Saturday, July 30, 2011

How Indies Can Disrupt the Disruptor - A Disruptive Revenue Model for Music and Games

Having recently heard a fundraising pitch by indie music distributor Nogeno, and looked at competitors like Bandcamp, I was again struck by the potential of FairPay pricing to change the game -- for the music business and/or the game business.

Both music and games are dominated by the Apple iTunes Store, which disrupted the old distribution models.  But there are many chinks in iTunes' armor -- one is that significant numbers of independent bands (and game developers)--and their fans--chafe at the economic constraints of the iTunes Store, and seek better ways to manage the value-exchange with their fans.
  • Many indie artists and programmers have found Pay-What-You-Want (PWYW) pricing to be a surprisingly effective way to price, whether in temporary promotions a-la Radiohead, or as ongoing model.
  • Indie distributors such as Bandcamp and Nogeno offer creators a range of payment models, including conventional fixed price and PWYW (with or without a minimum floor price).
  • Bandcamp reports on their home page that "On name-your-price [PWYW] albums, fans pay an average of 50% more than whatever you set as your minimum."  They offer additional guidance (and more) on using PWYW...and on drawing on the buyer appeal of the larger share they give to the artist.
While PWYW is clearly effective at the margins, there are obvious concerns about its practicality for broad use.

As explained elsewhere in this blog (see sidebar) FairPay adds a structured feedback process to enable a long view of pricing over an ongoing relationship, not just single sales, to make its "Fair Pay What You Want" model work far better and more broadly.  FairPay is offered selectively, as a privilege to those who demonstrate that they pay fairly.  An example of how this applies in the music business was in one of my early posts.

With regard to the indie opportunity there are two points to emphasize:
  1. FairPay is especially relevant to indie distributors, because their music (or games) are mostly Long Tail items (less mass-market), where PWYW and FairPay can be especially effective in increasing revenue, and where sellers are willing to take more risk to get wide exposure.  The artists are struggling for recognition (and compensation), and fans feel stronger connection to these struggling artists, and want to compensate them for their creations.
  2. FaiPay enables the aggregator/seller to establish an entirely new infomediary role, as keeper of the FairPay Reputation Database that tracks how each of their individual buyers behaves in terms of pricing fairness. That database is much like a credit rating database--offering important data usable by any potential seller. This reputation data is what is used to determine whether a buyer pays fairly and should be entitled to make purchases on a FairPay basis (depending on the risk level implied by their reputation from previous purchases).  The more complete the Reputation Database, the more effectively FairPay prcing works to maximize revenue and minimize risk.
This second point offers distribution aggregators like Bandcamp and Nogeno to create a strategic asset that will differentiate them from competitors and raise a barrier to competition.  Once FairPay gets critical mass, this database will have extensive pricing reputation data on many customers--something that will take time and money for a competitor to duplicate.

The combination of both points offers a path to disrupting the dominance of the iTunes Store (and other mass-market aggregators).
  1. The Long Tail focus of the indie market will be especially supportive of the FairPay model, because of the greater willingness of sellers to take a risk on their buyers.
  2. The buyers will behave well because they will know they are supporting the creators of the product (artists and/or programmers), not the Apple 30% vig, or the suits in the studios.
  3. The initial success that builds will grow a FairPay Reputation Database that will increase the effectiveness of FairPay pricing and enable it to be used with decreasing risk for increasing numbers of products and buyers.
  4. That can greatly increase the appeal of the indie distributor, and widen its appeal to increasingly take share from iTunes and other mainstream aggregators.
Of course iTunes can offer FairPay as well, and build its own database.  The indies would still have the advantage of a higher share going to the artist, and thus a better value proposition than the big guys.  

Thus the indies might not take over the world, but--in any case--they could disrupt the current models in a way that makes a better value proposition to consumers and creators, and increases the net opportunity for indies.

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