Digital Audio Insider -- the economics of music and other digital content

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Digital Audio Insider is David Harrell's blog about the economics of music and other digital content. I write from the perspective of a musican who has self-released four albums with the indie rock band the Layaways.

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December 19, 2008

The New Music Equation, Part 2
by David Harrell
Back in February, I posted "The New Music Equation," which reduced the "voluntary payment/purchase" music business model to the following equation:
(A x B x C) - E = D


A = the total # of people who acquire the work

B = the percent who actually pay for it

C = the average amount each person pays

E = total expenses (recording, marketing, promotion, etc.)


D = the total revenue received
What this equation ignores, however, is the growing number of ways for musicians to receive compensation for "free" music. Not directly from the listener, but from a third party.

So far, it's mostly compensation for ad-supported on demand streams, such as those offered by the free streams of paid subscription services such as Napster and Rhapsody. also pays musicians for the free streams it offers. I'm ignoring, for now, the revamped Myspace music player, as there's not yet a way for independent/unsigned musicians to participate. There are also some models like RCRD LBL that compensate musicians for actual downloads. And TuneCore recently announced a program for corporate-sponsored downloads.'s new artist royalty program, for example, pays artists/labels for on demand streams of individual tracks. While there's some flexibility to the payout rate, for the third quarter of 2008, the per-track rate was 0.5 cents per on demand listen. The per-song payout from is a similar amount. Using the standard payouts from iTunes, Amazon MP3, and eMusic (a varying amount), it's easy to calculate the number of free streams needed to equal the artist compensation for a paid download:

140 listens = 1 iTunes or Amazon MP3 download

68 listens = 1 eMusic download

However, it's important to note that it's not an either/or proposition. Free on demand listeners are also potential purchasers of the music. But even if they never buy anything, they're still adding something to the bottom line.

Incorporating this "compensated free" component within the new music equation gives us:
(A x B x C) + (A x F x G) - E = D


F = percent of listeners/acquirers who listen to/obtain music from an compensating source


G = the average amount received for each listen/download
It seems like the key for an artist/label is to -- as much as possible -- nudge listeners toward free music where there is an artist compensation component, even if it's only a fraction of a cent per listen or download.

The question is, how far do you go in steering listeners to such sources? The basic math is in favor of only offering free music via a compensating source. However, my guess is that restricting listeners to such sources would probably reduce the first component of the equation, the total number of listeners/acquirers. Some potential listeners will no doubt balk at the idea of going to,, or a corporate sponsor's site to stream or download music.

Obviously, there isn't a single optimal strategy for every artist and label -- what works best will vary according to the size and demographics of the audience for each specific act (not to mention the actual artistic merit of the work itself). Yet if you're willing to go "free," maximizing the total number of listeners remains paramount, and I'd be reluctant to do anything to reduce that number.


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