Music Business

Radiohead and Nine Inch Nails have decided to go solo and generate monies directly from their fans, taking their label out of the equation. Does their record label have the right to be compensated for any significant future financial revenues generated by their artist, resulting from the label's past contributions in the artist's development? Does their record label have any rights to share the wealth or do they need to adopt a more entrepreneurial approach to conducting business given the current demise of the record industry?

Have Radiohead and Nine Inch Nails paved the way to a music revolution with their donation-based business model? Is this the end of the record business as we know it? Perhaps this is true for major label artists as the Radiohead and Nine Inch Nail donation experiment has highlighted. Why include a middle man - the major label - when you can pocket all the profits yourself today at minimal costs? This is a no-brainer for major artists who have a loyal, mass fan base that is evangelical in spreading and sharing their music. However the story is different for upcoming, new artists. They need to be innovative and possess the musical talent that will urge music lovers to take notice to an extent that they believe that it is their duty to alert their friends about the new music they discovered - a wave of viral distribution aided by a network of social music communities who enjoy sharing and recommending music to others with similar musical tastes.

I have been observing the demise of the music industry since the old Napster and other P2P networks came around. The power shifted from the major label's hands to the consumer. Pandora's box has been opened - consumers could now download music for free.

The beginning of devaluing music CDs as a commercial entity in the minds of the consumer started when the digital MP3 era arrived. CD tracks were converted to a non-physical medium - an MP3 digital file. Consumers could no longer hold the product. It became a product they could not touch in the form of a record and did not have to go to the record store to buy. Every major song released was shared on P2P networks for free. An album that used to cost $15 now is considered a complete rip off in the minds of music lovers. Why pay $15 for an album with only 2-3 songs worth listening to? Then came single digital downloads, the Apple $0.99 per song model and last but not least, the despicable DRM model. How about the Rhapsody subscription model? That did not go that well either.

What happened with CDs is obviously clear. When the CD replaced the Cassette, most consumers could see the difference in audio quality and ease of use, not to mention the disadvantages of tape wear and waiting for tapes to rewind. Consumers thus replaced their old cassette collections with CDs, thus contributing to inflated CD sales in the 1990s.

The major labels shot themselves in the foot by not embracing technology and failing to figure out an innovative way to generate future revenues for their old-school business model of selling records. Instead, the did the opposite. They sued the hand that feeds them - the consumer. Again, how can you compete with free? It is impossible. The true answer to any Business Model is creating value in the minds of the consumer and secondly creating an environment where the consumer pays to obtain that value.

I was invited to UCLA as a guest speaker at the music department where for the first time I would give a sneak peak of Music.us to students, musicians and industry professionals. I posed the first question to all in the audience: What is your business model in regards to exploiting your music commercially? I wrote on the blackboard all the answers that the class gave me and I asked them what the average sale would be for each revenue generation model they proposed. This was what they proposed to me:

• CDs (Average Sale $10)
• Song Digital Downloads (Average Sale  $0.99)
• Album Digital Downloads (Average Sale  $9.99)
• Ringtones (Average Sale $1.99)
  
• Tickets (Average Sale $20)
• Merchandising (Average Sale $20)
• Licensing [Sync] (Average Sale $1000)
• Licensing [Mechanical] (Average Sale per Song $0.091)
• Licensing [Performance] (ASCAP / BMI / SESAC / PRO blanket license distribution)

There was one thing that I noticed. For starters, no-one proposed new alternatives on how to generate revenue. Secondly, everyone agreed upon the pricing model. A digital download of a song is $0.99 and a CD should be $10.

In my opinion, the pricing is wrong on both of these items. How can you compete with FREE? The answer is you can not. How can an independent artist generate revenues? That is the million dollar question. On Music.us I decided to let all artists decide their pricing model. However, I did select the default for digital albums to be FREE with a little bit of a twist. I decided that the consumer is given a choice to download the song/album for free with the option to make a contribution to the band. People thought I was crazy for doing that. Well, next thing you know Radiohead comes along and what do they do? They release their album for FREE on their website with the option to contribute to the band if the consumer wanted to.

Why did I think the Radiohead experiment was critical? First of all, for the first time the music industry could see that there are consumers out there that are willing to pay EVEN if they are given the option to get the album for free. Again, the key question is, what is the value of the music in the minds of the consumer. Most fans chose to download it for free. They would have done so anyway even if Radiohead chose to charge them by just downloading it illegally on P2P. I think the valuable lesson here is what the paying customer was willing to pay for the album. The number was not $10 but it was $4. So in essence, it is my belief that an album should not cost more than $5. Again, Pandora;s new box was opened. The pricing model of the CD was wrong from the beginning and consumers have once again shown that they are willing to pay for something but at their terms and at a price they agree to. In the pre-digital download era, consumers had no choice but pay. Now they have a choice to pay at their price they want, or they would get it through other means such as P2P for free.

Another reason why music record sales are down is because consumers have found other activities to spend their time and money on, for example video games. However the truth be heard. Never in the history of mankind has music been consumed more than it has been today. Digital music players (anyone heard of the iPod?), car audio systems, home stereos and last but not least mobile devices such as the iPhone and the Nokia N95 8GB are a reality. We are consuming more and more music than ever before. Not only that,  traditional distribution is slowly becoming irrelevant given the new host of outlets an independent band can go to in order to push their music (YouTube.com, MySpace.com, FaceBook.com and the list goes on). Online TV stations will become a new source of revenue generation in terms of licensing songs. No longer will a band need to be on terrestrial radio or cable TV to be noticed.

In my opinion, if you are that good, people will notice even if you give your music out for free. Music has become a slight loss leader when it comes to the overall revenue generation model. Music is being used to dig into other higher-paying sources of revenue such as touring, merchandising and licensing. The issue with most independent artists is that nobody knows them. If you are that good they will notice and they will pay if they say value in your music. For example, John Mayer put his music on the P2P networks for free. He got noticed and fans spread the word out about him like a viral infection. I know I paid $300 to go see him live. He could care less if I owned all his albums. But I did buy a $30 T-Shirt. I was working out at the gym and heard one of his songs on the radio. I even heard some of his songs in a commercial and on the TV.

The moral of the story for me is that, if you are that good, people will notice. So that is why I always said to independent artists to get their music out for free so at least people can put their songs on their digital devices and listen to them on a consistent basis. If the songs stick to the consumers mind, that is beyond valuable. You immediately invite them to make an additional sale - a T-Shirt, a concert ticket. Next thing you know a Music Supervisor selects your song for a TV show. The snowball effect has began. If you do not let consumers get a hold of your music, a great opportunity would be lost. Just like in advertising, people need to see or hear your message anywhere from three to twenty times before they act upon it. And, if you want to brand yourself and your music, then you need to get it in front of your potential fans as often as possible. Customer is king. Not sure the major labels got the memo though.

Music.us is poised to be a full 360 model for artists to exploit their music catalog and their artistry. They can choose their pricing model on their digital distribution as well as merchandising. I have added a few other revenue generation business models which I think will be significant for an artist's success. These include:

• Customized Ringtones (Consumers can create customized ringtones)
  
• Ad Sharing (Artists get paid according to their click through traffic)
  
• Sponsorships (Artists can get sponsored by others on their page)
• Online Pay Per View (Artist can broadcast a performance live over the internet)
  
• Online licensing (Artist songs can be licensed online for use in TV/Ads/Movies/Games/Other)
  
• Paid Referrals (Artists are paid commission for every referral they create)
• On-Demand Merchandising (No-inventory based merchandising. Artists can create their virtual store by creating their designs. Fulfillment will be done by 3rd party)
• Contributions / Donations (Fans can choose to donate to their favorite artist)
• Session Player / Hired Musician (Musicians can get hired for a recording session or to perform at an event for a price)
• Lyrics / Tabs (Rights holders can exploit their copyrights by revenue sharing on advertisements displayed on their lyrics / tab pages)
• Competitions (Artists can win prizes / money in competitions)

The truth is that there has never been a time when an artist has so many avenues to pursue a career in music. While the superstardom era has slowly been eroding, the opportunities for independent artists are growing given the digital era. The ones who succeed will be the most creative ones in both their artistry and their business management. Are you ready for the new business models of music. Today is the future. The real question is, what makes an artist different from all the others out there? What is their unique selling proposition and what are they doing different when it comes to marketing themselves and spreading the word out about their music like a virus? If it is not contagious enough then there is probably nothing there. My opinion on the matter is still firm. If you are that good, people will notice. So get the music out!