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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May 19, 2011

A Flat Fee or Commissions for Digital Music Distribution is an Economic Decision, Not a Moral Dilemma: TuneCore vs. CD Baby
by David Harrell
I've been meaning to post a detailed CD Baby vs. TuneCore comparison for several years now and thought that last week's changes at TuneCore (a bunch of new features, accompanied by a hefty price increase for the annual maintenance fee) would motivate me to start writing. But what finally got me going was TuneCore C.E.O. Jeff Price's comments about the ethics of charging commissions. His desire to defend his company and its business model is understandable, but I don't think we need to frame the flat fee vs. commissions question as a moral argument.

Overlapping, Not Identical
As a self-released musician, I've used both CD Baby and TuneCore for distributing my music and -- for the most part -- I'm very satisfied with both services. I realized long ago that the best way to make money in the music industry is to sell stuff to aspiring musicians, many of whom will spend every cent they make from gigs, music sales, and their day jobs to support their dreams of a music career. In a world of scammers and rip-offs, both CD Baby and TuneCore provide a valuable service -- instant worldwide distribution for virtually any musician, something that was unthinkable 15 years ago. Both do so for reasonable fees and both firms have good reputations.

A direct comparison of the two companies is difficult, as their distribution services overlap somewhat, but they're certainly not identical. CD Baby began as online seller of physical CDs and later expanded to digital distribution, TuneCore was a digital distributor from the get-go. With TuneCore's recent enhancements, it currently provides more features on the digital end, while CD Baby will sell your CD through its online store and, via a deal with Super D distribution, allows people to order your CD from almost any record store.

The business models differ as well: CD Baby charges a one-time set-up fee and a 9% commission on digital sales, TuneCore doesn't charge commissions on digital sales but you'll pay an annual maintenance fee in addition to the initial set-up charge. Please note: I'm limiting this post to a discussion of CD Baby and TuneCore, the two services I've actually used. There are other alternatives, of course, but that's for a later post!

Running the Numbers
With the caveat that the services aren't identical, let's assume that digital distribution itself is basically a commodity service. That is, once your music is available within the catalogs of iTunes, Amazon MP3, eMusic, and other digital retailers and subscription services, there's no real difference between the distribution providers. If you don't need/want the extra bells and whistles that TuneCore provides, nor CD Baby's distribution of physical CDs, it simply comes down to how much you end up paying for digital distribution. (That's assuming, of course, that you trust the distributor to make timely, accurate royalty payments and to stay in business. I have no worries with either CD Baby or TuneCore.)

For the first year, no math is necessary -- because the initial set-up charges are virtually identical, you'll come out ahead with TuneCore. While CD Baby's album set-up fee is just $39, that amount doesn't include a UPC bar code. CD Baby charges $20 for a bar code, but you can easily purchase one on your own for $10, giving you a total cost of $49, which basically matches the $49.99 initial fee with TuneCore. No matter what your total digital sales are for the first year of a release, you'll pocket more with TuneCore, as you'll pay no commission on those sales.

After the first year, you have to determine if 9% of your ongoing annual royalties from the digital sales of an individual album will exceed TuneCore's annual maintenance fee. (Keep in mind that the iTunes payout for a 99-cent download is 70 cents.) Before TuneCore's price change, the crossover point was $222 in digital royalties, which represents approximately $317 in total digital sales. That's about 320 99-cent individual song downloads, 32 $9.99 digital albums sales, or some combination of the two.

With TuneCore's new annual maintenance fee of $49.99, the crossover point jumps to $555.44 of digital royalties, or approximately $794 in total digital sales for the album. That translates into 802 99-cent downloads or 80 digital albums. If you don't sell that much for an individual release, you're better off paying the 9% CD Baby commission. In fairness to TuneCore, you can turn the math around to calculate how much extra you might end up paying with a commission model. For example, if you manage to sell 5,000 99-cent downloads each year, you'll generate $3,500 in digital royalties and pay $315 in commissions to CD Baby, more than six times the annual TuneCore maintenance fee. (TuneCore also claims that some of its clients were already spending $65 to $70 per release each after paying for additional services such as tracking reports, and that the new all-inclusive fee will actually represent a price decrease for these clients.)

But the real question here is which outcome is more likely for most self-released musicians -- a few hundred dollars in digital sales per album each year or a few thousand? You could make the argument that a serious musician with any sort of talent could/should move enough units to exceed the crossover points above. And in the wake of last week's news about the pricing changes at TuneCore, there were plenty of Twitter and message board posts along the lines of "if you can't sell $50 of downloads then you shouldn't be releasing music." Yet the sales threshold isn't $50 in music sales a year -- it's selling enough digital downloads, each and every year (in a world where CD sales still dominate), to justify an ongoing annual maintenance fee instead of a small commission on each sale.

I hate to say it, but for the vast majority of self-released musicians, that seems unlikely. In a post from three years ago, I highlighted the example of an indie rock band that released a strong album, one that got a great response from both college radio and the music press, including:
Pitchfork love -- an 8.0 out of 10

Strong support and airplay from KEXP -- one of the biggest/best known CMJ-reporting stations

Listed in "Top 10 Bands You Haven't Heard of" for the year by Rolling Stone magazine

Magnet Magazine's #3 record of the year
And this wasn't a self-released/financed album -- it was backed by the promotional muscle (new media, retail, and radio) and tour support of a well-known indie label with solid distribution. Yet it sold just a little over 5,000 total units. That album was released in 2004 and I doubt it has sold enough digital copies in the subsequent years to make the TuneCore model more attractive than the commission approach.

That's just one cherry-picked example, however, and you could just as easily point to dozens of TuneCore-distributed artists who would've paid significantly more for digital distribution under a commission-based model. Indeed, for the bigger-name acts featured on TuneCore's homepage -- acts like Cheap Trick, Joan Jett, Public Enemy, and Moby -- the decision to go with TuneCore was likely a no-brainer.

But new acts or those without established fan bases can't be sure they're going to sell. Here's what the founder of one well-respected indie label, spinART records, recently said about music sales:
I believed in every single of the 230+ releases and artists I signed and released. I did not think for a second that any of them would not sell. But the reality is, most did not take off, my label had the same hit to miss ratio as all other indie labels. Yes, we released successes like The Pixies, Apples In Stereo, The Dears and Clem Snide, but we also released The Technical Jed, Apollo Sunshine, Kaito, Head Of Femur and many others that, sadly, despite all of our marketing efforts, very few people bought.
The label owner? TuneCore founder Jeff Price!

While you never know what's going to happen with any individual release, it appears that the typical self-released artist doesn't fare well under the TuneCore model. As recently calculated by Digital Music News, the average TuneCore client earns just $179 in digital royalties each year, and that's on a per-client basis, not $179 for each album. Any artist/small label earning this amount is obviously better off with the commission model, even before TuneCore's price increase.

However, if you get lucky and have a "hit" with a self-released album, you'll pay far more in commissions to CD Baby than you would with TuneCore's set annual fee. The worst-case scenario with the TuneCore model is that you'll pay more in annual fees than with a commission model, but you're only out fifty bucks a year at most. But if you sell tens of thousands of digital downloads with CD Baby, it will cost you thousands of dollars in commissions. Yet it's a risk that you can easily hedge against.

The Best of Both Worlds
CD Baby or TuneCore isn't necessarily an either/or question -- you can use both services together to maximize your income from digital sales in the first year and eliminate ongoing maintenance fees. If I were releasing a new album both on CD and as a digital download, touring to support it, and conducting a college radio campaign, I'd probably use TuneCore for digital distribution (at least for the first year) and CD Baby for online CD sales and inclusion in the Super D distribution catalog. After the first year or two, if the total digital sales of the album were below the crossover thresholds listed above, I'd ask TuneCore to pull the album from the digital stores and initiate digital distribution with CD Baby. (Because the album would already be in the CD Baby system, you wouldn't have to pay the $39 fee again.)

The downside to this approach is that you'd have a period of at least several weeks when the album wouldn't be available in digital stores, and you'd likely lose any customer ratings and reviews in each store. For that reason, I think RouteNote is an intriguing alternative -- it's a digital distributor that gives you the choice of a $30 annual maintenance fee or "free" distribution with a 15% commission on sales, and allows you to switch between the two pricing structures, based on your subsequent sales. I'd love to see CD Baby and TuneCore offer that kind of flexibility.

For now, I'm taking a wait-and-see approach with my TuneCore distributed album. Its annual sales don't justify paying a $49.99 maintenance fee, but TuneCore has announced a new "YouTube deal." No details are available yet, but I'm guessing that it involves inclusion of TuneCore-distribution material in YouTube's AudioSwap program, which allows YouTube users to add pre-cleared music to their videos, with a small royalty paid to the artist for each play. If so, that income stream might be enough for me to keep the album with TuneCore. If not, I'll make the switch to CD Baby.


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