The Future Of Music Business Models (And Those Who Are Already There)

Culture

from the a-thorough-look dept

I’m at the Midem conference this week, and in preparing for it, Steven Masur asked me to write up a chapter for a book he was putting together of thoughts from various thinkers for a gathering of the International Association of Entertainment Lawyers (IAEL) here at Midem. Below is what I submitted. If you’re a regular reader of the blog, there’s little that will surprise you, but even so, it may be a good read, as it’s got a whole bunch of different things I’ve discussed about — things like “CwF+RtB” all summarized in one single place. Later, I’ll do another post on what I discussed this year at Midem, since it builds on what’s written below, and digs in much deeper on how to create compelling reasons to buy.

It’s no secret that there’s a lot of concern these days about what the music industry will look like going forward — especially from those who work on the label side of the business and have been around for a bit. A variety of things have caused rapid change in the market. Competition from other forms of entertainment, such as the internet, movies and video games, have put more pressure on the industry, as consumers have been presented with significantly more options for their entertainment attention and dollars. And, of course, there’s the ever-present specter of unauthorized file sharing — or, as the industry prefers to call it (accurately or not), “piracy.”

While the industry spent many years fighting the rise of the internet as a distribution and promotion method for music, it was eventually forced to recognize it. The labels eventually licensed music to Apple and iTunes (as well as some other stores). It took them way too long to recognize that people wanted DRM-free music, but they’ve finally come around to recognize that as well.

But the big new questions are all about licensing. New services are starting to show up on the scene, such as the industry’s new darling, Spotify. Then there are attempts, such as those by Choruss and Warner Music, to set up something that is somewhat akin to a blanket license. For the most part, the industry hasn’t shown much willingness to do these sorts of deals in manners that allow the underlying companies to survive, let alone profit. Numerous innovative startups have suffocated under burdensome licensing terms — and as each one fails, it just gives consumers fewer and fewer reasons to actually use these services, wondering how long each will last until it goes out of business.

However, there is another solution: stop worrying and learn to embrace the business models that are already helping musicians make plenty of money and use file sharing to their advantage, even in the absence of licensing or copyright enforcement.

In simplest terms, the model can be defined as:

Connect with Fans (CwF) + Reason to Buy (RtB) = The Business Model

Sound simple? It is, if you understand the basics — and it can be incredibly lucrative. The problem, of course, is that very few seem to fully understand how this model works. However, let’s go through some examples.

Trent Reznor, the man behind the band Nine Inch Nails, has done so many experiments that show how this model works that it’s difficult to describe them all. He’s become a true leader in showing how this model works in a way that has earned him millions while making fans happy, rather than turning them into the enemy.

Reznor has always reached out to his fans, and has an amazingly comprehensive website, with forums, chat rooms and many other ways of interacting. He encourages fans to better connect with each other as well. While companies like Warner Music forced all the music videos of their artists off YouTube for many months, Reznor actually aggregates all the videos his fans take at concerts (he encourages them to bring cameras) on one page on his own website. He does the same for photos. He released a (free) iPhone app that allowed fans to locate each other, and communicate with each other, while sharing photos and videos as well. It’s all about connecting with those fans, and helping them better connect with each other, so they feel like a part of a club.

From there, he gives fans real reasons to buy. Lately, he’s taken to releasing everything he records for free online, knowing that the music will show up on file sharing sites anyway, so he sees no reason to fight it. Yet, he adds many other options that people might want to buy. With his release of the album Ghosts I-IV, he released all the tracks under a Creative Commons license that allowed anyone to share them online for free. Yet, he also set up some cool “reasons to buy.” You could get the two disc CD, if you wanted, for just $10. Above that, though, was a Deluxe Edition Package, for $75. It was, effectively, a box set, but around a single album. Beyond the two CDs, it also included a DVD and a Blu-ray and a photobook of images.

Where the experiment got even more interesting was that he offered up the $300 Ultra-Deluxe Limited Edition Package — of which there was a limit of just 2,500 available. This was an even more impressive “box” that also included the songs on high quality vinyl, and some beautiful giclée print images. But, most interesting of all was that that limited set of 2,500 were all signed by Reznor himself.

It took just 30 hours for all 2,500 to sell out, bringing in $750,000 in just over a day.

For music he was giving away for free.

But, by connecting with fans, and giving them a reason to buy, they did. In the first week alone, combining all the other offerings for Ghosts I-IV, Reznor brought in $1.6 million. Again, this is for music he was giving away for free.

The idea that you “can’t compete with free” or that free means there’s no business model is a myth. As Reznor and others have recognized, when the music goes free, it opens up new opportunities for better, stronger, more efficient business models.

Reznor’s next album, The Slip, was released just a few months later, and again, was given away entirely free, but it was released the very same day as he announced his next Nine Inch Nails tour. All he asked, if you wanted to download the music, was that you provide an email address. He then gave fans the option of what quality to download the songs — all the way up to lossless FLAC files. All for free. But, if you downloaded the files, you also learned about the tour, and the tickets were quickly snapped up.

The free music didn’t hurt Reznor’s ability to earn money. It enhanced it.

By connecting with fans and giving them a reason to buy, he’s been able to thrive.

Some have complained that Reznor is not a representative example. After all, that huge fanbase came about in large part because of his success under the “old” model, where he was signed to a major record label who helped promote his album and turn him into an international rock star. While some may quibble with how much the label actually helped Reznor, it’s worth exploring how this model has also worked for many other artists — from the superstars to new up-and-coming acts.

Josh Freese is a session drummer based in Los Angeles, who appears on well over 100 albums and performs with many different bands. He’s played with (among others), Nine Inch Nails, Guns ‘N Roses, Sting, Devo, The Vandals, the Offspring. Yet, outside of certain musical circles, he doesn’t have a huge individual reputation with fans. So, when he released his first solo album, called Since 1972, in March of 2009, he decided to set up a system similar to Reznor’s Ghosts I-IV experiment, but made it more fitting to his own personality — which meant making the options extreme and hilarious.

There were cheap options to get the music and CDs, but at $50, you would also get a personal 5 minute “thank you” phone call, where he said you could ask anything you wanted (his suggestion: “Which one of Sting’s mansions has the comfiest beds.”) There was a limited $250 option to get lunch with Freese at a PF Changs or a $500 chance to get dinner with him at Sizzler. The lunches sold out in about a week.

Then Freese took the model to a different level altogether. At $2,500 (limit of 5 available), he would provide a drum lesson, where you’d get to keep one of Freese’s snare drums. You’d also visit the Hollywood Wax Museum with Josh and one of a rotating list of his rockstar friends (depending on who was available). Finally, you’d get to take and keep any three items from Josh’s closet.

At $10,000, you’d get dinner with Josh and a rockstar friend, before hanging out at Disneyland (where Josh’s father worked for many years, and where Josh got his start as a professional drummer) with Josh. And at the end of the day, you would get to keep Josh’s Volvo station wagon — after dropping him off at home. Obviously, there was only one of those available.

There were also $20,000 and $75,000 options available, including many more offers, like having Josh join your band or be your personal assistant for a few weeks. You’d also get to go on tour with Josh. He would also write and record a five-song EP about you. A teenager in Florida actually purchased the $20,000 option, and spent a week with Josh, including a night on the Queen Mary cruise ship, a pizza party at Mark Mothersbaugh (of Devo)’s house and a game of mini-golf with the singer from Tool.

Once again, by connecting with his fans, and giving them something of scarce value, Freese was able to create a business model that worked.

Connecting with Fans (CwF) plus a Reason to Buy (RtB) worked again.

However, some still complain that he’s a product of the “old” industry, even if he was little known outside of it.

The next example is Jill Sobule, who had a hit song in 1995 with “I Kissed A Girl” (not the Katy Perry song). Since then, however, she’s been dropped from two record labels and had two independent labels she was signed to go out of business. When it came time to record her latest album, she decided to get her fans to help fund it. She’d already done an excellent job connecting with her fans, regularly interacting with them on Facebook, where she would hold fun contests each day and actually chat with them and respond to questions.

She launched a website called “Jill’s Next Record” that — like Reznor and Freese — offered up many options for how her fans could support her to fund a new album. They could pay $200 and get free access to any shows for a year. They could get their name mentioned on a “thank you” song. At $5,000, she would do a home concert at your house. She even noted you could charge for that one, and maybe even make some money. She ended up doing five or six such concerts. At $10,000 (described as the “weapons grade plutonium” level) you could sing on the album. This was meant to be a joke, but a woman in the UK purchased it, and Jill had her flown out to LA where she did, in fact, appear singing backing vocals on the album.

Her goal was to raise $75,000, and she had no idea if she’d be able to reach that number at all. Yet, she broke through that number and ended up raising over $80,000 in just 53 days. With that, she was able to go into the studio and record a full scale production, including hiring famed producer Don Was to handle production.

CwF+RtB worked again.

Again, some complain that Jill is not representative, due to her hit song in 1995 — though, again, they’ll ignore her being dropped from two record labels and and having two others go out of business.

So, let’s look at Corey Smith. In the earlier part of this decade, Smith was a high school teacher, playing open mic nights on weekends. But then, he started focusing on building his music career. He started playing numerous live shows, and really worked hard to connect with fans. He gave away all of his music for free off of his website, and used that to drive more fans to his shows. On top of that, he offered special $5 pre-sale tickets to many shows, which has a useful side effect: his biggest fans would convince many others to go as well, building up his fan base, and getting more people to go to more shows. He tried pulling his free music off of his website as an experiment, and saw that his sales on iTunes actually dropped when he did that. In 2008, mostly thanks to live shows, Corey was able to gross nearly $4 million. While giving his music away for free. Connecting with fans and giving them a reason to buy worked wonders.

Jonathon Coulton was a computer programmer. In September of 2006, he decided to write, record and release a new song every week for a year — with all of the songs being released under a Creative Commons license, so anyone could share them. And share them they did. Coulton became a cult sensation, and was making a good living within months of this decision. His fans were supporting him along the way, even creating music videos for every song he released. He started using services like Eventful to more strategically target concert opportunities. If enough people requested a show in a certain location, he knew it would be profitable and started “parachuting” in to do shows that he knew would make him money. Again, by connecting with fans and giving them a real reason to buy, he was able to build up a great following and make a good living.

Moto Boy is a singer/songwriter in Sweden on the wonderfully named label “Songs I Wish I Had Written.” Moto Boy and his label purposely put all of his songs on file sharing networks — including The Pirate Bay (the label’s founder, at times, has shared an office with one of The Pirate Bay’s founders). But, Moto Boy has worked quite hard to connect with fans. He has a great website, where fans can interact, and he encourages sharing his music in creative ways. When a bunch of his fans started filming his concerts and putting them on video hosting sites like YouTube and Vimeo, his label found the best such vidoes, and put them all together into a “YouTube concert.” Compare that to record labels like Warner Music forcing their content off of YouTube. While all of Moto Boy’s music is free, he’s continued to connect with fans in fascinating ways. Last year, he began selling wind-up music boxes, that play one of his songs. Just recently, he launched a limited edition (only 25) of those music boxes in beautiful, hand-crafted wooden boxes, signed by Moto Boy, with a CD and the music notation inside the box. Connecting with the fans and giving them a reason to buy beyond just the music has turned Moto Boy into a star in Sweden.

Amanda Palmer is a singer who made a name for herself as a member of the “punk cabaret duo” The Dresden Dolls. While she put out a solo album on Roadrunner Records (a subsidiary of Warner Music), she found that they had little interest in promoting her, and took things into her own hands. She reached out directly to fans on services like Twitter, often setting up “flash gigs” where people would show up wherever she wanted to perform. In June of 2008, one such flash gig at a beach in Los Angeles ended up with an impromptu, beautiful, music video for a song that Palmer had just learned that morning, due to a suggestion from a fan on Twitter. And she’s doing a good job making money, as well. Bored in her apartment one evening, she started twittering with fans and came up with a jokey t-shirt suggestion, and set up an immediate store, selling $11,000 worth of t-shirts in days. Another night, she started a live video stream from her apartment, and started an impromptu online auction for various items in her apartment associated with a recent tour, often with a personalized twist. In three hours, she brought in $6,000. Connecting with fans and offering them something fun and unique to buy worked wonders. To date, she hasn’t received a single royalty check from Warner Music on her album.

Matthew Ebel is a singer in Boston who started building a fanbase by playing live and actively participating in social networks and other sites. He started regularly performing in Second Life, for example. At one point, he decided to set up a “subscription” backstage pass offer, whereby fans could pay $5, $10 or $15/month to get various benefits — including access to new songs every couple of weeks, as well as having new recorded shows sent to them. Depending on the level of support, they could get access to special shows, gift bags or other opportunities for unique offers not available to others. Ebel has discovered that he’s making enough so that music is his full-time job. Subscription revenues represent nearly 40% of his income, which is about equal to live gigs and sales of CDs and digital songs combined. Connecting with fans and giving them a real reason to buy has made it so that he can have career as a musician.

Moldover is an electronic musician based in San Francisco. Being in such a high tech hub, he had an interesting idea for his next album. Along with the music itself, the CD case would be a working circuit board, with all the songs spelled out in soldered electric circuits. These connected various components to make the CD case itself an instrument. Pushing a button on the side of the case, would light up the center and make a noise, which could be modified through a pair of light sensors, creating a virtual theremin. The case even had a line out jack, so it could be plugged into a computer or an audio system. The CDs themselves were sold for $50, and Moldover discovered the demand was far stronger than he expected. Yes, even though we’re told that no one will pay for music (without strict copy protection), this less well known artist is doing brisk business selling $50 CDs.

Of course, these are just musicians, but these sorts of models impact the wider ecosystem. Companies like TopSpin, Nimbit and Kickstarter are making this work today (for artists big and small). TopSpin has helped enable musicians to better connect with fans and give them a reason to buy over and over again — and found that, when it’s done right, people absolutely buy. One of TopSpin’s artists recently had an average transaction price of over $100, and multiple artists have seen their average transaction price at over $50. The claim that fans just want stuff for free is not borne out by these examples. Across all of TopSpin’s artists, they’ve seen an average transaction price well over $20 — more than the cost of your average CD. By enabling bands to connect with fans while giving them something of unique value to buy, beyond just the music, these bands are thriving.

And, of course, there’s a role for labels to play as well. Terry McBride runs Nettwerk, a Canadian-based label that has tremendous success embracing these sorts of models with a bunch of different artists. McBride has declared that copyright won’t even matter within a decade, and he’s acting accordingly. But he’s making sure that his acts really do connect with fans. With a recent album release by the hip hop artist K-OS, before the album was released, they released all the stems from the songs to let the fans do their own mixes. These weren’t “remixes” because the original mixes weren’t even out! Rather than worrying about an album leaking, K-OS and Nettwerk purposely got the core of the music out themselves and let fans do what they wanted with it. They then set up a system to submit the fan mixes and to vote on them, such that the best mixes were then put on their own album, and both the “professional” and the “fan mixed” albums were released at the same time — leading many fans to buy them both. Both albums, separately, but at the same time, ended up in the top 50 on the charts.

As you look through all of these, some patterns emerge. They’re not about getting a fee on every transaction or every listen or every stream. They’re not about licensing. They’re not about DRM or lawsuits or copyright. They’re about better connecting with the fans and then offering them a real, scarce, unique reason to buy — such that in the end, everyone is happy. Fans get what they want at a price they want, and the musicians and labels make money as well. It’s about recognizing that the music itself can enhance the value of everything else, whether it’s shows, access or merchandise, and that letting fans share music can help increase the market and create more fans willing to buy compelling offerings. It’s about recognizing that even when the music is shared freely, there are business models that work wonders, without copyright or licensing issues even coming into play.

Adding in new licensing schemes only serves to distort this kind of market. Fans and artists are connecting directly and doing so in a way that works and makes money. Putting in place middlemen only takes a cut away from the musicians and serves to make the markets less efficient. They need to deal with overhead and bureaucracy. They need to deal with collections and allocation. They make it less likely for fans to support bands directly, because the money is going elsewhere. Even when licensing fees are officially paid further up the line, those costs are passed on to the end users, and the money might not actually go to supporting the music they really like.

Instead, let’s let the magic of the market continue to work. New technologies are making it easier than ever for musicians to create, distribute and promote music — and also to make money doing so. In the past, the music business was a “lottery,” where only a very small number made any money at all. With these models, more musicians than ever before are making money today, and they’re not doing it by worrying about copyright or licensing. They’re embracing what the tools allow. A recent study from Harvard showed how much more music is being produced today than at any time in history, and the overall music ecosystem — the amount of money paid in support of music — is at an all time high, even if less and less of it is going to the purchase of plastic discs.

This is a business model that’s working now and it will work better and better in the future as more people understand the mechanisms and improve on them. Worrying about new copyright laws or new licensing schemes or new DRM or new lawsuits or new ways to shut down file sharing is counterproductive, unnecessary and dangerous. Focusing on what’s working and encouraging more of that is the way to go. It’s a model that works for musicians, works for enablers and works for fans. It is the future and we should be thrilled with what it’s producing.

Filed Under: amanda palmer, business models, connect with fans, corey smith, culture, cwf, jill sobule, josh freese, matthew ebel, moldover, moto boy, music, reason to buy, rtb, techdirt feature, trent reznor
Companies: nettwerk, topspin