21 January 2011

The World’s Worst Business Model

It's a familiar refrain from the music industry: revenue is down and piracy is to blame. That's the gist of the International Federation of the Phonographic Industry's (IFPI) annual Digital Music Report, which points to a slowdown in the growth of digital music sales.
While digital music revenue has grown 1,000% over the past seven years, the entire music industry has lost a third of its value over that same time period. And while digital music seems to represent both the best hopes and the worst fears of the industry, even its growth is slowing - only 6% last year, down from 9.2% growth in 2009. Digital sales comprise about a third of the industry's total revenue. 

Bob Lefsetz has addressed this very issue many times before, so I’ll be brief.  There are two things wrong with the music industry’s approach to sales.

First, the price points are ludicrous.  If you want to download a single, you’ll be looking at shelling out $.79 to $1.29, most of the time.  Quite simply, there simply are not very many songs worth paying more than a dime for.  Instead of cutting prices, making it easy to buy songs in bulk, the music companies stick to a rather rigid formula.  Thus, people wind up choosing (most of the time) between shelling out a dollar for a song or pirating for free.  The solution to this issue is simple: Pay what you want.

The second problem is the focus on music sales as a major source of revenue.  The concerts don’t drive album sales anymore.  That paradigm is dead and gone.  Instead, it is albums that drive ticket sales.  The easiest thing to do is give away music for free and make the money in concerts. You will have a hard time convincing people to shell out $10 an album in order to figure out if they want to shell out money to see a concert.  You have a harder time getting away with it when the music isn’t tied to a physical medium, like a record.

Ultimately, the current business model isn’t doing anyone any good.  Companies pay a ton in legal fees and lobbying fees to maintain their monopoly on music.  This is expensive and, in the absence of documentation, likely counterproductive.  Bands are viewed as businesses and not artists, which tends to annoy some music aficionados.  They also have a harder time getting heard when the first thing they say is “give me money.”  And fans, assuming they obey the law, are less exposed to bands they might like.  If they pirate music, they are left with a gnawing fear that they might face a lawsuit.  Tell me, who benefits from this?

It’s a game that no one can win.  It’s time to stop playing.


  1. Answer: Pandora.

    Using pianobar, it costs $1 per month, unlimited listening, no ads, and way better interface than the flash crap. Way lower CPU usage.

    For example, you can like, bookmark and get the song's musical component breakdown in 3 keystrokes. Brilliant.

  2. The biggest problems I have with using the cloud to host music is that access is expensive if you want your music to be mobile (smartphone + data subcription, likely capped), and the cloud isn't as reliable as my hard drive.

    For music companies, Pandora isn't likely to be the answer either, since revenue tends to be even thinner than what they get from digital sales. The simple fact of the matter is that they need to move beyond the idea of selling music and embrace the idea of selling bands.