The following is a guest post from Adam Hanft, a brand strategist whose clients include Barnes & Noble,Vinfolio, Original SoupMan, and Wheelz. He also writes for Huffington Post, Fast Company and other media. Billboard.biz welcomes responsible commentary - contact firstname.lastname@example.org.
The search for new music business models in the post-Internet era has been as tireless and extensive as the search for alternative sources of energy, the results of which are equally insufficient and sometimes frustrating.
So it's no secret that the Internet still hasn't proved to be the great leveling force it was predicted to be. Musicians have long griped about the economics of the industry. First the labels took big cuts out of their revenue. Then the Internet created an epidemic of piracy and downloading that crippled the traditional model, taking billions out of the hands of artists and labels. For years, there was a decrease in album sales, largely due to illegal downloading. But last year, for the first time since 2004, U.S. unit sales were up - although only by 1.4 percent. Dollars were not. In fact, the lower unit prices - and hence compressed margins - are likely responsible for what is probably a misleading sign of health.
Of course, there have been countless startups designed to help musicians - particularly indie bands - go outside of the traditional models and make themselves known to fans. To cite just two examples, Three Quarter, offers musicians a new business model in which "3/4 runs the business, the artist runs the art." They take much of the management responsibility off the artist, including acting as a label, a management firm, a PR firm, and in some cases, a venture firm. Another company, called Story Amp, provides musicians with a platform to connect with journalists so they can communicate updates and other news directly to their inbox.
A more commonly known attempt to leverage the openness of the Internet is the "pay what you want" model, which has been around since 2007 and turns the tables by allowing consumers to pay what they want for a good or service. It was Radiohead who broke the ice and released their "In Rainbows" album digitally, with no price tag attached.
Radiohead never revealed the average volunteered price per download for "In Rainbows," which is a shame, given that the results would have been invaluable for researchers and others fascinated by what was, in effect, a psychological experiment with a sample size of millions. They did admit, though, that more people downloaded the album for free than paid for it.
Louis Cabral, an economics professor at the NYU Stern School of Business, attempted to triangulate in on the actual numbers. Using comSore data, he estimated that an average of 60% of users downloaded the album for free, while the other 40% paid for it. The average price paid per download was $6.00 worldwide, and in the U.S. was $8.05."
While it doesn't seem salutary for the industry that 60% of consumers are happy to free-load, you need to consider that a) the 40% who paid were willing to voluntarily fork over a not-too-shabby average price-per-download in the U.S. of $8.05; and b) over time, education and other social norms could convert some of the free-loaders to payers.
In a piece that summarized the results, Rolling Stone noted that "Warner Chappell confirmed that 'Radiohead made more money before In Rainbows was physically released than they made in total on the previous album Hail to the Thief.'" Additionally, even though fans could legally download for free on the Radiohead site, more of them chose the Bit Torrent route.
Innovations are bound to continue. Most recently, Conduit, Israel's first Internet Israeli startup to cross the $1 billion valuation threshold, is allowing musicians to determine their own price for creating and distributing a mobile app and mobile site for their music. (Disclaimer: I am a strategic advisor to Conduit.)
The mobile platform has been specifically designed for musicians and bands, and includes relevant features like tour dates, new release previews, and a "LiveAlbum" functionality that lets fans take pictures during concerts and immediately post them to social media. By offering musicians a pay-what-you-want model, the shoe is on the other foot. How will musicians behave when given the opportunity to pay something or nothing? Will they behave like the free-loaders in the consumer-market?
One thing is certain: we are moving well beyond the fixed-price model. Whether it's in the music business or any aspect of the consumer economy, a new era of "liquid pricing" is emerging.
There are even examples of "pay what you want" in restaurants. http://nymag.com/news/articles/reasonstoloveny/2011/pay-what-you-want/ It's part of the vast power shift that the Internet has created, giving individuals the ability to determine how businesses treat them. This notion was neatly captured in a recent Wall Street Journal article titled "The Customer as a God," which contends that a "revolution in personal empowerment is under way - and buying will never be the same."
Over the next few years, we can expect to see a wave of pricing innovations that will test the limits and the economic return of the pay-what-you-want model. I'll also be following Conduit's bold idea to see if, when it comes to naming their own price, musicians turn out to be different from the millions of fans whose behavior demonstrates that there's nothing better than free.