The Internet changes the music business
This blog entry is written jointly with Kaushik Krishnan.
The crisis of the old music business
With computer technology, music has gone from LPs and CDs into
computer files. Crashing prices of networks and storage has meant that
transferring music files from one friend to another is effortless.
Through these changes, music has acquired characteristics of a public
good: it is non-rival (my consumption of music doesn't come in the way
of yours) and non-excludable (it has become impossible to stop piracy
in anything but a police state). Hence, the traditional business model
of the music industry is in deep trouble. As an example of the
difficulties that music companies are facing, see Robert Sandall
writing in Prospect magazine. David Byrne has also written a very nice
piece in Wired magazine. (You might also want to look at a
conversation between Thom Yorke and him on the future of music.) He
shows that there has been a drop in music sales in general and a
steady increase in the sales of music electronically:
Many experiments are afoot on rethinking business models in this age
of the Internet. The essential opportunity lies in utilising the very
computer technology - which has obsoleted the record / CD business -
by linking up the ultimate artist to the ultimate consumer, so as to
eliminate the overhead of various middlemen. Byrne writes that a large
portion of the cost of a CD is in overheads; the payments by the buyer
of the CD mostly don't reach the artist:
The sarodist Suresh Vyas pointed out to us that the 15% of the
overhead that's spent on marketing/promotion is in the interest of the
artist, insofar as it is about raising publicity and awareness. And
yet, a key change of the electronic world is that friends pass on
music to friends, giving a powerful word-of-mouth phenomenon through
which awareness can be increased. It is different from the marketing
blitzkrieg of pop music of old, but that doesn't mean it's
non-existent.
The Apple Music Store does not solve many of these problems
The leader of the pack, in terms of revenues, is Apple Music Store.
However, I would personally never buy a single minute of music from
Apple Music Store, given their closed standards: you can only use
their music files on Apple hardware. Even though I have an ipod and my
main machine is an Apple Macbook Pro, I wouldn't dream of being tied
down to them like this. In addition, they have digital rights
management (DRM) of a sort that I find offensive. Electronic
distribution should help by lowering overheads. As yet, the situation
is one where Apple makes money, but the musicians still get very
little (as shown in the above diagram).
Today, I saw magnatune, an alternative way of organising the music
business, that I think has a bright future. Magnatude has been around
since sometime in 2003. Here is how it works:
1. For starters, experimentation in their catalogue is convenient and
free. They have pages sorted by genre, such as this page of `world
music', which work as a free radio station. This helps you to
sample their material.
2. They make it easy to shift from listening to the radio to buying.
While something is playing, the album cover is displayed. Click on
it and you are looking at the material produced by this artist.
Here is an example.
3. When you click to `buy', it gives you a choice between download or
physical disc.
4. When you go to the download page (here is an example), you are
asked to pick a number for what you will like to pay - between $5
(Rs.200) and $18 (Rs.720).
5. They make it very convenient - all you have to do is type in a
credit card number and the CVV.
6. This takes you to a download page (here's an example) which offers
various file formats. All the files are free of Digital Rights
Management (DRM), and both low-res and high-res files are on
offer.
The download password works for 60 days, so if something goes wrong in
the download, it's easy to restart it. Every time you buy an album,
download the same album for free.
I find it to be quite a transformation when compared with the
traditional music business - whether it's the old record companies or
the Apple Music Store -
1. It is easy to evaluate material on the website without paying for
it.
2. Customers have flexibility to pay between $5 and $18 for an album;
3. Half the revenues goes to the musician, which is a lot better than
the traditional business;
4. Downloading files is, of course, nicer than buying CDs;
5. Yet, this is done without bringing any DRM into the picture;
6. High-resolution FLAC or WAV files are on offer, as are low-res
files for those who prefer them;
7. Non-commercial use of the purchased material is free.
8. The website is extremely well thought out and easy to use.
I think they will go far, and are a far more impressive model for what
the music business can be in the Internet age when compared with the
market leader, Apple Music Store. Here are some links:
* Wikipedia entry on them.
* Interview with the founder, John Buckman, on creativecommons.org.
* An article by the founder on openDemocracy.
* More information from under the hood.
Other efforts
Magnatune is very impressive, but it's only one of a new breed of
`open source record labels'. One example worth examining is
onclassical.com.
Some other music sites worth exploring are pandora which is the
offspring of the Music Genome Project. Pandora used to be available
everywhere but it is now restricted to US users only due to legal
issues. Suresh Vyas pointed us to http://www.underscorerecords.com
which pays 70% to the artist.
Ruminating on what is happening
If I may ruminate on what is going on, the free software movement has
shown the way in shifting from products to services. In this world,
products have public goods characteristics (non-rival and
non-excludable) and are free. Associated services are not public goods
(they are rival and excludable) and are not free. So it is possible to
earn money from consulting, configuring, adapting and modifying free
software - but not from selling it. A good programmer will never
starve, but in this world there is no possibility of scoring another
Bill Gates.
In similar fashion, when music has acquired public goods
characteristics, musicians will have to shift from revenues based on
products (sale of CDs) to revenues based on services (concerts, custom
compositions / performances, etc). The Byrne article shown above lists
six strategies that musicians can use in this changing environment to
still chalk out a living for themselves. A good musician will never
starve, but revenues like those obtained by music companies of old are
not feasible in this world. Open source record labels fit well into
this emerging ecosystem, while many traditional firms do not.
Rajappa Iyer asks a deeper question. The `old deal' offered to
musicians was: With a low probability, you will get Led Zeppelin
payoffs. This helped attract a certain kind of person, with low risk
aversion, to take the plunge into the tens of thousands of hours of
effort that is required to try to become a good musician. Most didn't
make it, but a tiny few became fabulously rich. In the new world,
where this low-probability massive-payoff is not in the picture, will
there be a reduction of supply of individuals who are willing to
undergo such penance? My first answer would be that the risk aversion
of people who choose to make music will be higher than that found in
the old world. :-) But that is surely only a part of the story.
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