The following is a guest post from Ian Rogers, CEO of direct to fan artist platform Topspin. He previously was VP and General Manager of Yahoo! Music and Yahoo! Video. He currently blogs at fistfulayen and on the Topspin site where this post originally appeared.
The Unbundling (and Re-Bundling) of Music
(Photo by Sara in Montreal, from Flickr )
As digital emerged, the labels were faced with a harsh reality: over the decades, consumers began to prefer singles. There was no economical way to get them, so we bought full albums to get the 1-2 songs we really wanted. We wanted the album unbundled, but we had no choice. With the emergence of alternative distribution (like Napster and then iTunes many years later), the latent demand for singles was unearthed and havoc ensued.
It was havoc because the labels had not prepared a business model or cost-structure for the unbundling of the record. They had grown accustomed to higher-margin and higher unit-priced albums. We started to witness the unbundling of media. And it took the record industry more than 5 years to offer digital singles for sale legally. Now, music industry total revenues are down more than 50% since their peak in 1999, and continue to fall every year. The biggest culprit is not piracy, it is the fact that consumers, when they buy music, are buying 10% of what they used to, because they only need to buy the single, not the album.
The notion of "unbundling" was first introduced to me in these terms a few years back by Topspin's co-Founder and Chairman, Peter Gotcher (our company pitch deck contained a slide entitled "The Great Unbundling"), and later reinforced by this interesting study from Laura Martin at Needham on the loss of value in the music industry (Laura presented this at an event hosted by Ken Hertz, Jeff Pollack, and Eric Garland just over a year ago). The Needham report asserts more value has been lost by "unbundling" via iTunes than by piracy. From the report:
What Is the Problem?
If there's not a consumer demand problem, then what is the source of the economic problem? We believe that unbundling in the digital age is the primary source of value destruction. In the physical world, consumers were forced to pay about $15 for an album that packaged the A-title songs they wanted with many B and C titles that they didn't want. The pricing of $7-8 for each song the customer actually wanted (assuming 2 songs on an album of 10) was too high a price umbrella when iTunes began offering individual songs at $0.99. The music industry had to accept the iTunes version of unbundling because between 2000 and 2003, the audience unbundled music by stealing the songs they wanted to hear. In the end, $0.69, $0.99 and $1.29 per song (x 70% to the music labels) from iTunes were better than nothing. We are a little more skeptical than consensus about the notion that 4 Needham Insights digital piracy is responsible for the destruction of the music business. Before people stole songs one at a time over the internet, they bought entire albums via CDs made offshore illegally. That value chain has been decimated by digital. Why pay $1 for an illegal CD if you can legally pay $1.29 for the only song you wanted on the CD anyway?
(Sales chart above courtesy of Tom Silverman and New Music Seminar)
Fortunately this is not where the tale ends. A new, more positive story is emerging. As artists get their arms around all their rights and build direct relationships with their fans we're seeing artists' output RE-BUNDLED into higher value packages and average revenue per transaction greater than those delivered by the Compact Disc. Instead of selling their art across a variety of channels (CD at Best Buy, digital download at iTunes, t-shirt at Hot Topic, ticket at Ticketmaster, and vinyl at Amoeba) artists are able to bundle their collective output into a single direct-to-consumer sale where they are the retailer (and pocket half the retailer margin, too). It's true the CD was an incredibly efficient product with massive distribution (the move from "record stores" to big box retail in the 90s was a large contributor to the bubble you see in the above slide) with an average revenue per sale of greater than $10. It's also true both piracy and individual track sales have unbundled the product and driven the average revenue per transaction for most artists to less than $3. But at Topspin we see people selling new bundles, different from the CD and as a result very high revenue per transaction:
Across everything Topspin has sold to date (including many artists who haven't sold any high-priced items) our average revenue per transaction is more than $25. When you have "typical" presale campaigns (see TV On The Radio, Beastie Boys, or My Morning Jacket for examples) you can easily find yourself north of $50 average sale. Throw tickets into the mix and you start getting close to $90. In our class at UCLA Jeff Jampol already has the students trained; he asks "What business is an artist in?" and the students repeat in unison "The Tickets and T-Shirt Business." This is a bit of an exaggeration to make a point, of course (there's also music publishing, thankfully), but his point is supported by what we are seeing in how fans are interested in supporting artists. Fans will pay real money for things with real, tangible value. As Shamal pointed out in his presentation from MIDEM last year, while digital-only sales make up 50% of Topspin's volume, those sales make up less than 25% of our gross revenue. This is why we have invested and continue to invest in worldwide physical distribution for our artists. Shipping atoms is a big part of the business.
We always hear, "Yeah, that works for Beastie Boys, what about the emerging artist?" Actually, due to re-bundling, the direct-to-fan channel appears to be EVEN MORE valuable for the emerging artist than the large artist. When you have very few fans, the ability to serve superfans efficiently is paramount to success (e.g. the 1,000 True Fans meme). Take the winner of the Topspin Direct-to-Fan Grant, Sonoio, for example. I was pleasantly shocked to learn direct-to-fan sales account for 97% of Sonoio's revenue to date. Given the offerings on Sonoio.org I wasn't surprised to learn they'd made more money total but I was surprised to learn they'd made more selling digital downloads from their own web site than they have via iTunes. This is surprising only because so many artists think of iTunes as THE market but pausing and reflecting it flows from logic: Sonoio is selling great stuff their fans want, beyond just digital (posters, t-shirts, demos, even a functional synth). They've built their own direct connections with fans via Twitter, Facebook, and email, and when they sell direct from their site they add a fan connection they own, as opposed to a track sold via iTunes or Amazon where the fan connection belongs with the retailer and that retailer is free to re-market to that consumer but the artist is not. Since Sonoio's direct-to-consumer offering contains cool stuff priced way more than $0.99 (the synth is currently sold out), it follows people would be enticed to spend (on average) more than they would on just a couple tracks at iTunes. All of the above add up to Sonoio having a much bigger incentive to drive people to buy direct from them than somewhere else, so that's where all their promotion drives. The result: more direct-to-fan sales, higher average revenue per transaction, and more fan connections on which to build future campaigns.
It's still early days, yes, but I like the direction this is heading for the two people who matter in the music business: Artists and Fans.