Music industry: five alternative business models

Music industry: five alternative business modelsThe record industry is in dire trouble and the major record companies know it. According to the IFPI’s most recent figures, “physical” music sales were down 11% to $17.5bn in 2006, and, blaming piracy — both CD copying and online file-sharing — the IFPI says that overall music sales have fallen for the seventh year running.

However, none of this was unpredicted, and in post-Napster 2003, Steve Jobs appeared to offer the recording industry a way into the future, through the iTunes Music Store. People didn’t want to steal music, argued Jobs, and if paid-for downloads could compete on price and convenience, then many of those illegal file traders would be converted back into paying customers. As a result, Jobs insisted on the unbundling of albums; instead all tracks would be offered for purchase individually, at the same price — 99c — whether they be a new release, top 40 hit, or an older and more obscure song. To which the majors reluctantly complied, and would later learn to regret.

Fast-forward again to 2007, and although paid-for downloads are on the increase, they aren’t rising nearly fast enough to make up for the loss in revenue from falling CD sales. By Jobs’ own admission, on average only three percent of music on an iPod originates from the iTunes Music Store. As if to rub salt in the wound, iPod sales accounted for nearly half of Apple’s total revenue for 2006.

Instead of recognizing that the record industry’s aging business model, even with the intervention of Jobs, is a broken one and in desperate need of a fix, the response has largely been litigation coupled with the introduction of technology, in the form of DRM, designed to enforce copy protection, which, ultimately, just inconveniences paying customers.

If the iTunes model isn’t the answer, and business can’t go on as usual, then what is? Here are five alternative models for selling music, many of which are actually being tested by artists, entrepreneurs, and even the major record labels themselves.

Free

If music is becoming ubiquitous, through illegal file-sharing, supported by mass storage MP3 players, then why not just give it away? The “free” model doesn’t mean not making money from music. Instead, the tracks themselves are treated as a loss leader, designed to promote the artist and drive sales of other associated products, such as concert tickets and merchandise.

Jamendo

JamendoJamendo is a web service that embraces the “free” model by helping artists to distribute their music for free, under a Creative Commons license, on peer-to-peer filesharing networks such as BitTorrent or eMule. Jamendo users can also discuss and rate tracks, as well as make a donation directly to the artists whose music they’re fans of. Additionally, Jamendo has an ad-revenue scheme for artists who set-up-shop on the site.

Prince

Prince gave his most recent album away for free, or more accurately, a British Sunday newspaper did. How much he got paid by the newspaper we don’t know, but Prince claimed the deal was primarily about getting his music into the hands of as many people as possible and to help promote his upcoming UK tour. It was later reported that all of Prince’s UK dates had sold out almost as soon as they went on sale. However, the move didn’t go down so well with the recording industry. The UK arm of Sony BMG withdrew from Prince’s global deal, refusing to distribute the album to UK stores. Retail store, HMV, was equally unimpressed, with chief executive Simon Fox describing the arrangement as “absolute madness.”

SpiralFrog

SpiralFrogLaunched last month, SpiralFrog lets users download music for free, in return for viewing advertising (see our full review). In addition to viewing ads while searching for and downloading music, the service requires users to log in to the site and view ads at least once every 30 days, or the downloaded music for the account becomes disabled. SpiralFrog is built on a revenue-sharing agreement with participating labels, and currently offers a catalog of 800,000 songs and 3,500 music videos.

Pay what you want

Radiohead

RadioheadSimilar to “free”, the “pay what you want” model came into the public eye most recently when Radiohead released their new album, In Rainbows, with a voluntary price tag. Fans can choose what to pay for the album, including nothing at all.

Jane Siberry

The artist, Jane Siberry, makes a similar offer to fans, with the difference that they can choose what they’d like to pay, after they’ve already downloaded and listened to the album first.

Magnatune

MagnatuneMagnatune is an online music service which has built much of its business around the “pay what you want” model. Albums carry a low minimum price, with fans able to decide how much more to pay after that. In an email, I asked Magnatune founder, John Buckman, how fans, artists and record labels have responded to the “pay what you want” model.

“New visitors to Magnatune see the “we are not evil” slogan and justifiably remain skeptical. The “how much do you want to pay?” question they get when they click the “buy” button is so shocking, so different than any traditional business, that it usually puts a smile on their face and makes them True Believers in the Magnatune Way.

Labels think it’s insane.

Artists often think it’s a bad idea *before* they’ve been signed to Magnatune but when they see that on average they will earn more money with this scheme than setting an $8 fixed price (on average, $8.21), and that fans will be able to express their strong positive feelings by optionally paying more (even, a lot more).”

Buckman also says that even when users choose only to pay $5, they tend to spend more overall, buying several albums at once.

Pay by popularity

AmieStreet

AmieStreet logoAmieStreet, of which Amazon is a recent investor, is a social market place for artists to connect with fans and promote and sell their music. The site has pioneered a “pay by popularity” model, whereby transparent market forces dictate the price of music. All tracks on AmieStreet start off free, then the more the track gets downloaded, the more the price increases in increments, all the way up to the industry standard of 98c. This is in complete contrast to iTunes, whereby all tracks are priced the same, irrespective of how popular or obscure they are — something which the major labels are desperate to change.

Subscription

Legendary music producer, Rick Rubin, recently told the New York Times that subscription services are the way forward.

“You’d pay, say, $19.95 a month, and the music will come anywhere you’d like. In this new world, there will be a virtual library that will be accessible from your car, from your cellphone, from your computer, from your television. Anywhere. The iPod will be obsolete, but there would be a Walkman-like device you could plug into speakers at home. You’ll say, ‘Today I want to listen to … Simon and Garfunkel,’ and there they are. The service can have demos, bootlegs, concerts, whatever context the artist wants to put out. And once that model is put into place, the industry will grow 10 times the size it is now.”

However, despite what Rubin says, services such as Rhapsody haven’t reached mass adoption, as it’s not clear that people are ready to “rent” their music. Another reason might be that we haven’t yet reached ubiquitous Internet access. When all of our music can “live in the clouds”, accessible at any time, owning it outright may no longer be that important.

A music tax

It’s an old idea and one that UMG was rumored to be pushing most recently: some sort of music tax, possibly collected via your Internet Service Provider. The idea is to charge the customers of ISPs and cellphone carriers a flat-rate fee as part of their data service plan, in exchange for the right to download and share the major record labels’ music over an ISP’s network. That way, filesharing is decriminalized and the recording industry is guaranteed revenue.

Other forms of music tax could include a tax on digital audio players, similar to how some countries tax blank CDs, or direct taxation through government.

All three variations would require the different parties — including all five major labels and government — to agree to work together, something which is very unlikely to happen. Additionally, if a file-sharing tax makes up the majority of the music industry’s revenue, it’s hard to see what incentive there would be for the major record labels, with their huge back-catalogs, to continue to invest in new artists.

last100 is edited by Steve O'Hear. Aside from founding last100, Steve is co-founder and CEO of Beepl and a freelance journalist who has written for numerous publications, including TechCrunch, The Guardian, ZDNet, ReadWriteWeb and Macworld, and also wrote and directed the Silicon Valley documentary, In Search of the Valley. See his full profile and disclosure of his industry affiliations.

33 Responses to “Music industry: five alternative business models”

  1. Mike M says:

    You cant forget about these guys. I just found DiscRevolt not too long ago.
    Free is good, but Artists still gotta eat. Disc Revolt makes cards like credit cards, that have art on the front like on the front of a CD, and a code on the back. The, once enter on thier website gets you to the artists page, where you use the credits on the card to download the artists music. The artist make money by selling the cards just they would a cd, except the cards cost the artist less, have a much smaller carbon footprint, and the artist keep more of the money.

    IMHO DISCREVOLT IS THE FUTURE

  2. moxley says:

    Some of those ideas are innovative and interesting and all of that -

    But the problem I see with subscription based crap as Rick Rubin suggests is that I want to own a copy of my music. What he suggests reminds me of “On Demand” services that the cable companies have – you’re limited to what they have on tap at the time. So that doesn’t work for me…I like my ipod.

    As far as “Pay what you think it’s worth” – I think that is great, and for the artists who can afford to do that or are inclined it will be interesting to see how it works out – but I don’t see that as an adequate solution for everyone.

    What I think is that the record labels need to do the following:

    1. Embrace digital technology.
    2. Stop fucking with DRM – it causes more headaches and creates so many problems for the the users.
    3. Make their albums/CDs special with art, add ons, special goodies that cannot be downloaded.
    4. Realize that piracy IS NOT the same as theft, it CANNOT be claimed that every pirated song is a lost sale; in fact, I would say that MAYBE 5% of pirated CDs cost a sale if that. There are many inherent benefits of free digital distribution.
    5. Stop suing or otherwise attacking music lovers (EG their customers)
    6. Give the artists a fair share and stop taking advantage of them (see “Some of Your Friends are Already this Fucked” to understands how a first time major label deal usually affects a new band http://www.negativland.com/albini.html
    7. Charge a fair price for products, and make both digital and brick and mortar version available (this relates to #3 somewhat), the digital version is just the music and a picture, etc…the special physical version would be as described in #3
    8. Those labels which can’t adapt, and are clinging to the old ways and doing things t hurt the business, the artists and the consumers (music lovers) should be shunned by artists and the other progressive labels. They will then die out businesswise.

    This way everyone gets what they want. Everyone makes money, the labels progress, the artists progress, the fans get what they want without being treated like criminals, people stop trying to claim filesharing is inherently illegal or has negative connotations.

  3. Elvis says:

    I agree with moxley – sell the tracks like iTunes, Amazon and Walmart are, DRM free. I’ll gladly pay .80 – 1.10 per track for music I want.

    I’m 40 years old and can easily see myself spending $30-60 per month on music. There’s lots of music I remember and can’t easily find in a store. How much music is the industry sitting on that baby-boomers and Gen-Xer’s remember and can’t easily find. Make it easy, make it fun and make it reasonably priced. Can you imagine all the iPod owners being able to get music from other sources as easliy as iTunes? What about other MP3 player owners and the older crowd that still has CD’s? Allow us to use what ever media we want and keep a library of hundreds or thousands of songs that we WANT. What a concept.

    Again, I can see them making thousands from me alone in a 5 year period, rather than the last 5 years when I have bought exactly 5 compilation CD’s. And I can’t be alone in this. I’ve boycotted music purchasing in general as a protest agains the DRM crap and legal suits that the music industry has been engaged in. They are insane and I refuse to put more money in their pocket it they are crazy enough to sue their own customers.

    Give me the music I want at the price I’m OK paying and encourage your industry siblings to do the same so I can get all the music I want and not be concerned with who is or is not using DRM. You’ll be making money hand over fist and your biggest issue will be the taxes you’ll own on your newly made billions. Napster proved the model years ago and you’ve all been too pig-headed to see the writing on the wall. You’ll either realize that you’re in the music distribution business and distribute music or someone else will do it for you and you’ll be selling the equivalent of buggy whips. Good luck with whatever decision you make. Don’t say that no one ever explained it like that.

  4. Richard says:

    You should check out how Marillion (www.marillion.com) funded the 1st 2 albums they produced after their contract had ended with their previous record label. They used their website to engage directly with their fans and proposed a “pre-purchase” of the album to enable them to afford production costs…. worked out very nicely. Obviously not a model that can or necessarily will be taken up by other artists but interesting none the less!

  5. Nice feature! Check out what I write about the Flat Rate for music here: http://www.musiclikewater.com
    :The biggest change is that the model is moving away from selling units to selling access. That means that at first you have to give access, in some cases for free. You provide a way for people to find it on the Internet, blogs and social networks like MySpace and Facebook. You provide access for the larger communities in return for an ad-revenue split, so that money is made from the web site but the music is free for the user, very much like radio is done. No one pays for radio, but there’s still money being made….” Cheers Gerd Leonhard

  6. Daniel Hughes says:

    No mention of eMusic in this article. In the subscription section of the article it states that people may not be ready to “rent” their music, which implies to me that the music is disabled once you stop paying (like what that Spiral Frog service does). I don’t know if that’s how Rhapsody works, but as far as I know from poring through the FAQs and legal doc, eMusic’s subscription service doesn’t disable the songs if you terminate your subscription.

  7. Bryan says:

    I have to disagree with Moxley. Tomorrow, “owning” your MP3 will be forlorn sentiments, much like physical album art and liner notes is today. “Owning” your Mp3 is a transitional urge, and the underlying factor here is convenience. If ad-rev or subscription services are so convenient and so reliable and well contextualized and comprehensive, then young people will care less about whether the mp3 is on their own harddrive or the servers. Remember, it’s only a matter of time before WiMax rolls out, ensuring more and more of our own files are hosted on servers rather than hard drives.

    It’s the behavior of the young people will drive mass consumer behavior. To young people born into WiMaxed internet ubiquity, “owning” an mp3 file is a blurry concept.

    I personally think we’re headed towards a ad-rev share free model, with subscription services filling the niche need for superior services and/or no ads.

    Steve, I’m surprised you don’t mention Imeem. They’re really pushing the ad-rev share / streaming concept.

  8. Steve O'Hear (editor) says:

    @Daniel Hughes

    eMusic isn’t a subscription service in the strictest sense, since you don’t have access to all of eMusic’s catalog, just a certain number of tracks per month. It’s more akin to a pre-paid model, like a pay-as-you-go mobile contract, whereby you pay for credit up front. Although, yes, you do get to keep the music you’ve downloaded, even if you stop being a “subscriber”

    Rhapsody, on the other hand, gives you access to the whole lot, so long as you stay a subscriber.

  9. Steve O'Hear (editor) says:

    @Bryan

    There are lots of services that didn’t get a mention, instead I tried to get the main alt. models across. Imeem and other music-based social sites, are certainly pushing another aspect to the ad-revenue side, along with doing a great job of music discovery.

    What’s clear is that the three main costs of the music biz are falling dramatically: production, distribution, and marketing. The social networks are helping with the last two.

  10. Bryan says:

    Yeah, I realize there’s a million and one music discovery sites out there. But I think what distinguishes imeem is their trackable, on-demand music playback. When I’m listening to say a UGK (Sony-BMG artist) album on imeem, for free, I’m actually supporting the artist, because they get that proportioned cut of the ad rev that imeem served me. I spoke with Ian Rogers last week, head of Yahoo Music, @Digital Music Forum, and even he sees ad-rev supported free streaming as the future that Yahoo very probably look into.

    As for thethe Spiral Frog model, to me, seems unsustainable, becuz they’re monetizing off of a single transaction. By streaming, you’re able to monetize each and every time a song is played. There’s great potential in that, I feel.

    Anyhow, I forgot to say, great entry! And I didn’t even know about Jamendo or Magnatune, so thanks for that heads up!

  11. James Peel says:

    Why isn’t anyone talking about services? Check out http://www.tailoredmusic.com. These guys are doing the same thing open source software developers do: make money from services.

  12. Kal says:

    what about the music website that Angels and Airwaves have specifically designed to fix the problems this article is all about! are they about to save the whole industry? Tom DeLonge says that its about getting the music out for free but the artists still making more money than before. a win/win it seems to me! whether that actually happens remains to be seen! but lets at least see!

  13. tim.towner says:

    I’m a big believer in the subscription model. In Germany, they use a subscription service for their TV. Everyone in the country gets cable with no commercials. They around $200 a year that’s included in their utility bill.

    I think the future of music is along those lines. We could use different levels of subscription and the music would come right to your home, to use anyway you want.

    The labels would make more money than they are now.

    Radio went to subscription with satellite radio and everyone thought that would never catch on. It did.

  14. Gary says:

    You missed http://www.sellaband.com in your (otherwise excellent) article. Here’s a new music model which gets the artists and fans together to make the music they want, AND gives away 3 free (260kbps) mp3′s off the finished album. Other tracks are available for download at 50c each, or buy the cd if you want. Due to publishing laws, the artist gets paid about 8c every time the free track is downloaded… Sellaband have to pay that. I don’t see any other free mp3 downloads actually paying the artist for every download. Nothings perfect, but Sellaband is the closest I`ve seen so far to a fair system for artists, label, and fans, as all profits are split equally between them.

    Radiohead and other established artists can afford to give away their music for free. There is a huge fanbase who will buy the real thing. New artists can’t afford to… they need to pay the bills (and eat). Without covering their recording costs they can’t continue to make music….. look out for them working at your nearest McDonalds while you listen to their music on your car mp3 player.

    Subscription…. dunno. How do you fairly distribute the money to the artists? Or is it like communism where they all should get an equal share, no matter who is the best worker or most popular?

  15. Mike says:

    Record labels already get tax money based on blank CDs and have for quite some time.

  16. Charlotte says:

    Hey there,

    Thanks a lot for mentioning us to the web, that’s great.
    Hope you like our site and more and more will get to know it.
    Musically,

    Charlotte

  17. Kurt says:

    check out http://www.we7.com

    free music, free to download, drm free – artists get paid through ads!

  18. Cal says:

    Side note: while it’s true what you say about the three main costs of the biz are falling dramatically (production, distribution, and marketing), it’s least true of the ‘marketing’ aspect. There seems to be this prevailing idea that all one needs to do is download some recording software, post the songs for free, and then let Myspace fans take you right to the top. The first two steps, the production and distribution, are indeed much easier in the digital age, but believe me, without a real marketing push behind something, it stands about zero chance of getting anywhere.

  19. George says:

    You should mention SpiralFrog requires a Windows-only downloader. I was excited until I found out I couldn’t run it.

  20. Steve O'Hear (editor) says:

    @George

    We Mac users live in a Windows world ;)

    No, seriously, sorry about that. It’s another Windows-only DRM affair. Do you see a pattern here?

  21. Good article. I really have doubts that the record companies are going to ‘see the light’ and start charging more reasonable prices and I think this is at the heart of the pirating problem; fans have known that they are mainly paying for a bunch of suits that sit around a table ie., the record execs. I think Radiohead is coming closest to the solution. I believe fans will still want to support their favorite artists and keep them in business.

  22. Tommy says:

    I used to buy a couple of vinyl albums, then cassettes and then CD’s every pay day, did it for years. I can’t remember the last time I bought a new CD, it has been several years. I buy some music on iTunes, and recently tried Amazon. I will not pay a subscription (wasted money a few years ago on Real Player), and definitely will not ever pay for a streaming service because ‘wideband’ in the US is a joke…there are just way too many places where there is no or very poor connectivity. Since the record companies started suing music lovers, I decided to stop buying their stuff on principle, but finally broke down and started buying from iTunes. As far as I’m concerned, the record companies can all go out of business. Twenty dollars for a CD with pennies of it going to the artist, so that they can afford to market Britney or whoever the latest “mega star” is, well that’s just not something I choose to support with my money.

    So, let me purchase the songs I want. I’d prefer no DRM, even though I don’t share files. I’d ideally prefer to purchase the music directly from the artist, although this isn’t very practical, especially when the artist is dead. There has to be some distributor, but the historical model is obsolete.

  23. If must confess that it’s more likely that music will be free and will serve to promote one’s concerts and other revenue sources. I’d like to.

  24. Maurreen says:

    The tax idea is the worst. People who download no music should not have to subsidize other people’s entertainment.

  25. John says:

    The IFPI can’t even control it’s own domain name (see http://www.ifpi.com to see what I’m talking about!), let alone steer a sensible course for the majors, so I think we should dust off our black funeral wear for the record industry. Today’s consumers want music at a fair price, not at $.99/track. That kind of pricing went out the door with the retail middlemen and CD production costs. Charge a fair price like the Russians, and the buyers will come. Meanwhile, watch out for private p2p which is 100% legal, and lets users share entire albums with friends: http://www.gigatribe.com is an example.

  26. Jeff Coleman says:

    The basic flaw in all of these schemes (except free) is the fact that income for the artist depends on unit sales. We believe that this is normal and natural, when in fact it’s a phenomenon that’s only about a hundred years old. Artists managed to survive before music became an “object” which could be sold like cheese.

    But music isn’t consumed like cheese (even though a lot of music is cheesy). No, it pretty much lasts forever now. It’s given away for free (via advertising) on the radio, and in shops, and between friends. How many times might one recording be “consumed”? Once it’s made, music can go on and on without restriction.

    So the industry created these artificial restrictions, and they try to enforce them, but this will never work until the day they manage to have decoder chips implanted in our heads. And still we listeners believe that music must be paid for one unit at a time. It’s unnatural!

    So how do I think music should be paid for? Well, if you hear that music for free and it convinces you that you want to hear more from an artist, why not pay the artist just for doing what they do directly? It’s easy for a few thousand people to support one person just by sending them some money every year. It’s almost like a subscription to the artist.

    Imagine the “exclusives” such an arrangement could bring- you and a few thousand other sponsors would have the inside scoop on new music, who the artist is listening to, what they had for breakfast…

    The music is free, it’s the advertising for the person making the music. Step up to the plate, put your money where your heart is, and pay them for being the wonderful, creative people they are. Hell, listen to my music- and join my sponsors. It’s easy, it’s fun!

    somewhereoutwest.com

  27. Great article. I just published something similar on my company’s blog, http://www.nextgreatthing.com.
    Check it out here: http://www.nextgreatthing.com/2007/10/22/artists-create-new-music-revenue-models/

  28. Martin says:

    Backing up the post fro Gary ,http://www.sellaband.com/ is an already working model

  29. Nick Rambo says:

    Excellent article…I’ve always wondered when the monopoly that the music labels owned would come crumbling down. I can’t wait to see how they start to monetize music videos so I can add the PPP stream to my site at http://www.rocknview.com. It really is an exciting time to be in the online music industry!!!

  30. JaWar says:

    Thank you for the music business resources.

  31. Rich Dale says:

    My band, Escape Act is currently releasing its first album. We decided to go ‘free’ because it was the best way to reach as many new fans as possible. We hit upon the idea of releasing each track through a different blog, so we’re reaching 10 different audiences with each song. With the first three songs out there and 7 to go, we already doubled the size of our mailing list which will stand us in good stead for gigs and future releases.

    We’re using an excellent service called bandcamp (www.bandcamp.mu) that lets us offer music streaming and downloads to fans. The service also offers fans the option to ‘pay what they want’ for a higher quality download. For us, the killer function is the data: we can see how many tracks are being downloaded and streamed, so we’ve a real sense of the success of our campaign.

    I think we’ll see a lot more services like bandcamp springing up, not copycats, but other complementary ‘components’ in a band’s toolkit that can enable them to have a successful independent music career.

  32. ludi says:

    Hi,

    You should check out this out: http://peoplesmusicstore.com

    It’s completely new business model because on this site, it is people who choose what to stock, promote, and sell DRM-free mp3s from their own personalised store.

    Its really innovative because we can sell music we love directly from our site or social network profile, and each time someone buys something from our widget store, we get a cut – “10% in the form of points which can be redeemed by purchasing music on the site”

    The guy who has started people’s music store is also the one who founded bleep in january 2004. Bleep was the first online music service to offer high quality DRM free files at a crucial time – there were no alternatives to peer-to-peer networks.

    cheers
    ludi
    http://peoplesmusicstore.com/rose_is_a_rose

  33. Sparkster says:

    Crowdsourcing & fan funding have become major resources for digital music and are proving to be hugely successful, aswell as using listeners & fans to filter out the best new music. It saves a fortune in a&r costs, physical premises and physical distribution.

    Offering users to chance to invest for something back in return is a very innnovative and appealing way of operating. Then there’s so many other ideas. Just take a look at all these websites:

    Grooveshark
    Sellaband
    Slicethepie
    Formyband
    Bandstocks
    Song People

    and of course my own website,

    Bandengine