John Paczkowski, who writes the always excellent Good Morning Silicon Valley came up with a great idea earlier in the week. He started the "Great Recording Industry Business Model Contest" where he asks readers to try to help the recording industry out a bit, since they can't seem to innovate their way out of the hole they've been digging. So, in exchange for suggesting business models that actually embrace file sharing, you could save the recording industry and potentially win a SiliconValley.com t-shirt. I'm always up for any contest that might lead me to winning a t-shirt, and I've been working on a longer piece detailing business models that embrace "free", so I figured I'd write up something quickly. It's the third entry in the bunch, and you can read it at the bottom of today's GMSV issue (or, simply click on the "comments" or "read more" link below, since I've reproduced it here). Now, a couple things, while it's based on something I'm working on in more detail, I really did just scribble this out in a few minutes and send it off to John. Also, I know someone is going to respond with "but, but, but, this model is worse for the recording industry than what they have now, so they'll never embrace it." So, here's the answer to that before we even get to it: that's the wrong comparison. The comparison is not to the system we have today, but to where the system is heading. As it stands, CD sales are rapidly decreasing and file sharing is increasing. No matter what is happening with the various lawsuits, the trend is clear. So would you rather go down with the ship, or pick up a rising business model on the upswing? It's a classic disruptive technology curve, and those that don't embrace new models will discover that their old models simply don't exist any more, no matter how much they like them. Those that do embrace the new models and do a good job building a business around them will find (just like so many cases of disruptive technologies before them) that the new market turns out to be much bigger than the old one.

Hi John,

I'll throw my hat in the ring with a "free music file" business model. Admittedly, this model can work somewhat with your own idea, but I think it's a combination like this that will eventually catch on.

I'm actually working on a longer article that details all this, but a quick summary of a potential business model. The fact is, when you're dealing with digital goods, you can't sell the music as a "good" -- they're not goods in any sense. So, you have to sell services or other tangible goods. And, if you're selling a service, you never sell past work, you're always selling future work. So ... with that in mind:

* Bands start out the old fashioned way, playing local shows. Building up an audience. They record a few songs (cheaply, thanks to inexpensive digital recording equipment) and use that to get some attention beyond local venues. They're encouraged to offer the songs as free MP3s and even *want* people to put them on file sharing networks because it gets them attention. They begin to realize that the music file is simply a promotional item for the fact that they make good music. Buzz on file sharing networks is important.

* If they get that wider recognition, they start touring more broadly, playing larger venues. They take the door money, and they sell some merch. Some people will still want CDs, especially if they can be offered cheaply ($5?) and include additional things such as liner notes and lyrics. Notice that Steps 1 and 2 are still the same as they are now (other than if you're completely manufactured by the recording industry).

* Now is when things get more interesting. You start to offer a "service." You might call it a fan club, but that has connotations. Let's call it a "subscription" to the band. When the band is still young and small, the subscription should remain pretty cheap and flexible. Say, you let people pay $10/year (less than the cost of a current CD), and they get benefits: direct contact with band members, early access to recordings, ability to request songs at shows. Give the fans their own special RSS news feed so they can be alerted every time the band has a new song for them to hear. Members also get discounts on tangible goods. T-shirts for 25% off. Actual CDs (with bonus features -- movies, games, who knows what) for less than anyone else can buy them. Easy access to recorded concerts right after each show that they can download also would be great.

* The band grows even more, and expands the fan club. They're playing larger venues, so they reserve the best seats for their members. Members get backstage passes. Maybe even the chance to win a concert in your backyard or something like that. The fan club membership prices rise (though not to ridiculous levels) as the band gets larger. Preferably those fans who joined early get grandfathered in at lower prices (incentive to support young bands).

The bands are now making money from (a) concerts (b) fans who are "subscribed" to their service and (c) still from selling tangible merchandise. Fans get to directly support the bands they like. The actual music can be enjoyed by a wider audience. Digital music files are seen as promotions, and thus a band is more likely to get a wider audience, meaning more people joining their fan club. No, not everyone will join, but so what? Not everyone buys CDs now.

If my choice is to buy 12 $18 CDs a year (one a month, say) or support 20 or so bands at $10/year getting all those extra goodies, guess which one sounds more appealing to me? I'm still spending about the same amount, but I'm getting much much, much more, as are the musicians, themselves.

Now, again, this cuts out some of the industry -- but it doesn't have to entirely. Promotions are still needed. A savvy promotional campaign (understanding the nature of using free MP3s as a promotional tool) would still help. Concert promotions are still important. Setting up tours. Setting up higher quality recordings. All of that. What's no longer needed is quite the same amount of CD distribution. Contracts would, of course, need to be restructured, since the industry now gets all their money from CD sales and bands end up with most of the touring money.

Mike Masnick
Techdirt