When obscure bands like the Dirty 30s play a gig, they are often paid a percentage of the bar sales. This time-honoured tradition solves two information problems:
1. The owner of a bar may lack the time or the ability to assess a band's quality. But with a revenue-sharing arrangement, that's not a problem – if the band doesn't fill the dance floor, they don't get paid much.
2. Potential patrons may not know the quality of the band either. They'll be reluctant to pay a fixed cover charge to see a band that might be unlistenable or undancable. It's better to pay no cover and a higher price for drinks – that way, you only pay if the band is worth listening (and drinking) to.
It works until a drug like Ecstasy comes along.
I started thinking about this when watching the movie 24 Hour Party People, which tells (in part) the story of The Hacienda nightclub. Opening in 1982, the club featured performers like New Order and The Smiths. It never made much money, but when Ecstasy hit the scene, it began to lose money in a serious way, because people stopped buying liquor, and started buying from drug dealers circulating in the club – the only ones who made serious money from the operation.
People have now figured out a way to make money from the rave scene: high cover charges and $5 bottles of water. But what about information problems, assessing the quality of unknown bands? Raves don't feature live music. DJs are in the music information business, sorting through obscure new recordings, playing only the most promising musicians.
The theory that paying musicians through liquor sales solves information problems is simple, but it generates a number of interesting and possibly testable hypotheses. For example, there should be a positive correlation between liquor consumption and entry of new bands into the music business. Britain seems to fit those stylized facts – what about the US and Canada? Is America's high legal drinking age choking off its music industry? Men drink more liquor than women – does this give bands an incentive to cater to male tastes?
And what about other demographics that don't drink a lot of alcohol, for example, pre-teen girls or those for whom cannabis is the drug of choice?
Professional expertise delivers to pre-teens the music they want (or that experts figure will sell). Is there a group aimed for the pre-teen market who wasn't manufactured? According to Wikipedia, the Bay City Rollers weren't, and one could make a case for Justin Bieber, but just about all the others I can think of were, from the Monkees to Britney Spears and Miley Cyrus.
What about marijuana smokers? There's another way new bands can get a break, that is, being bundled with a more successful group. Folks festivals work that way. People are prepared to pay for a ticket in part because they want to see the headliners, and in part because they can work the odds. There's likely to be a band worth seeing somewhere in the line-up. Sometimes bundling arrangements can go wrong, of course – but I'll leave the nominations for worst opening act for the comments.
Sharing alcohol revenues is just one way of solving information problems in the music business. There's many others – American Idol, the internet. And the different ways of solving information problems will have different implications for the costs of entry faced by bands.
It actually turns out there's a growing literature on rockonomics, but as far as I can see, there's not much written on the economics of drugs and rock 'n' roll.
Worthwhile Canadian Initiative 
You’re missing one big component of a primarily ecstasy driven nightclub: house dealers. Most clubs that cater to that crowd tend to have “strict” bouncers who will go after any dealers in the club, but who turn a blind eye to one or two chosen dealers who have some sort of profit sharing agreement with the management and/or security and/or the police.
Probably the most pertinent example would be Club Illusions (I think it was called) on Dalhousie. It was run by the bikers on that sort of model until it got busted.
$5 water only goes so far, since the patrons only buy one and then refill it.
Marijuana doesn’t cannibalize music revenues. I shouldn’t have to risk poisoning, beating, bad rave dancing or theft to use drugs. E should be legal for adults. Stimulants and hard sedatives should be at least legal with consumption supervision if not unrestricted for small amounts (drivers licensing demerit system seems appropriate for alcohol/drugs consumption). Lots of dealers would make wicked businessmen or taxed producers and lots of police and guards could be used to enforce cyber crimes, property crimes and seniors home assaults; we’re all in for the beatings of our lives when elderly.
There is a CRTC 30% Canadian content regulation. If you want new bands/music you can tax break new groups or albums (tax more the oldies if revenue neutral). When I 1/2 tried to learn guitar a techie told me a decade ago its all synthesized now (is expensive), and he was right. Maybe computer synthesis schools for Vancouver, Winnipeg, Toronto and Montreal? Musicians are broke. Chretien’s GAI would’ve advanced new music immensely. Subsidizing the transmission strength of University stations would help.
…for examples layered Siamese Dreams sounds nothing like live songs, and Metallica recut their St. Anger album three times trying to get out of the eighties, and Master of Puppets single sounds good because of 90s-ish change-ups (S&M was novel). 2/3s of the Punkies sounded good because their single sounded like Prog rock Tool. U2’s tries at electronica sounded like crap but at least tried to lead away from the Spice Girls takeover when Seattle died. So maybe it is subsidizing new genres that would help. Rock in the 1950s, punk in the 1970s, rap in the eighties…100s of sub-genres. PBS (strangely espouse neoconomics) just played a concert for Obama or McCartney. Maybe CBC could subsidize different genre bands to cover eachother in concert or something. How about universities invent a live synthesis computer instrument? Hurry up before I lose hockey game reception.
One of the most promising new bands I’ve heard was “The Velvet Pill” and they broke up after one album. I’m pretty sure you take away Flaherty’s tax breaks and mail em out as GAIs and I get a few more albums of substance free music high.
ggg, interesting comments, I had to think about that for a while.
When owners can share the drug revenue yes, definitely, clubs are more likely to be profitable. However it’s still difficult for the club owners to enter into a contract with the musicians that says “we’ll pay you X% of the drug/alcohol/water revenue earned during your gig.” First of all, if I was a club owner, I wouldn’t trust a drug dealer to give me a % of his/her profits, because the contract can’t be enforced – it’s really hard to figure out how much the dealer has sold because there’s no record of transactions, drugs are so small you can’t see the transactions taking place, and you can’t exactly go to small claims court and sue if the dealer reneges on the deal. So I would expect dealer/club owner contracts to be mostly protection-type contracts – pay me a fixed sum of $XX and I won’t kick you out of my club, trash your most treasured possessions, etc.
Second, the club owner can hardly say to a musician “I’ve got this arrangement with the dealers and you too can get x% of the drug sales” – way too risky. So even though side payments from dealers to owners make owning a club far more profitable, they don’t solve the information problems (1) and (2) above in the way that revenue sharing between owners and musicians solves information problems.
Wayne, I’d say illegal marijuana cannibalizes music revenues, in much the same way as it cannibalizes tax revenues – your local folkie-cafe can’t cash in on any potential profits to be had from clients toking up.
I guess you’ve been following the California proposal to solve their financial problems by de-criminalizing and taxing marijuana?
On synthesized music – I’m out of my depth on that one (actually I’m out of my depth on most of these issues), also you’ll notice I’ve said nothing about hip hop and rap.
I agree with you on the transmission strength of university stations.
“Men drink more liquor than women – does this give bands an incentive to cater to male tastes?”
There is a pretty big incentive for guys to make music that appeals to female tastes…. have you seen the list of girls John Mayer has dated???
“There should be a positive correlation between liquor consumption and entry of new bands into the music business.”
That doesn’t seem readily obvious to me. Just because some unknown bands get paid based upon liquor sales doesn’t mean that liquor sales should be correlated with the entry of new bands into the music business.
Canuck – so you figure sex and drugs and rock and roll dominates economics and drugs and rock and roll?
David – to clarify: what I’m talking about is liquor sales in bars, and especially the potential market for liquor sales in bars. So an increase in the drinking age decreases that potential market, as would, say, the spread of religious beliefs prohibiting drinking.
And I’m assuming a positive correlation between live music and liquor sales. If there wasn’t, I don’t know why bars would bring in bands.
So if drinking is banned (and the ban is enforced), there’s no liquor sales in bars, so it’s hard to bring in new bands because of the information problems above.
Hi, I am definitely not an economist, but I am in a couple bands in Vancouver, and I’ve helped out at lot of shows around town. Funnily enough, it turns out that the cheaper you can sell the booze, the more money you make. People are far more likely to pay $10 cover and spend $9-12 on three to four beer than they are to spend $5 and spend $9-13.50 on two to three beer. I do sound at a weekly night that is struggling through this issue right now, as it’s a catch-22 with the owner’s right now (people aren’t coming expressly because the drink prices are too expensive, and the owner’s in turn keep the prices expensive to make what little profit off of the people who do come)
Honestly, in my circle (which is more of the punk/”avant-garde” scene) people are far more focused on merch than they are on live show revenues. Often, live shows are used as a market place for goods such as t-shirts, CDs (on the decline), 7″s, LPs (both increasingly with digital downloads, my bet as the way bands will be increasingly releasing music), and tapes (yes, cassette tapes, also with digital downloads) People both sober and drunk/stoned LOVE these kinds of things, and they are far more reliable than making money off of either the door or the bar. I could relate it to the wages of a server, who’s paycheque is minimal but survives off of somewhat reliable tips. We mostly get paid < $100, but if it’s a good night of sales, you can at least double this number on merch.
Now, this is only from a band’s perspective. A club owner doesn’t get any benefits from these strategies, and I have heard of some bars that charge a percentage of merch sales. A way around that is, of course, the wonderful warehouse party. In Vancouver, these are everywhere, and they profit off of the 11:00 PM closing of all BC liquor stores. The common method has the bands splitting the $5-$10 door and the host pocketing the (quite massive) alcohol profits. There is of course the high risk of being shut down, but there are quite a few groups that rove around from spot to spot doing these kind of gigs. They also allow smoking, for whatever that’s worth (personally, it makes me very glad for the smoking by-laws) Often, these parties serve as a great place for a new band, as it gives you a chance to play to a crowd that would be impossible to coerce into a bar with far more expensive drinks.