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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July 31, 2009

Set Them Free -- Some Thoughts On Free: The Future of a Radical Price
by David Harrell
You can't write something titled Free: The Future of a Radical Price and not give it away, at least in some form. The new book from Wired's Chris Anderson -- author of The Long Tail -- is available, in various formats, free of charge. You can read a free Google books version for another week or so and there are also free ebook and audio book versions. (In keeping with the idea that "time is money," you actually have to pay for the abridged version of the audio book, which will save you three hours of listening time!)

I opted for the unabridged version -- here's my take: Despite the "radical" portion of its title, most of the book isn't that radical. Anderson provides the history, with many examples, of businesses that have thrived with free content, ranging from the free Jello cookbooks used to sell the actual product to the birth of ad-supported radio to today's free online services -- Google, etc.

Anderson's case for free digital goods boils down to this: Once you move from atoms (physical goods) to bits (digital files), the marginal cost of each copy approaches zero. In this situation, whether or not the manufacturer or producer of the product likes it, the option for free is unavoidable and you're simply fighting gravity if you try to stop it. Moreover, today's digital savvy consumers (particularly those under 30) have an instinctive understanding of this idea of zero marginal cost, they simply don't regard file sharing or digital copies as theft. Rather than resisting it, content producers should embrace free, and make their money on other goods and services, some of which will be promoted by free goods. In the case of Free the book, for example, while there's no charge to read the digital version or listen to the audio book, you'll pay big bucks to hire Anderson to come speak to your organization or business. The "freemium" model, where a small percentage of consumers pay for an enhanced version of the free version, such as when online gamers who play the free version are subsidized by a small percentage who pay for the premium version, also gets a lot of attention.

As with the Long Tail, which also started as a Wired article, the original magazine article might have been enough -- the basic premise is easily explained, the book format essentially allows for more background and examples in support of Anderson's initial idea. Still, it's an interesting read/listen, with lots of background on economics and consumer psychology, even if you're not completely sold on the idea. (The main criticism in Malcolm Gladwell's review of the book is that Anderson glosses over the fact that even if per-unit marginal costs approach zero, they can still add up if you're dealing with millions of units. His example is the hundreds millions that Google spends on bandwidth fees for YouTube videos. Plus there are other costs associated with the creation of products beyond the pre-unit manufacturing costs.)

Anderson also addresses -- and better articulates -- some of the same issues that I've been grappling with in this blog for the past several years, such as the attention economy and the fact that content isn't scarce any more, but time the available to consume it is becoming more precious every day. Sometimes, however, in his enthusiasm for free, Anderson gets a bit carried away, as when he includes restaurants which offer free condiments and malls with free parking as examples of business models that are "built on free."

As for Anderson's take on free music, I would've loved some additional analysis. In his defense, the book isn't called Free: How The Music Industry Can Thrive By Giving It Away, but I thought his treatment of recorded music in the age of free was a little breezy. He provides the usual anecdotal examples -- Radiohead deciding to "give away" its In Rainbows album (not technically true, as it was a name-your-own-price experiment), Prince giving away a CD in a Sunday newspaper, etc. -- to paint an optimistic picture of how musicians can harness the power of free music while making money from live shows, premium versions of the recorded music, and merchandise. While RCRD LBL and Pandora receive brief mentions, he didn't address Spotify,, or other ad-supported ways for music fans to stream or download tracks.

I'm not anti free music (my band the Layaways is giving away the mp3 version of our latest album), but there are some major issues relating to free music that I wish Anderson had addressed:

1. The attention economy: As Anderson notes in the book's coda section, "The first to Free gets attention, and there are always ways to turn that into money." The Radiohead experiment worked in part because Radiohead was the first superstar act to try it. But what happens if/when dozens of major acts do the same?

2. Another major theme of the book is abundance vs. scarcity -- when something becomes abundant, an adjacent scarcity emerges, and that's where there's money to be made. (If the software is free, for example, charge for supporting that software.), Anderson's main thought on music is that the promotional value of free music files can help acts earn a living from live performances.

Yet there are only so many live shows most fans can attend each year. If recorded music is destined to be free, then musicians are left to compete for something that is ultimate more scarce than the dollars of music fans, the amount of time they can devote to seeing live music. Granted, consumers are willing to pay much more for a concert ticket than a CD, so you don't need to sell as many tickets as you do CDs or digital albums to make the same amount of money.

One other thought here is that, due to online distribution, it's possible for a small act to literally have listeners around the world. Yet there's no practical way for that act to perform for all of those listeners and make money from ticket sales.

3. Touring income dries up as soon as the artist is unable or unwilling to tour. As Anderson notes with his example of manufactured Chinese pop stars who make all their money from touring and corporate-sponsored appearances, the singers complain about losing their voices from all the live performances. Also, if recorded music becomes free, there's no possibility of the retired musicians (or their heirs) earning money from their back catalogs.

4. Finally, and this a much larger issue, but it's important to distinguish between the overall music industry and musicians when evaluating the merits of free music. I'm not bashing the major labels, but I think it's fair to say that the traditional "recoupable advance and recording and promotional costs" model has -- historically -- done a poor job of transferring money from consumers who purchase recorded music to those who create the music. A relatively small number of artists earn big bucks in recording royalties, while many musicians who sell tens or hundreds of thousands of units never recoup and hence never see royalty checks. (In fairness to the labels, they lose money on most of their releases...)

If the old major-label is the only model, free music becomes much more attractive for artists, as many of them earn relatively little from the sales of recorded music. But in today's world of online distribution, it's possible for self-released artists to receive a large portion of the purchase price of every unit of music sold -- 70 cents from a 99-cent iTunes download, for example. Even though the sales of recorded music are plummeting, it's possible to earn more money on fewer sales.

These shortcomings aside, the book is definitely worth a read or listen. And -- please forgive the pun -- you can't beat the price.


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