From horse to Pegasus - is there any future to the music industry? Part III

In Part I of this series, we explored why the music industry is suffering, and what the market, technology and legal forces are that brought it to this point. In Part II, we discussed what the barriers to change are within the music industry, and what might be done to plan for the future. In this final Part III, we will look at some possible models.

We begin with a caveat. "The future is unknowable." The entire rationale behind free-market economics is that the millions or billions of people making individual decisions will do so far better than a select few or one. The corollary to this insight is that whatever one person predicts, it is unlikely to match the future precisely, since it is only one person, not the market as a whole. For a more interesting look at why some people do seem to predict the future fairly well, have a look at Nassim Taleb's books in the "Recommended Reading" list (on the right).

We are making several assumptions as to the behaviours of consumers in the music industry.

1. People want music and are willing to pay reasonable prices for it. In a year when pirated music is easy to come by, and you can even buy DRM-free music on Amazon and iTunes and redistribute it, the fact that the industry sold $10.4BN of music in 2007 indicates that people will pay for music they like.
2. People will pay what they believe is reasonable, while either not paying or pirating what they believe is unreasonable. This is the "carrot and stick" method. It is not enough to say, "we will sue you if you pirate," or to use ads comparing casual copiers to Blackbeard the Pirate or the Enron perpetrators (let alone Fannie Mae); you need to make it as easy and cost-effective for them (or reasonably close) to do something legally as illegally.
3. Most people do not view casual copying as piracy, and never will. Their perspective is that they enjoy the music, they want to share it with a few friends, or perhaps use a small clip of it on their Website / MySpace / Facebook page (which relates to the Fair Use Doctrine, out of scope here).
4. People have gotten used to social networking, as well as mobile media. They expect it to be reasonable to take pictures at a concert with their mobile phone, or even stream it live to their Website. "Look at the great concert I am attending, listen to it!" 
5. The people who do the most casual "piracy," e.g. the streamer and sharer above, are likely the most passionate about the artist, and most willing to expend energy to spread the word. 

The industry can either fight these trends - they have been attempting to do so for years, with little success - or embrace it. As Jeff Pulver pointed out at his recent Web 2.0 NY keynote, several artists and/or labels have actually encouraged live attendee Webcasting of concerts. The question becomes, if they embrace it, and thus remove the last barriers to people doing casual copying, how do they make money off of it?

The labels need to recognize that without the old barriers to reproduction (see Part I), music content is largely commoditized. The source is still special - very few have the talent of Billy Joel - but once it is recorded and distributed just once, it is reproduced infinite times. Thus, the music itself must be sold at prices that are almost as cheap as piracy, in other words, near-zero or actual zero. $0.99 per track on iTunes or Amazon will have to be replaced by a fraction of that price. Of course, music industry revenues then apparently evaporate. Where do they make it up? Here are just a few of the possibilities.

• Concerts: Someone who owns an MP3 of Natasha Bedingfield can reproduce it and redistribute it infinitely, but they cannot reproduce the concert experience. The music itself - the MP3 file - becomes advertising, an investment, in getting individuals to buy non-reproducible services, like the concert. Concert ticket prices, however, have gone through the roof as well. In order to make up the revenue losses, ticket prices would need to come down, while the number of concerts would need to go up (revenue = number of tickets x price per ticket). I am currently working with a software start-up that is dealing with an identical issue: can we avoid fighting piracy entirely by essentially giving away the software, but only selling the ancillary online services?
• Memberships: Most music fans - certainly those who currently or until recently paid for music - tend to be fanatical about their fan-hood (pun intended). Very few who were around or have seen videos of teenagers flocking by the many thousands or more to see the Beatles in the 60s can doubt that, and the trend is only stronger since then. Labels can essentially give away the music as advertising, but sell club memberships, or sell the music with membership and special benefits embedded. For a long time, media celebrities have viewed fan clubs as a loss-leader, advertising to drive music/movie sales. In an era when music/movie sales are low and getting lower, they need to explore the other way around.
• Frequent Flyer: Although this has rarely, if ever, been applied in the entertainment industry, it has worked quite well in many others. The story of American Express haughtily turning down American Airlines' AAdvantage for their members is legendary and taught in just about every business school. Someone can download 100 MP3s of Kate Perry from EMI or Alicia Keys from Sony Music (the label formerly known as Sony BMG), but actually buying 10 or 20 can get a free concert discount, signed copy, special release, etc. 
• Volume: It turned out, much to the music industry's surprise, that the entertainment business is very price-elastic: when they raise prices on CDs, concerts and movies, fewer people attend. But there is another side to this price-elasticity: if prices are lowered, more music will be sold. Can it sell 10 times the amount to make up for it? I doubt the industry produces enough music per year to get to that volume. However, people were very skeptical that, following telecom deregulation, people would make enough long-distance calls to make up in volume what was lost in per-minute profit, and we were all quite wrong. Volume will definitely make up for a lot of the reduced price, although unlikely to do so entirely. Total direct sales of music will likely come down, but overall profit margins can actually go up. Where will the volume come from?
  • Increased sales of existing artists. Plenty of people who love Madonna will not buy Coldplay or vice-versa at $0.99 per track. On the other hand, plenty will be willing to pay a dime or a quarter to try a few and see if they can expand their tastes.
  • Increased artists. The industry will need to expand its pool of artists to go beyond superstars into those who can "only" sell a few tens of thousands or hundreds of thousands of tracks (not albums). The Indies are already doing that, and will continue to eat into the major labels unless they restructure for it. The restructuring will need to include lower-cost methods of finding talent, producing it and promoting it.

There are many other possibilities...

Note that all of the above require not only serious and fundamental strategic rethinking, but also a hard look at the operations side, likely leading to major changes to support new business models. 

What impact will all of this have on the industry in general and artists in particular?

1. Likely greater competition for moderately talented artists, leading to greater revenue for those who do not hit superstar status.
2. Reduced gross profits (but possibly higher profit margins) for the industry, or at least those who adapt.
3. Reduced compensation and harder work for superstars, who will no longer be able to get wealthy on percentages of sales, but rather on ongoing labor, such as working with fan clubs, signings, concerts, etc., and greater competition from the next tier.
4. A more mobile growth and ranking system. A good but not superstar artist will be able to make a living, or at least supplement one, through labels, while possibly moving up the ladder as they get better. Conversely, it will also be easier for superstars to fall down the rankings as their star wanes.
5. Greater availability of varied music.
6. Possibly a dilution of culture. I am unsure if this will happen, or if it matters, but fewer superstars and more music means fewer shared elements among everyone in society. I am not worried about this, but a recent piece by Elizabeth Wurtzel, author of Prozac Nation, did worry about this. Personally, I cannot believe that greater consumer choice or competition is ever damaging.

Short form: lots of challenges to the industry. I see a number of failing players, consolidation, and rising Indies. Whether or not even one of the major labels can rise to the challenge is a question time will tell.