The Online Tip Jar Experiment:

Why the Results Could be Underwhelming - Or Even Harmful - For Artists

By Peter DiCola
10.15.2000

I thoroughly enjoyed my recent conversation with Matt Goyer, President and CEO of Fairtunes. I think it's great to see individuals experimenting with different models within the music industry. Their ideas have been met with much enthusiasm in the fan community, and with much interest in the music industry. People like the idea of paying artists directly, cutting out middle men, and being absolved of their Napster guilt.

I'm also pleased that this experiment is intended to provide compensation to musicians for their labor. Fairtunes, and other voluntary contribution mechanisms like it, start with an assumption I agree with - that the work of musicians is valuable to individuals and to society. Their goals are focused on notions of fairness and value. Their idealism is certainly to be commended.

That said, I think this economic experiment should be viewed scientifically. Hypotheses should be proposed and tested. Fairtunes, for instance, has based their model on at least two key hypotheses: first, that sufficient numbers of music fans will be exposed to the tip jar mechanism through either the Fairtunes website or the Fairtunes software embedded in media players, and second, that such exposure will generate significant amounts of revenue for artists. Over time, we can evaluate whether those things will hold true.

I have some additional hypotheses to propose in this article, based on some economic reasoning and analysis. These hypotheses are not as rosy as those of the proponents of voluntary contribution mechanisms are. But it's important for the music community to be thinking about these critical inquiries along with the blithe optimistic predictions. We can't go looking for good news or bad news based only on the assumptions of the businesses that created online tip jars. We should focus on evaluating whether online tip jars have positive or negative effects on musicians.

A quick note: In my interview with Matt Goyer, I did not present the critiques of the voluntary contribution concept in their most robust form. I think it's important to be able to read and understand his thoughts in that interview more than mine. But I certainly invite Matt, his colleagues, and like-minded folks to take issue with any and all of my assumptions and arguments in the Insound forum.

An Economic Definition of Online Tip Jars
So how do these tip jars work, economically speaking? It's more complicated than a handout to a person on a city street. It's also slightly different than, though in many ways similar to, tipping wait staff at a restaurant.

Online tip jars - also known as voluntary contribution mechanisms - take advantage of internet technology to simplify the process of private individuals giving to artists. They aim to make transactions between an individual and an artist (or group of artists) easier. Thus, they are based on the assumption that music fans will support musicians financially, provided two things: (1) they like that artist's work enough to place a value on the production of future work by that artist, and (2) there is very low opportunity cost to actually making the donation.

Why Would You Tip a Musician?
Assumption (1) is phrased carefully. It explains the incentive we would have to tip musicians. A tip for a musician functions to provide the ability and the incentive to produce music in the future. It is not reward or remuneration for past production. This would make no sense - why pay later for music you have already heard?

Tips are meant to support musicians whose future work we believe to have a high probability of being "good." This is where tips for musicians are unique - because musicians create something unique, tips function like in an investment in their creation. It's different than tipping wait staff, which is an action that rewards past performance (the service received at the meal just completed). Tipping musicians is more like a business investing in new technology - it involves looking for a reward in terms of future performance. The reward hoped for by fans is that their favorite bands keep making music for them to listen to.

Tips are also meant to provide the incentive to keep making good music by establishing that only creators of good music will be tipped. This is intended to increase the probability that the music created will be good. (It could also be established that creators of better music receive larger tips, but this categorization of good vs. better is not necessary to the concept.) Here we see a similarity to tipping wait staff: our society has established in some sense that tips are meant as appreciation for good service. Bad service generally won't receive a tip from very many people.

Thus, we only tip musicians we feel they have the potential to create good music for us in the future. We generally base our belief in that potential on the musician's past work, but this does not have to be the case. We give up some of our money now to get (what we hope will be) good music later.

Is it Worth the Effort to Tip?
Assumption (2) is based on the idea that any costs an individual incurs while trying to make a donation will take away from the value of that donation. It states that the costs of tipping musicians are low enough that people still tip. The idea here is that if assumption (2) doesn't hold, then no one would give any money.

Since it takes time to search for an artist's mailing address, if it takes time to write a check, and if it takes a stamp to mail the check, those costs will count negatively against the value of the donation. Online tip jars eliminate all these costs, replacing them with (what are assumed to be) smaller costs: searching for the artist's name on a centralized website or searching for the artists' individual website, typing in a credit card number, and typing in an amount.

Say you enjoy swimming. But if the community pool is far away, you're less likely to go. You might be more likely to jump into the pool in your neighbors' backyard, if you know they're not home. The community pool is a tip jar. Your neighbors' backyard is Napster. (I think the neighbors just got home, but that's another storyƒ) So basically the pool needs to be a quick drive from everybody's home. It needs to be easy for people to use it, or they won't. The online tip jars hope they're fast enough and cheap enough to seem "easy," and thus become something people use.

So what could go wrong with these two assumptions? What does economic thinking - or, better yet, just common sense - tell us? What guess would we make about whether the online tip jars will work? What hypotheses would we form about whether their assumptions will hold true?

Hypothesis #1: You Can't Even Count on Enlightened Self-Interest
Anyone can see that asking a person to pay a price for downloading music instead of simply downloading the same music for free using Napster, Scour, or Gnutella, is like asking for charity. The person who pays for downloads would end up with the same music, but have less money. That is requesting pure altruism: people are strictly worse off, and others (i.e. the record labels and artists) are better off. This is clearly an unreasonable thing to ask. You cannot count on people's charity.

However, one should not characterize voluntary contributions as equivalent to charity. They might appear to be based on the altruism of individuals, but really they are based on people's enlightened self-interest. As said before, people expect to get good music in the future in return for their tip. It appears they're giving money away to the musicians, but really they're trying to give themselves - their future selves - good music in the future. In other words, if people are smart ("enlightened") they will think about the long-term picture, not just the short-term.

I would interpret the traditional patronage system of voluntary contributions as being an example of enlightened self-interest. Patrons of the arts aren't being selfless; they choose to fund artists to receive the benefit of living in a world where that artist can work and they can experience that artist's work. More tangibly, many patrons have historically used their patronage money to ensure the right of first access to an artist's work. So patronage isn't charity or a giveaway, it's enlightened self-interest; clearly the patrons are getting something in return for their dollars.

The problem here for tip jar donations lies in the fact that when people act based on what will happen in the future, they are forced to act under uncertainty. People don't know what the future will hold. This can jeopardize the entire notion of giving an artist money to secure their future work. Any fan's thought process must include a lot of questions that can't be answered. What if the artist moves towards a genre I don't like? What if the artist gets hit by a bus? What if the artist simply starts to suck? In sum, how does one know that the artist's works in the future are going to be worthwhile - even if the past works have been worthwhile?

Due to this uncertainty, people have to build risk into their calculations of the value of the musicians' future work. Building risk in means paying less - something risky is generally less valuable to something safe. (Most people are risk-averse; yes, some people are risk-takers, but not many.) This is why stocks generally give a higher return than treasury bonds. Stocks are risky, and so the companies that offer them have to offer more value in return for the risk that stock buyers take on.

So the enlightened self-interest model means that artists will in all likelihood be paid less than the actual value of their work. Because it relies on people's predictions about the future, it will generate too little money even if their future work meets the highest caliber that could have been expected. In the uncertain situation of assessing the future, that "best-case" scenario has to be averaged out against the "worst-case" scenarios, too, i.e. the artist being hit by a bus or the artist starting to suck. Thus, online tip jars seem very likely to under-compensate the artists.

Hypothesis #2: Success Wouldn't Last Long
Let's say that the online tip jar mechanism "succeeded." In other words, let's say that, generally speaking, musicians were receiving enough money from tips to compensate them "fairly" (in their estimation) for their recorded works. Even in this rosy scenario, their compensation would necessarily sag below this ideal level.

If artists were making enough money, it would probably be the case that a given member of society could know that. They would probably know simply by virtue of artists continuing to record music. Thus, music fans would perceive that musicians would continue to make music with or without their individual tip. So why give the tip?

This is an instance of the free-rider problem. Anyone can get recorded music for free, so receipt of the good in question (recorded music) has nothing to do with whether you paid or not. So long as "other" people donate money to a give artist, an individual can continue to enjoy the fruits of that musician's labor. This removes the connection between the economic value of the musician's work and the number of people who actually enjoy it. So in that sense, the musician is under-compensated, because some people aren't paying for the value they get.

A familiar example of the free rider problem involves under-funded public television. Because public television comes over the airwaves free, anyone with a TV can get it and no one with a TV can be prevented from getting it. So public television stations hold subscriptions drives - which are optional. So some people donate money, and other people are free riders. The stations can't make everyone pay, and some of them suffer for it.

Goods that are subject to the free-rider problem tend to receive less funding than they need to continue being produced. This becomes more true once more and more individuals figure out that they, too, can get away with being free riders. Thus, even in the case of tip jars' success, that success would probably be unsustainable. People would see that others are paying, and realize that their incentive to keep paying as an individual isn't all that strong.

Hypothesis #3: No Bellhops on the Cover of Time
Wait staff at restaurants receive tips through a fairly formal mechanism, the standard 15% of the bill. Pizza delivery drivers receive tips as well, though perhaps not as large. Coffee shop clerks typically put out a tip jar to collect mostly coins. Bellhops in hotels receive tips. You get the idea. There are many other examples of professions that usually or sometimes do.

Plenty of intelligent, hard-working people are employed in professions that receive tips. Regardless, I have to make an observation - none of these jobs are to be found in a list of "Top 10 Starting Salaries." And guess what - they don't tend to catch up, either. If you work in a job where you receive -and perhaps count on - tips, you are probably not making very much money. Sure, wait staff at very expensive restaurants might do quite well for themselves. But it's far more illuminating to speak of the average employee, not the exceptions. In general, jobs that generate tips are on the low end of the income spectrum.

This is connected to the fact that these jobs tend to be low on the social value and social respect spectra as well. (I don't feel that this should be the case, but nowadays our heroes are CEOs and sports figures, not pizza delivery men and bellhops.) Figuring out why requires a chicken-and-egg question - do these jobs pay less because they're not respected or are these jobs not respected because they pay less? But that's not the relevant question here.

The relevant question is: "If you turned musicians into people who commonly worked for tips, would their compensation and cultural value go up or down?" The correlation between those three things - tips, low pay, and low respect from society - cannot be ignored. Even without understanding why exactly they go together - there are many reasons, most likely difficult to measure conclusively - we should be concerned with the fact that they do, and what that could mean for musicians, if this tip jar idea indeed catches on.

Sure, the tip-jar mechanism might start generating a fair amount of tips. Maybe its success would combat the "low pay" part of the equation. But what if receiving tips causes people to value professions less, and subsequently results in low pay? The cultural damage to musicians' standing in society could further damage their economic well-being.

Hypothesis #4: Short-Shrifting the People behind the Scenes
One particularly troubling critique of the online tip jar model is that it ignores the songwriters, producers, engineers, session musicians, etc. who participate in works of music but are not the "name" on the songs. For instance, Mariah Carey is a recognizable name and her fans might be happy to use their credit cards to send money to her. But what about the men and women who write Carey's songs? Because the online tip jar model depends on fans looking up the name of the artist - and only the artist - and contributing to the artist's monthly check, it overlooks the artistic contribution of many individuals.

Couldn't artists simply pay the songwriters, producers, etc. out of their tips? In theory, yes, but in practice this would lead to further devaluation of the songwriters' efforts, a probable result from getting handouts from tip revenue. Why should session musicians, for instance, depend on a secondary cut from the uncertain revenue from tips to earn a living?

Furthermore, once the tip revenue starts being divided, it then becomes subject to requests from labels (for past promotional work, perhaps). The artists end up with the same problem they have now: a revenue pie being divided among too many people. And what if the artist didn't collect enough to pay everyone? Could they be sued for not garnering enough tips? As for the songwriters, producers, etc., their revenue source seems far from guaranteed in this case of depending on the artist to share the wealth.

A remedy to this problem could be to include the names of songwriters, producers, engineers, and session musicians on the online tip jar website. Yet most fans probably won't know those individuals' names. So perhaps the online tip jar could include information about who else should receive money. (That is, it could point out the relevant songwriters, etc. to people who donate to Mariah Carey.) It seems a bit tenuous and time-consuming to ask people to do so, which would begin to violate the "makes donating easy" assumption. But even if one assumes people are willing to pay the songwriters, etc. there are problems with this solution.

Fans may be willing to send money to all the parties involved. (We assume that the online tip jar could somehow have perfect information about all contributors to a given song.) But the fan has no information to divide the pie. Let's say the fan is willing to pay $5 for 10 downloaded Mariah Carey songs. How much does Mariah get? The producer? The songwriter? There's no way for the fan to donate in a fair manner or to know that they're donating in a fair manner. Some artistic contributors will always be forgotten or short-shrifted.

This hypothesis is almost unavoidable, because fans will only know (or want to know) so much about the songs they're hearing. One is led to predict that the online tip jar model would produce highly unfair results for the behind-the-scenes creators and facilitators.

Hypothesis #5: That "Water" in the Test Tube Might Be Sulfuric Acid
My last, and most troubling, hypothesis to add is that instituting online tip jar revenue as a viable stream of (some) income may result in structurally lower levels of compensation for artists. If this economic prediction were to hold true, the online tip jar experiment could prove to have been a dangerous one. In other words, it could backfire.

No one has claimed that online tip jars should be artists' only revenue source. Matt Goyer from Fairtunes compared tip jar revenue to the leg of a table. This sounds great - until you see that the leg is halfway sawed-through and could collapse, knocking the whole table down with it.

Let's return to the wait staff analogy. It is legal for restaurants to pay less than the minimum wage to wait staff because they receive tips. The rationale is that tips will bring waiters' and waitress' total compensation (wages plus tips) to an acceptable level, at or perhaps beyond what the minimum wage would get them.

The problem is, some wait staff receive huge tips - say, at fancy expensive restaurants with high average tabs - but many, many do not. Wait staff's hourly wages are probably similar from restaurant to restaurant, but their tips vary widely. Thus, only a select few waiters and waitresses exceed the total compensation level they would have made at the minimum wage. Most waiters and waitresses get stuck below that, I would guess.

What if this happened to musicians? Granted, musicians are not employees with an employer that sets their total compensation level. (Total compensation refers to income from all sources added together.) But when the music industry and the government begin making decisions that affect musicians' compensation, they could count this uncertain tip revenue as part of what an average artist gets. That average would reflect a few big-name artists getting a lot of tips and most artists getting very little. So artists' total compensation would be set in a way that exaggerated how well most artists were doing. Most artists would be hurt by this over-estimate of what they were pulling in from tip revenue.

Even if successful, the online tip jar experience will produce widely varying levels of tips among artists. And most artists will suffer as the skewed "average" tip jar revenue figure is counted as something they get, when really its an uncertain, variable amount.

In effect, the addition of tips to artists' total compensation allows their work to be devalued in a structural, systematic, and codified way. At the first indication that this particular hypothesis is coming true or is close to coming through, artist advocates must be vigilant in preventing that result.

Not Cheerleaders but Watchdogs
Even if the tip jars don't generate much revenue for artists, that might not be such a bad thing - at least the music and technology industries will learn from this experiment. Perhaps articulating these critiques in the form of hypotheses will help the process of evaluating, improving, and refining this business model. Of course, if many of these hypotheses turn out to hold true, I would hope that the music industry would take caution. We should refrain from spending an inordinate amount of time on - let alone championing - a model that does not work or, worse, does damage to the value of musicians' labor.

None of these comments are meant to take away from the hope that this business model will work for artists. I am interested in anything that works. Yet the focus must remain on working towards viable solutions to the problem of compensating artists. It would be irresponsible to follow the lead of most journalistic treatment of the tip jar phenomenon and to ignore the likelihood that the online tip jar model might not be one of those solutions. The economic machinery behind the voluntary contribution model is subject to many pitfalls.

So wish the tip jar folks like Fairtunes luck, and tell all the music fans you know about them, if you want - but watch closely to see all that happens when and if those fans start tipping musicians online.

home | manifesto | resources | press & news | events | FAQs | subscribe | contact us