uncomfortable reality: While Grammy wins and performances still boost record sales and exposure, the glory is increasingly muted as record sales make up a shrinking piece of most artists’ income.

The speakers included Tim Quirk, GoogleInc. GOOG -3.13% ‘s head of programming for music and digital-media store Google Play. Mr. Quirk talked candidly about Google’s long-term strategy to make a “profit center” by charging different consumers different prices for the same songs.

Yoni Bloch, founder of Israeli technology startup Interlude, showed why low-cost interactive music videos—such as recently released clips for Bob Dylan’s “Like a Rolling Stone” and Pharrell Williams’s “Happy”—garner far more advertising dollars than the traditional videos. Helping drive interest, fans can click on the videos to customize everything from the song lyrics to the instruments band members play.

SFX Entertainment Inc. SFXE +2.72% plans to make more money from social media than from selling tickets to the dozens of electronic-dance-music festival’s the promotion company has snapped up in recent years, said Chris Stephenson, SFX’s chief marketing officer.

“There’s a 5% to 10% margin on these events—that’s not what the business is. People are reliving that moment 365 days a year,” said Mr. Stephenson, noting that one of SFX’s festivals, Tomorrowland, was streamed live by 16.9 million people last year, and has been viewed 100 million times. The company plans to capitalize on that ongoing interest by corralling social-media followers onto a central platform where brands can advertise.

Google’s Mr. Quirk said his vision to make money in music involved catering to three different groups: fans looking for free tunes; fans willing to pay a small amount to rent or stream music from its subscription service, All Access; and superfans who will pay almost any price for a memento associated with their favorite act. As an example, he cited devotees of the rock band Kiss who want to be buried in a “Kiss coffin.”

The trick, Mr. Quirk said, is to market to all three groups at once. Albums, for example, should be presented as free apps, including access to some content but requiring eventual purchase for certain songs, features, or merchandise, he said.

Google Play’s early experiments have yielded mixed results, he said. A global promotion for the now defunct British punk pioneers The Clash in September—for which Google paid “a significant amount” to produce documentary interviews with the band’s four surviving members—did “not necessarily recoup” the video investment, he said, and only sold several hundred downloads in Belgium, for example. But the promotion, which also featured free Clash cover songs and $175 box sets, helped to significantly increase Google’s share of the music market, he said. Google doesn’t disclose its music sales.

“We have to get people used to buying stuff on Google,” Mr. Quirk said.

Among the other lessons Google has learned: It’s far easier to funnel fans from free to paid content on genre-specific sites than it is on a general-music home page. While the company struggled to get country-music fans to connect with general Google Play promotions, its country page has become its most lucrative.

Google also started eking out more revenue from its emerging artists page, “Antenna,” when it began offering a multi-artist sampler free of charge instead of focusing on one artist at a time.

“When it was single [artists] we could not get people to download these tracks—now the site has the best conversion rate,” he said. “Free is where you have to start, but free is not enough.”

Google is also gathering data on which types of fans are most likely to make purchases if given freebies. While track and album giveaways generally pay for themselves within a week, Mr. Quirk said, some generate far more sales than others.

A decade ago, as a member of the alternative rock band Wonderlick, Mr. Quirk said that to fund the completion of an album, the band ran a presale letting fans name their price and promising fans who paid more than the average that their names would be published in the CD liner notes. Fans paid an average of $32 an album, he said, with no one paying less than $5.

“So this [stuff] works, basically,” he said.

 

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