Rethinking The Music Industry Business Model... Finally Going Mainstream

from the can't-stop-the-trend dept

Fri, Aug 25th 2006 10:19am — Mike Masnick

For all the complaints we have about the way the RIAA conducts its business, we have always been optimistic that things would get sorted out eventually. It wasn't the music industry that was in trouble at all -- just the traditional recording labels. People often accuse us of hating the music industry, which is totally incorrect. When we discuss music industry strategies it's hoping that they recognize that these new business models have the potential to be much bigger than the old ones. This is based on a few simple ideas that really shouldn't be that hard to grasp, unless you're desperately tied to an existing business model and unwilling to change. First, treating all your customers as criminals doesn't create much loyalty or willingness to buy your product. Especially in a market where the product is based on being a fan, not filling a need. You want your fans to be happy -- not pissed off. Second, the basic economics are there. On the supply and demand curve the supply of digital goods is infinite, meaning that the trend over time will absolutely be for the price to get pushed towards zero. It's just the way the market works. That's not a bad thing if you embrace it and recognize that, rather than lost revenue, free content represents free promotion. After all, the hardest part of becoming a success in the music business is the marketing to get your product known. The third, and final, aspect of this is how new technologies have dramatically decreased the costs of every other aspect of the music business. Creation, publishing and distribution are all now much cheaper due to the onward march of technology, forcing a shift in how we think about copyright issues.

Based on all of this, it's not hard to come up with a variety of different business models that are based on (1) using the music as a promotional good to get a lot more attention in a crowded market (2) offering customers what they want, and offering them plenty of different ways to get it and (3) building tremendous loyalty from happy customers who feel much closer to the musicians and are much more willing to spend money on secondary products (merchandise, concerts, access). Plenty of musicians have figured this out, and now it's moving further and further away from being a "fringe" idea and into the mainstream music business. Wired Magazine is running a bunch of articles about how the industry is realizing this, with two pieces that are definitely worth reading. There's an interview with Beck where he discusses continually giving fans more ways to interact with the content, and not worrying about things appearing on the internet. However, even more interesting is the article about Canadian music management and music label firm Nettwerk. You may remember that name from their announcement earlier this year that they would pay the legal fees for a teen sued for file sharing one of their own artists. The article also discusses how Nettwerk recognizes all of what we discuss above, in that it's encouraging each band on its roster to build its own label, and focus not just on how to "sell a CD," but on selling the entire experience of the music. When you look at things that way, it means you don't worry if some of the music is heard for free, because that just encourages more interest in other things the band is selling. It's also looking to try experiments similar to the recently announced Sellaband, who focuses on getting people to "invest" in a musician to help them pay for a recording, in exchange for a share of the later profits. In other words, the industry is evolving -- in many of the ways that plenty of people have been predicting all along. This is a good thing -- and one of these days the old record labels will finally recognize the mistakes they've made... or simply disappear.

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33 Comments

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Michael Long, 25 Aug 2006 @ 10:54am

Model...
Actually, on the supply and demand curve the supply of digital goods is NOT infinite, unless there's an infinite number of people I don't know about creating new music. In fact, as you mention, "creation, publishing and distribution are all now much cheaper"... but not free. While the costs to distributie digital goods may approach zero, the artists still need to get paid.

While I applaud any model that moves directly towards paying the artists directly, they still need to be paid for the work they create, and not by the occassional fan buying a t-shirt.

I'm only a "fan" of a few artists and bands, but I have over two hundred others on my iPod... and each and every one was "paid" (via iTMS) for their work.
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- CosmicDog, 25 Aug 2006 @ 11:20am
  
  Re: Model...
  Actually, I think the 'infinity' referred to in the article relates to the number of times a particular recording can be distributed. There is a finite number of any physical copy (i.e. CD/Tape/DVD) and there is a cost involved with producing each one. Online content, on the other hand, can be downloaded an unlimited number of times and it only has to be produced once. There is an infrastructure cost to this activity, but there are infrastructure costs for all business models. Servers and bandwidth are still a whole lot cheaper than CD printers, packaging, shipping, ect.
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- Anonymous HERO, Oh!, 25 Aug 2006 @ 11:22am
  
  Re: Model...
  ["unless there's an infinite number of people I don't know about creating new music. "]
  
  Are you daft? Brother, musicians come out of the cracks like drips off a fat mans @$$. Minstrals from all times and periods of extreme desolation have played to not only make people feel good and listen, but to give them selfs goosebumps as they strum there guitars or pound the base pedal at the intro of a ground rumbling crowd pleaser. Even talking about it give my heart a zap.
  
  REAL musicians aren't plucked out of IVY leages or hunted down by "Scouts" and made to play songs written by a room full of composers. REAL musicians make music that tells "the man" to stuff it or tells there girlfriends they're sorry, or celebrates school being out for summer. REAL musicians, garage bands, local sounds, club bands, mix artists, live for hire bands, these people aren't going anywhere.
  
  If you love to listen to music and you hear something you like that you downloaded for free, then you hear about them coming to town, from experience more people then not are going to want to go to that concert, because they already know they like what they're going to hear. And a bloody T-shirt may not amount to much but 500 T-shirts bought by 350 attendees going to a show with 3,000 sold out seats in a small concert hall really adds up, and more then makes up for your free song on-line (which by the way would also be a major reason you had so many folks come to your show to begin with).
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- Mike (profile), 25 Aug 2006 @ 11:23am
  
  Re: Model...
  Actually, on the supply and demand curve the supply of digital goods is NOT infinite, unless there's an infinite number of people I don't know about creating new music.
  
  Infinite in terms of each digital good. It can be copied infinitely at zero cost. Therefore, the supply is effectively infinite. Another way of looking at it is that the marginal cost of each new copy is zero.
  
  ?While I applaud any model that moves directly towards paying the artists directly, they still need to be paid for the work they create, and not by the occassional fan buying a t-shirt.
  
  Again, look in more detail at the models being discussed. No one is saying "the occassional fan buying a t-shirt" but much more advanced models that still embrace the free music.
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- Charon, 25 Aug 2006 @ 11:26am
  
  Re: Model...
  Micheal.. you are completely missing the point.. Who cares if the supply is infinite or only close. The point is that some parts of the mainstream music industry are finally taking the hint and taking steps to change the business model for the better.
  (INSERT HALLELUIAHS)
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Pariah, 25 Aug 2006 @ 11:26am

I have never heard anyone seriously sayng the artists should not be paid, far from it. Most of what I read about is objections to a system where the artists only see a few cents out of each dollar paid for their music.
So years ago I was acquainted with a member of a band that had a brief flash of popularity and had an album sell one million copies. Approx $15,000,000 at retail.
By the time the money had filtered thru the bloated distribution network and a check was cut for the band their net receipt from that million seller was $12,500 each.
That, there is the system people hate.
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- sockfoxy, 5 Sep 2006 @ 1:05pm
  
  Re:
  ah yes but how much did they get paid to sign to the label, how much was spent in marketing, what was the retail mark up, how much did they then go on to make in touring income from the million seller, how much in publishing from the hit they probably had on the radio.
  
  it's fun to bash the label system and oh so easy. but take away the unequal distribution of wealth on the hits favoring the label or 'investor' then the opportunity for risky new artists to be marketed and launched also goes away
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Guard, 25 Aug 2006 @ 11:29am

Supply is infinite, in that besides mainstream even its gotten alot easier for less-known bands, or individuals, to record and edit their own music at very little cost. (Hook up a microphone, record, and edit with audacity for example).

Heck, I play guitar for fun and will sometimes record it and send it to others to hear what I'm playing, and I find it funny my random songs may stay on their playlists when I had no intention for the song to be heard more than once.

I wouldn't find the RIAA lawsuits so terrible if the money was actually going to the artists it was supposedly stolen from. But I have my doubts that they're recieving much, if any, of the "damages". So in that, it seems none of the lawsuits are interested in repairing damages, only to further their profitable lawsuit model, bringing down the music industry in the process.

I end up buying CDs or other things (T-Shirts for example) of bands when I've heard their songs, usually from downloading or from other people. Without the downloading, I would have maybe heard one song from a CD on the radio, and I would have no legal way to evaluate the rest besides listening to short 20 second clips on iTunes or something. The new red hot chili peppers CD was a great CD as a matter of fact, but all I heard was Dani California on the radio for a few months (very overplayed) when there are at least 6 better songs on that same CD.

There are plenty of online websites that provide free service and make money off of other methods (advertising, alternate sales). Theres no reason the music industry can't start on the same approach if need-be, since ultimately, good music can create a loyal fan-base and open up endless other possibilities for the artist.
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- Chuck Norris' Enemy (deceased), 25 Aug 2006 @ 12:43pm
  
  Re:
  There are plenty of online websites that provide free service and make money off of other methods (advertising, alternate sales).
  
  I sure as hell am not going to buy a CD that comes with adverts in it or on the artwork. Nor will I buy a song that has ads recorded on or around it.
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  - Anonymous Coward, 26 Aug 2006 @ 12:12pm
    
    Scuse me Mr Strawman...
    Scuse me Mr Strawman but no one here has said ANYTHING about that, cept you of course...
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Anonymous Coward, 25 Aug 2006 @ 11:47am

much more willing to spend money on secondary products (merchandise, concerts, access).

well, this is as far as i could make it through the article. the whole problem lies in this very assesment. they're the "recording" industry and the recording itself has become the meat and bones of music today, which this very concept devalues music as a whole. the recording itself should be the secondary product and the concert, the live show (which is what music is about, a composition and a performance), should be the main draw.

sure, it's nice to have a recording of beethoven's 7th symphony to listen to, but the impact of seeing it performed by a live orchestra is phenomenal. granted, today's music doesn't compare, but the basic concept should be the same. instead, we get half-rate talent who is coupled with some amazing producer to create a product that has no real content and is nothing but ear candy, while at the same time the band in question can't even perform a decent live show without a frivolous stage production. They suck at playing their music, or their music isn't anything worth going to see played.

Either way... the recording industry needs to do a complete 180 and start focusing on the thing music is about, the live performance. It's nice to listen to a recording of a Liszt rhapsody, but it's another thing entirely to actually see someone performing such dizzying virtuosic playing.
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- Anonymous Coward, 25 Aug 2006 @ 12:50pm
  
  Re:
  the purpose of music isn't the live performance. there is plenty of music out there that *can't* be performed live. Trent Reznor of Nine Inch Nails is known for playing *multiple* instruments in the same song. That's hard to do live. Also, while many people debate it, sometimes computerized effects can still be considered music, but is much more difficult to play live.
  
  I'm not really going anywhere with this other than to disagree with you in saying that the purpose of music is the live performance. Granted, live performances, if done right, are awesome. NIN does an amazing live performance in my opinion. However, the purpose of all that he does is *not* for the live performance. He's even stated he thinks the live music is sub-par to his recorded stuff.
  
  The recorded album and live performance are just two different sides of the same coin. they both just give a musical experience, one different than the other.
  
  i dunno, this is sort of off topic. i just wanted to comment on that.
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Anonymous Coward, 25 Aug 2006 @ 12:05pm

actually the cost of copying a digtal file isn't zero. you need to pay for the server, for the electrcity to run, the value of the time it takes to copy. sure the more copies created, the sunk costs, such as physical drives diminsh to zero, but you still have recourring costs, such as utilities, server/internet fees, and the like...
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- Mike (profile), 25 Aug 2006 @ 12:34pm
  
  Re:
  actually the cost of copying a digtal file isn't zero. you need to pay for the server, for the electrcity to run, the value of the time it takes to copy. sure the more copies created, the sunk costs, such as physical drives diminsh to zero, but you still have recourring costs, such as utilities, server/internet fees, and the like...
  
  The server is a sunk cost. The electricity cost is effectively zero. The cost of copying a single song does not increase your electricity bill. The value of time for a copy is negligible too, as it's effectively automated at this point.
  
  So, no you're still talking about fixed costs, not marginal costs.
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- Anonymous Coward, 25 Aug 2006 @ 12:48pm
  
  Re: Anonymous Coward
  None of those costs are seen by the company on a filesharing network. The "free" music that you are getting is being paid for by your ISP bill. However, since most of us were going to pay that anyway, we deem it free. The studios don't need to put the songs up for us to download, we'll take care of it ourselves.
  The studios may, however, host the music files on servers paid for by advertising, at which point they can make money off of distributing their "free" music. This is also a great time for the companies to assure everyone that the file they download from them are free of viruses. This is always a concers on P2P networks. By doing this they earn even more loyalty and make even more money. Some might even call it a "win win situation."
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krum303, 25 Aug 2006 @ 12:37pm

cribs...
Catch an episode of MTV Cribs and it's hard to see how some artists, and the recording industry are losing money to free downloading. Props to Beck and the Canadians. In 1981 when MTV first aired, there where many artists who embraced the "new technology" of videos and there were those who shunned it. One artist who loved the idea was Madonna and she's still touring and making records. One group that shunned it was Hall & Oats....well...we all know where they ended up. Great job on this company and artists like Beck on seeing the future and moving forward instead of bitching and suing your fans because you see the monopoly you once had going the way of the Do Do.
I knew there was a reason I have every Beck album and paid for everyone of them....although I downloaded Midnite Vultures first to check it out. :)
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Curious, 25 Aug 2006 @ 1:00pm

I'm not arguing that there shouldn't be new business models or anything. I've just got a question about most of the models that seem to be tossed around: What about artists who are no longer playing? Band breaks up, members die, etc.? Under the old system, they'd still receive royalties every time a CD was sold. I'd guess that for a lot of popular bands that winds up being a significant source of money over time. In most of the new models proposed, the bulk of an artist's money comes from parlaying live shows into revenue in some way; seems like retired artists/bands would cease to be compensated for the ongoing use of their work.
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- Mike (profile), 25 Aug 2006 @ 1:37pm
  
  Re:
  I'm not arguing that there shouldn't be new business models or anything. I've just got a question about most of the models that seem to be tossed around: What about artists who are no longer playing? Band breaks up, members die, etc.?
  
  First off, not all of the business models being discussed rely on live music as a component of the model.
  
  Under the old system, they'd still receive royalties every time a CD was sold. I'd guess that for a lot of popular bands that winds up being a significant source of money over time.
  
  Let me ask you a question. If you work for a company building widgets. When you leave the employment of that company, do they still pay you for the widgets you made when you worked for them?
  
  seems like retired artists/bands would cease to be compensated for the ongoing use of their work.
  
  Well, perhaps that will encourage them to keep making new music.
  
  A good case study for this is Verdi. He made music both during a period when there was copyright and when there wasn't. He produced a lot more music before copyrights existed. Once they did, he stopped making music, since he could just "live off the royalties."
  
  Most of us work for a living every day and don't live off of what we did yesterday or last week or last year. Why should musicians be different?
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  - Curious, 25 Aug 2006 @ 2:38pm
    
    Re: Re:
    Are you really saying we should think of "La Traviata" as a widget?
    
    I get what you're saying, and in many ways I agree, but the widget angle is a bit of hyperbole.
    
    Why bother giving patents then? Can't let those lazy inventors rest on their laurels, now can we?
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    - Mike (profile), 25 Aug 2006 @ 3:22pm
      
      Re: Re: Re:
      Are you really saying we should think of "La Traviata" as a widget?
      
      Yup. It's a product. It has certain value, but "widget" is common terminology for a product output. I don't see what the problem is.
      
      Why bother giving patents then? Can't let those lazy inventors rest on their laurels, now can we?
      
      Have you seen our posts on patents lately? The evidence agrees with you (even if you were being sarcastic). The patent system discourages innovation, and encourages hoarding. Innovation tends to grow faster without patents. So, yup. I agree.
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      - adamcee, 29 May 2008 @ 5:51pm
        
        Re: Re: Re: Re:
        Mike: Music, and art in general, is not a product. It may be treated similarly for economic purposes, but at heart it is an instance of individual creative expression, or however else one would define art. People can treat art as a product (and probably we all do inevitably), but that's not what it is.
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Anonymous Coward, 25 Aug 2006 @ 1:14pm

Re: Re:
sorry, maybe i didn't make it clear. music has two aspects to it, composition and performance. nine inch nails is great, but my appreciation for them greatly declined after i saw him live. he's an excellent composer, but not an excellent performer. only focusing on one aspect devalues the music. It would be equally disappointing to see a band put on a crazy live show but for the composition to be horrible.

it's not actually hard to do electronic pieces live, it's hard to replicate the cd version exactly, but anyone who has heard or seen aphex twin in a live performance knows that the exact same quality can be heard in that sort of setting. there's actually quite a few electronic performers that can pull off high quality live shows (given the acoustics of place don't completely suck ass).
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Anonymous Coward, 25 Aug 2006 @ 1:23pm

Re: Re:
oops, me again, one band that i'd like to point out for counter point against your nine inch nails reference is pink floyd. pink floyd would sometimes have 3 different guitar tracks for one song, and only 1 guitarist. they would use plenty of synthesized effects. they would also have backup vocalists and various instruments that were not played by band members. they were excellent composers, and damn, could they pull off an incredible live show. they'd just have 3 guitarists on stage, along with a slew of other musicians. not to mention they were fond of using the most expensive stage productions. was the excessive production of the show frivolous? absolutly not. it was beautifully choreographed to fit in with their albums which were beautifully crafted compositions all having similar, interrelated, underlying concepts. none of their "electronic" pieces (on the run) had any less of an impact live. they do such an amazing job that despite having been and still being able to download their music for free, i will always purchase their albums when one gets lost, ruined or stolen.
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Discounk, 25 Aug 2006 @ 1:27pm

I agree that the industry needs to change their way of thinking and the model they currently subscribe to. That does not mean that production of and distrubution of packaged content has to be changed, but instead should become a form a reward.

Instead of complaining, here is an idea:
1. Release a CD - within the CD provide a coupon that can be used as a discount to either purchase the bands paraphernalia or put towards live concert tickets. Both could be purchased form either the labels website or bands website.

2. After a given time period (say 6 mnths - 1 yr) open up free distribution of the music. Free legal distribution would ensure that it would be self-promoted.

Although "illegal" file sharing would occur from the time the CD is released, bought CD's would be still available for those who wanted it (and it would promote buying even more via the coupon).
It's a win-win-win....
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Rick, 25 Aug 2006 @ 1:42pm

"the trend over time will absolutely be for the price to get pushed towards zero"

Nobody expects the artists to not be paid or to give it all away for free. Supply and Demand dictates the price SHOULD come down though.

The RIAA cannot seem to accept this fact and that is where the issue resides. They are only fighting for their own existance now, not the artists. They (RIAA) are no longer needed or wanted.

People need to stop justifying an archaic busines model. It's the same crap that allows our telco monopolies to continue to exist. The same reasonign why sugar costs 10 times what it should (government subsidies) and why milk costs less than a gallon of gas.

America is about free markets, why are we straying away from this by legislating, regulating and suing our way to hold onto dead business models?
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Anonymous Coward, 25 Aug 2006 @ 1:50pm

Re: Re:
Excellent point Mike. Mozart produced an enormous body of work. Today people produce, what, 5, 10, 20 cds worth of music? You can download a nine inch nails discography that's 1.93 gigs. It even includes his contribution to the first Quake game. The Mozarts collect? 14.66 gigs, hell, nin's released, what, 20 cds... the Mozart symphonies, alone, comes on 14 cds. Anyways, up until the recording industry, musicians were expected to produce large quantities of work. It was, after all, what they did for a living. Nowadays, you have someone like Brittney Spears who makes what? 5 cds (if that) tops? and cries because she can't get the most expensive jet to fly her around the world? Or Metallica, they expect to continuously produce crappier and crappier music, without a very large catalogue of stuff, and to make millions while they have a vacation years to work years ratio of 5:1?
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Anonymous Coward, 25 Aug 2006 @ 4:13pm

Comparing Spears and Metallica as artists is a sad joke. Spears doesn't write her music, she doesn't even sing at most of her concerts. She's a performer. Period.

Guard wrote, "I wouldn't find the RIAA lawsuits so terrible if the money was actually going to the artists it was supposedly stolen from."

You're right, none of the money siezed from fans goes to artists. It goes directly back to the lawyers to fund more cases. Paying the RIAA only fuels the beast. The lawsuits will continue as long as they turn a profit. (Can you say mafia tactics?)

In the past I've bought hundreds of albums. I've not bought one since the RIAA began it's attack on fans. I've not visited Itunes..I don't need DRM. I'll go to concerts or pay musician directly, but there's no way in hell I'll ever fund the corrupt industry. It's great that change is slowly being embraced, but it's meaningless while fans are still being attacked by the industry.
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Erik, 25 Aug 2006 @ 6:46pm

Verdi
The Berne Convention was in 1886.

Verdi was 73 in 1886. He slowed down because he was old, not because of copyright laws.

He wrote more earlier because he was poor and needed to pay the bills. Some of those early works are terrible (you ever seen I due foscari?).

Later in his career he spent a lot of time rewriting many of those earlier works (Don Carlo, Macbeth, Simon Boccanegra, Trovatore, Stiffelio) into much more mature work. He spent a lot of time playing with a score for King Lear (never finished). He also spent much more time on a new work, and frankly it shows. Aida, Otello and Falstaff are some of his finest work.
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Howlin' Hobbit (profile), 23 Jan 2007 @ 12:48pm

widgets?
The problem with the "widget comparison" isn't comparing some classic aria with a widget, it's comparing the widget factory worker with the composer of the aria.

The factory worker didn't invent the widget, he just bolted tab a to slot b.

Even with all of that, copyright law has gone all to hell (thanks very much Mouse and Bono!). Getting it back down to a reasonable term would be a great start but I don't foresee that happening.

Meanwhile, as an indie musician, I just have to play around with the "new business models" until I find one (or more) that allow me to keep the wolves from my door.
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jerry, 8 Feb 2007 @ 12:24pm

good article
i hope i live to see the day when hard working musicians are truely compensated for what they deserve.
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- stu, 1 Jun 2007 @ 3:49pm
  
  Re: good article
  Interestingly, as cd sales plummet (even at live shows) venues are decreasing what they will pay artists (sometimes to zero), based on the argument that bands should be making thier revenue from cd sales, and that live shows are merely to promote cd sales. We are getting squezzed from both sides.
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Michael, 18 May 2008 @ 3:55am

Music 2.0
Hi Mike!
The article is already 2 years old but definitely still acutal...My and my students are writing a strategy paper on music market future at the moment and we are still not sure what the recommendations for every interest group in the channel will be. At the moment the a la carte download is online market leader but that is not the cash cow when still 95% do not want to pay.
I am not sure if there is one model which dominates in the future but flaterate streaming, a la carte, freemium model and ad model or musician sells himself will still be there in the next years...
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ngught, 25 Jun 2009 @ 6:16pm

IPODs and Music
I think the music industry is completely missing the boat by clinging to a business model that is doomed to fail. I will explain.

Imagine our teenagers who save money (babysitting, etc) and eventually have saved enough to buy a 250 USD Ipod are simply not going to spend 1 USD for every song, because they do not have that kind of money. Imagine filling an ipod with 10000 numbers for 1 USD each...you have your calculation right there.

Instead of taking that amount of money, they better could take something like 20 USD a month for a subscription. This would then boost their income and a wider range of people will be on their side when they are fighting the guys who make money out of the illegal sales.
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