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February 21, 2008
The New Music Equation: Radiohead, Trent Reznor, Etc.by David Harrell
It seems that the business model of giving music away and relying on voluntary payments boils down to the following equation:
A x B x C = DIn theory, the beauty of the equation is that -- if all else remains the same -- any increase in A, B, or C, however small, results in more D. Also, because multiplication is commutative, the same percentage improvement in any of the components results in the same overall increase. That is, no matter what the original numbers are, a 10% increase in A, B, or C is equally effective and always results in the exact same increase in D.
where
A = the total # of people who acquire the work
B = the percent who actually pay for it
C = the average amount each person pays
and
D = the total revenue received
In practice, however, A, B, and C aren't likely to be completely independent factors. That is, if you manage to increase A (total acquirers), you'll likely see a decrease in B, as more of those people will be casual/curious listeners who are unlikely to pay. That's not necessarily a negative to the bottom line, as what really matters here is the product of A and B, or the total number of paying listeners.
Yet B is also affected by the pricing options that average out to the C figure. Do you offer a set price those who are willing to pay (as did Trent Reznor with the Saul Williams release) or go the Radiohead approach, and allow any payment amount? The latter approach might result in a larger B amount (zero to $5 is a relatively big jump, maybe more people would pay if they had an option for $2.50), though you likely end up with a smaller dollar figure for C.
As Chris Anderson at the Long Tail and others have noted, Reznor seems to have REALLY focused on B, perhaps to the point of overlooking that the Saul Williams album did relatively well in terms of D.
However, the equation above also ignores E, promotional and marketing expenses (not to mention recording, mixing, and mastering costs). Adding that to the equation gives us:
(A x B x C) - E = DObviously, spending money on promotion and marketing can increase A, but it also creates the distinct possibility that D ends up being a negative amount. Which is what attorney/industry insider Chris Castle points out in this CNET story by Greg Sandoval (via this Coolfer post):
"Trent thinks that (150,000 downloads) is bad?" Castle asked. "I'll tell you bad. Bad is zero. Bad is when you spend $100,000 on marketing and tour support and you got nothing. Do you know how hard it is to go from a cold start and just get 1,000 people to listen to an album?"Which takes me back to something that I've written about before: Musicians aren't just competing for the dollars of music fans, they're also vying for their time and attention, a commodity that is -- ultimately -- perhaps more limited than dollars. And that competition becomes a little fiercer every single day, with every new piece of music that is released and as every piece of older, previously-released music becomes available as digital downloads (legitimately or via peer-to-peer systems). Simply making your music available for any listener-determined amount won't necessarily attract enough listeners to result in profitable formula.
Right now, when practiced by high-profile acts, the model garners a fair amount of attention. But what happens if it becomes the rule, rather than the exception? At that point, the E part of the equation -- promotional spending -- might very well be the most important component. Hence, do we end up with a "new" music business model that still looks a lot like the old one, where musicians need access to outside capital to succeed at the highest levels?
Greg Sandoval thinks so:
Musicians are not the new labels. Artists need someone to provide financial support and business acumen. If we end up ridding the world of labels, we'll only have to re-create them--in some other, probably more nimble form.I wouldn't go quite that far -- artists who are already successful could certainly go it alone and do well for themselves. But again, as the novelty of the "pay want you want" model wears off, most musicians won't be able to compete on the merits of their art alone. They'll likely need cash for promotion -- their own or someone else's...
related: A Little Is Enough (a guest post I wrote for Shake Your Fist)
tags: digital music free music
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The Digital Pricing Conundrum series:
Part One Part Two Part Three Part Four
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It's written as a how-to guide for those looking to become music supervisors, but I found it to be a good resource for musicians (like me) who are trying to get their music used in movies, TV, etc.