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Friday, December 21, 2007

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, they give you three gift coupons using which three of your friends can 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:

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

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 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.

1 comment:

  1. What path is Suresh Vyas thinking of adopting about making his own talent accessible to the music loving universe? Any ideas?


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