New business models for music

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18 VLSELJ 63


18 Vill. Sports & Ent. L.J. 63

Villanova Sports and Entertainment Law Journal

Henry H. Perritt, Jr. [FNa1]
Copyright (c) 2011 Villanova University; Henry H. Perritt, Jr.









       The Problem




       A. The Old Model




       1. Recorded Music




       2. Live Performances




       3. Publishing




       B. Effects of Technology's Latest Revolution




       1. Effects of the Demise of the CD




       2. Limited Potential of Downloadable Digital Files




       3. Potential of Live Performances




       C. Law's Role






       Who Makes Music Now? Why and How?




       A. Hedonic Values




       B. Making Money




       1. Why Money Matters




       2. Day Jobs and Opportunity Cost




       C. Career Paths




       1. Life Cycle of a Band




       2. Two Case Studies of Successful Entrepreneurship: Vampire Weekend and Fall-Out Boy




       a) Vampire Weekend




       b) Fall Out Boy




       c) Common patterns




       3. Plateaus of Popularity




       a) Established celebrities




       b) Striving Entrepreneurs




       c) Hobbyists




       d) Balancing the motivations




       e) Artist exit






       Who Consumes Music and Why?




       A. Demographics




       B. Musical Preference




       1. “Quality” of the Music




       2. Vicarious Association with Celebrity




       3. Music is Modeling




       4. Popularity of the Music




       C. Finding What You Like




       D. Formats






       Music Market Intermediaries




       A. Need for Intermediaries




       B. New Intermediaries




       1. New Distribution Channels




       2. New Matching Services




       3. New intermediation technologies




       a) Statistical Classification




       (1) Factor analysis




       (2) Identification




       b) Open Source Technologies




       4. New Intermediary Entrepreneurship






       Structure of the New Marketplace




       A. Matchmaking




       B. Role of the Bottom Tier




       C. Breaking Through




       D. Investment Capital




       1. Capital Sources




       2. Sources of Subsidy




       a) Cross subsidy From Day Jobs




       b) Direct Subsidies






       Business Models: the Money Part




       A. Elements of a Business Plan




       1. For Musicians




       a) Costs




       (1) Recorded Music




       (2) Live Performances




       b) Revenue




       2. For Intermediaries




       a) Revenues: Tapping New Revenue Streams




       (1) Live Performances




       (2) Publishing




       (3) “Merch”




       (4) Ring Tones




       (5) Music Tracks for Movies




       (6) Advertising




       (7) Access to Celebrity




       (8) Revenue Results




       b) Costs




       (1) Total Costs, Including Costs of Tapping New Revenue Sources




       (2) Bribes (“payola”)




       3. Capital Requirements and Return-on-Investment




       4. Uncertainty




       B. Effect of Declining Efficacy of IP Protection: Making Money from Free Music










*65 I. Introduction
      The popular music industry is in the middle of a technology-driven revolution.  It is clear that the old order has been swept away, but it is not yet clear what form the “new order” will take. The major labels are on life support and will not survive in anything like their previous form. Compact Discs are dead as a distribution medium. Copyright is unenforceable and hence essentially irrelevant except at the margins of the “new order.” Barriers to entry have been reduced dramatically as the costs of producing top-quality recordings have declined by a couple of orders of magnitude. Portable music players such as the iPod permit consumers to listen to music all the time and this enormously increases the potential demand for music.
      The amount of new music generated by indie musicians will increase as the demand for music increases because of its portability for consumers.  Copyright protection, in the form of digital rights management (“DRM”), will become even less effective for recorded music and technological protections and will be abandoned altogether. The result will be continued downward pressure on prices for recorded music and soft demand for paid record sales.
       *66 Increased supply and demand mean increased search costs--how are musicians and their potential fans to find each other? As in the past, intermediaries must match consumers with the music they like, but this will happen in new ways. As music MySpace pages and independent websites proliferate, the burden of finding new music only increases. Someone has to perform the matchmaking function formerly performed by the major labels and the radio-station chains. Who will do it? Innovation and experimentation will increase as new kinds of intermediaries try to find the best way to connect musicians with their potential fans. A handful of these will become the dominant gatekeepers.
      The increased competition and the demise of traditional gatekeepers signal a sharp reduction in prices--approaching zero--for recorded music.  This means a reduced revenue stream to support anyone in the industry unless demand increases so heroically as to outpace the downward pressure on prices.  This is unlikely.  What business model will support the post-revolutionary space?  In this climate of increasing competition, musicians and their sponsors will try to fill the revenue gap for established musicians and to support new entrants by shifting their focus to live performances, ring tones, new forms of fan-performer interactions, movie scores, and advertising.
      All the evidence supports the proposition that most musicians will make music; even without a business model.  They say that they want to “get to the next level”--that they want to make a living from their music. But their behavior makes it clear that they will perform for pennies or for free to get their music in front of any crowd--live or virtual--even if limited to their friends and to the friends of other bands appearing on the same bill. It may become easier for a few new musicians to break through and to achieve a significant following among consumers, but most will continue to labor in obscurity. Many of them will make good music, but it will be listened to only within a modest circle of associated musicians, their families and friends.
      It is unlikely, however, that potential intermediaries, necessary to perform the matchmaking function, will work for free.  Even if a business model is unnecessary for the musicians themselves, it is necessary for the intermediaries. [FN1] Unless such a business model can be framed, embraced, and sold to investors, the “new order” in the music industry will be one in which hundreds of thousands of *67 artists making very good music go essentially unnoticed by those who would enjoy their music.
      The demise of the major labels will not be the end of the “music business.” The major labels were never the true innovators. [FN2] Nevertheless they channeled capital to anonymous musicians and enabled a handful to become famous, as the labels poured money into attempts to build a following for those they adopted. The big questions about the future of popular music are who will aggregate and allocate capital? Who will perform the gate keeping, advertising and promotion functions historically performed by the major labels?
      Metaphorically, this is a struggle between dinosaurs and beavers, with herds of amiable and talented sloths on the fringes, providing background music.  The dinosaurs--the major record labels, their defensive myths, and their lobbyists and lawyers--are trying to crush an environmental phenomenon that threatens to make them extinct.  The beavers--the indie musicians and the entrepreneurs who are experimenting with new forms of intermediation--are largely oblivious to the thrashing of the dinosaurs, and are heroically working to construct structures that work in the new marketplace.  Because most beavers focus on the individual trees rather than the forest, most will fail; but some will succeed in proving the viability of a new business model. [FN3]
      This article is the fourth in a series by this author seeking to explore the impact of the technological revolution in the music industry.  The first three built the case for three propositions concerning costs, copyright, and DRM, while this article explores the question of what economic incentives will suffice to facilitate an effective market in the absence of intellectual-property or copy protection. [FN4] It bases its analysis, in part, on empirical evidence collected from interviews with musicians and music consumers.
       *68 Following this introduction, the article first defines the problem; explaining why the old business models have eroded in the face of new technologies and of the changing role of the law--especially copyright law. Then, it builds on the author's work in his New Architectures article, explaining who makes music, who consumes it, and why. These sections explain that while money plays a role in the marketplace for music, it is secondary to “hedonic” factors both for musicians, who make music largely for self-expressive and self-affirmation reasons, and for consumers, who listen to music for reasons including idiosyncratic perceptions of its quality, a desire to be part of a particular crowd, and vicarious identification with or attraction to the performers.
      This Article then explores the essential role that intermediaries play in the marketplace.  This section acknowledges that the new kinds of intermediation needed in the new technology-driven market place will not occur unless intermediaries can make money.  Building on this foundation, this Article develops the elements of a business model that can sustain new forms of intermediation.  The result will be a robust market for popular music that will provide more opportunities for a wider variety of musicians and result in greater consumer satisfaction than past models.  For viable business models to exist, entrepreneurs striving to stake out roles as new kinds of intermediaries must creatively monetize access to the celebrity that they build in their clients through new technologies including not only social networking and videogames, but also technologies for classifying music to reduce consumer search costs.
      Whatever insights this article offers are the product of the author's involvement in the grassroots music, theatre, and film communities in Chicago, often known as the “indie” (in the case of *69 music and film) or “storefront” (in the case of theatre) communities. [FN5] The author writes and records songs under the name Modofac, which has so far released two albums. [FN6] Beginning in the summer of 2008, the author wrote a musical, and produced it in 2009 and again for an eight-week run in 2010. [FN7] The musical played to sold-out audiences during its initial run in a storefront Chicago theatre. Now, the author is working with a group of indie filmmakers to make a feature-length film based on the story embodied in the musical.
      In the course of that effort, he collaborated with and formed friendships with a growing group of indie musicians, theatre people, and filmmakers, mostly in their twenties and thirties, who write *70 their own music (or plays or screenplays), perform it live publicly, and dream of making a living with their art. On the whole, they approach life in ways significantly different from the author's multiple generations of law students. Interested in their philosophies, their experiences, and their formative influences, the author interviewed several of them in depth and wrote a series of profiles for publication on the Web. [FN8] The profile-writing effort expanded naturally to include several enthusiastic consumers of popular music, in the same general age group.
      The author joined the advisory board of the Chicago Music Commission, a non-profit group devoted to improving Chicago's climate for musicians and its visibility as a music city.  Simultaneously, as a vice-chair of the Chicago Council on Global Affairs' Global Chicago Project, he investigated the role of grassroots music creation and of independent theatre and film work as determinants of success in the global competition among cities.  In the course of these activities, he organized and moderated several focus groups in which musicians and their professional facilitators discussed the environment for music activities and the hallmarks and pathways of success.
II. The Problem
      Harvard economics Professor Richard Caves summarized the characteristics of the music industry as follows:
       1. The goals of the creative process strain against the economic resources available for the task

       2. Musicians face an “anguished” contact with the gatekeepers who select among the many available artists and their creative output

       3. Ecological forces in the marketplace determine the organ-ization of the gatekeepers

       4. Gatekeepers may function in a sequence so than an artist may be admitted by one, but denied entry by another--necessary--one.

       5. “The many would-be creative workers who suffer rejection either [give up], toil in dedicated poverty or settle for humdrum work, while those who experience creative success*71 reap adulation and wealth in what tend to be take-all contests”

       6. Uncertainties reign in a market structure in which costs at each level are sunk, before the gatekeeper who controls the next function decides whether to risk investing. [FN9]

      Caves's “ecological forces” change over time, causing upheavals in the organization of the industry. Printed scores, broadcast radio, recording technologies, and audio amplification all changed the way music was made, distributed and consumed. All of these technological innovations, like the more recent proliferation of small computers linked to the Internet, rendered existing forms of organization obsolete and provided opportunities for entrepreneurship in redefining how musicians would find and interact with their audiences.
      The popular preoccupation with recorded music delivered to consumers in the form of CDs is a misleading way to think about popular music.  Dominance of recorded music as the revenue engine of the music business is a phenomenon of the twentieth century--mostly the latter part of the twentieth century. [FN10] Recorded music pushed publishing and live concerts into the background only toward the end of the century. Radio was a big driver of discovery and celebrity.
      Technology has produced a new “ecology” in which all access to recorded music is essentially free (broadcast radio had always been free). This has upended a business model based on billions of dollars annually in sales of recorded music. The resulting crisis in the music industry really is a crisis only for enterprises that depend on recorded music for their profits.
      This part of the article analyzes the development and erosion of the model on which those enterprises depended and contrasts it with the new model that is replacing it.  This section concentrates most of its attention on recorded music, but also describes briefly how live concerts and publishing enter the picture.

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