The Future of the Music Business -- The Artist is King with FairPay

The economics of the music business continues to be highly problematic.  The revenue pie for recorded music is a fraction of what it once was, and artists/creators complain that they are seeing only crumbs. At the same time music is more available - and artists are closer to their fans - than ever.

As this dilemma motivated the upcoming MIT Enterprise Forum Think Tank session on The Future of Music: Where is the Money? (which I will co-lead on April 16 in NYC), this seemed a good time to explore how the new FairPay monetization strategy bears on this. This post is my take on Where the Money Should Be, and how FairPay can enable that.

The crisis of Napsterization has eased a bit, as first iTunes and later subscription services like Pandora and Spotify are getting many people to pay something, but business models remain besieged. At the same time, artists/creators have gained a direct path to their fans and seek to exert more power. The recent spotlight on this business as Taylor Swift pulled her music from Spotify (and Spotify's response) has shed some light on the economics, and the recent move of YouTube to add a paid service adds to the momentum toward paid subscriptions.

But the size of the pie remains shrunken, and the size of the slice that passes to the performing artists and songwriters* often seems disproportionately small.  More radical models of disintermediation, with artists/creators going directly to fans and even selling on a pay-what-you-want basis, as done most famously by Radiohead, and more sustainably by Amanda Parker, have shown that we are ripe for new ideas, but none have yet proven broadly workable. [See Update below.]

Revisiting the economics of the size of the pie - and the portion of the pie

The core problem is that the value and economically proper price for recorded music is not well captured by any conventional model. Primary criteria are:

1. A fair price to the listener
2. A fair portion to the artists/creators* (performing artists and songwriters)
3. A fair portion for distribution
4. A fair portion to other services such as A&R development support and marketing, whether done through labels or special services hired by the artists/creators.* 

Consider first #1 and 2, revenue in to the distributor, and then passing through to the artists (via whatever convoluted path through labels and rights organizations):

Sales of albums, and now album or track downloads ($1 or $10 for unlimited play), had been the mainstay of the business, but the flaw in their economics is clear, now that alternatives are more available.

• Buying music is a good value for the user only if they play it many times. Lightly played albums are very expensive per play.  Conversely, heavily played albums are a huge bargain (one that the the artist does not fully share in). 
• The payment to the artists/creators (via whatever path) is roughly tied to sales, and so depends on how many people buy, not how much value they got (measured by how often they play it and other factors). That disproportionately favors production of pop hits over more subtle kinds of value.

"All you can eat" subscriptions (typically $5-10 per month) to unlimited numbers of plays per month are now gaining market share, but this too has perverse economics:

• Flat rate subscriptions have a one-size-fits-all price that actually fits very few. Ultimately the price must be set to earn the distributor a reasonable margin on average over a widely varying user base. Some will play many hours per day, resulting in little revenue pass through per track -- or a net loss if the distributor pays rights holders a set fee per track. Others will be in a range that generates reasonable profit. Some will pay full price for light usage (for a nice profit), but many will refuse to pay the monthly fee at all, and stick with less profitable advertising-supported free versions (or piracy). For light users, the standard monthly price will rightly seem exorbitant. The irony here is that distributors earn little (or even lose money) on the dedicated music fans who should be their best customers! 
• Depending on the subscription service, the payment to the artists/creators (via whatever path) may be based on revenue (e.g.: "streaming services" like Spotify, Rhapsody, Deezer, and MOG), or on tracks played (e.g.: "webcasters" like Pandora). If on revenue, the usage-related inefficiency passes directly to the artists/creators. If on tracks, the artist/creator is not harmed by heavy users, but still loses out on those who opt out, or makes less on "free" versions with ads. Overall, this results in a licensing structure in which per track fees to rights holders must be very low because of this economic inefficiency.  They may get paid per track, but as they say, the payments are woefully small - not because the distributors are exploiting them, but because the distributors are caught in the middle with an inefficient pricing model.

Neither of these current pricing models produce an economically sound result in which users pay at a level that corresponds to the value they receive. From an economic perspective, it would be far more efficient and fairer to all if users paid based on usage (with some volume discount). But usage-dependent pricing models have generally been unpopular because users fear unpredictable billing levels and nasty surprises. (A future post is planned to discuss this issue further, but consider the examples of voice and data communications services that have been oscillating between usage tiers and unlimited.) The next section will explain how FairPay can change this.

But first, what about the portion of the pie that goes to the artists? This is the other critical issue. Historically, the record labels held a lock on distribution, and used that to exert control and extract high fees, giving relatively small shares to the artists. The Internet has been a great leveler, turning distribution into a utility service, enabling musicians to sell directly to their fans, cutting out or reducing the role of the middleman (see my post on indie music). Some have been very clever and successful at this, but many artists want or need help developing themselves and their market. This argues for a flexible unbundling, where the A&R (artists and repetoire) and marketing services of a label (or specialized service) are priced and bought by the artist separately from distribution services. The openness of the Internet suggests it will increasingly be the artists who decide what services to outsource, at what cost, depending on what level of help they want and need, and that labels will move to the side, morphing into support services to artists.*

A better value proposition with FairPay

FairPay promises to change the game --  primarily, by making the revenue pie bigger -- and secondarily, by making the artists/creators share of the pie bigger as well.

How FairPay works for music is outlined in an early post on the basics and a later one on how it can work disruptively for indies, The essence is that it enables prices to be individually set to match the value exchanged.  Instead of a flat price for (a) an unlimited number of plays of a purchased track or album forever, or (b) for an unlimited number of plays of any music in the catalog per month, FairPay can track to the amount of music played in any month, and can also factor in other aspects of value, including very subjective factors.

Our current models are historical accidents, caused by the limitations of distributing physical recordings for which usage was not trackable, and the limitations of mass marketing and its need for a uniform set-price per record or CD.  That world has changed radically, but our pricing models not so much.

With FairPay, users are given usage reports and suggested prices for their monthly listening, and get to decide what they think is fair -- and give their reasons why. Distributors let them continue to do that as long as they generally pay an amount that seems fair enough to the distributor, given their individual context.  Thus a light user might, in fairness, pay less than the $5-10 per month now charged, and a heavy user might be convinced that it is only fair that he should pay $15 or even $20 per month. This expands the total revenue base, bringing in many more paying subscribers, some paying less and some paying more than the current fixed price.**

This usage sensitivity alone can help the artists/creators, since they can now get paid for more plays, and by more people. But FairPay can go farther, since it enlists patrons in "dialogs about value" that center on the fairness of the price, and that fairness includes factors like how much of the price goes to the artists/creators. Daniel Ek of Spotify speaks of the need to increase transparency in this obscure area (as does the Copyright Office), and FairPay can greatly leverage the power of that.

• Distributors (or their artists) can disclose their algorithms for passing through revenue to rights holders, so that customers can choose to use services that most generously sustain the artists/creators who produce the music.
• FairPay can go further by enabling bonus payments to favorite artists, either by explicit direction of the user, or by indirect metrics of value such as "thumbs up," inclusions in playlists, or frequency of play.  Such adjustments might come out of base pricing, or out of special patron bonus payments that pass through 100% to rights holders.*

All of this can enable a more direct linkage between fans and artists, and a more direct exchange of value in which fans more fully take on the role of "patrons" -- to sustain the artists that produce the music they care about. Amanda Parker said:

I see everybody arguing about what the value of music should be instead of what I think the bigger conversation is, which is that music has value, it's subjective and we're moving to a new era where the audience is taking more responsibility for supporting artists at whatever level.

The core of FairPay is a systematic process for building individualized relationships in which creators/suppliers are rewarded by patrons for providing value that meets their individual needs. This can work through multiple levels of the value chain, to enable artists to most effectively tune and position their work to appeal to the audience that values and patronizes them.

Making it happen will take work, and experimentation -- and the entrenched powers of the labels and the licensing system and rights organizations will adapt slowly -- but there is no reason why this can't be made to work far better than our current inefficient models. This may start most easily with the indies (with their simpler business model infrastructure), and then migrate to the major labels (to the extent they remain relevant).

When it is clear that most of the price goes to the artist (and the people they chose to help them produce and distribute the music), and not just into the coffers of some faceless corporation, listeners will be more willing to pay a fair price for their music. FairPay can provide a process for working with each patron to jointly find a fair price. With such a direct linkage between value creation and monetary reward, the artist can become king.


--------------
*For simplicity, I refer to both the performing artists and the songwriters as "artists/creators" (or sometimes just "artists") in that both (sometimes the same persons) are creators of the music, and ultimately the ones listeners most want to compensate to sustain their creation. The industry structure treats these roles very differently, and pays them through different paths and under different rules, often through labels and publishers (who may handle most of the rate negotiations) and through a web of Global Music Rights Organizations (GMROs). I gloss over these details here, but of course applying FairPay or any other new monetization strategy will require accommodating (or changing) this industry infrastructure.  I also focus on the distributors and labels as the main competitors with artists/creators for a portion of the pie, ignoring the role of GMROs as a secondary issue, but one that is still essential to getting revenue to the artists/creators.

**This process can be simplified once a pattern is developed, so that a customized pricing pattern can continue automatically, with the user intervening to change it only when desired.

(My thanks to Daniel Susla for helpful comments to clarify my understanding of this complex industry)

Update: See these pleas for new business models for music in Harvard Business Review, from an ex-Rhapsody exec, and in Music Industry Blog posts here and just earlier.

Also, see the next post:  Beyond the Deadweight Loss of "All You Can Eat" Subscriptions

FairPay: "Better Strategies for Monetizing Digital Offerings" MIT Enterprise Forum 12/1/11

It was very gratifying to present FairPay to an audience of about 100 at last night's MIT Enterprise Forum of NYC panel session on "Better Strategies for Monetizing Digital Offerings: Thinking Out of the Box while Looking across Industry Silos."  (more commentary below...)

Video and slides of FairPay presentation:

 

(If any problem viewing the slides, click the "slideshare" button above)(Links to full session below)

After a nice overview by our moderator Dr. Howard Morgan (Co-Founder and Partner, First Round Capital) we got into the perspectives of a diverse array of panelists.  

• Paul Smurl (Vice President, NYTimes.com) shared insights into the closely watched Digital Subscription paywall strategy at the Times, which has gone even better than they expected to meet the challenge of generating reader revenue without loss of ad traffic--and given a boost to print as well.  
• Betsy Morgan (President, TheBlaze.com, formerly of HuffPost and CBS Digital) noted how they were  monetizing Glen Beck's TV offerings with direct OTT (Over The Top) subscription services, that are already generating $10 per month from 230,000 subscribers.  That may seem small compared to the Fox audience, but when you consider the share to Beck, that gets very interesting.
• Shawn Price (President, Zuora.com) provided insights on what Zuora calls "The Subscription Economy," based on work with over 500 companies.  He noted the power of a flexible platform like Zuora's to adapt in real time with some 100 different control parameters, and how it makes it manageable for content and service providers to apply very advanced and nimble e-commerce strategies.
• I provided a more radical perspective on how we might rethink the whole structure of how we monetize digital offerings, including basic issues of transaction and pricing architecture, to create a new kind of deep real-time dialog with customers about value.  Key themes were
  --the need to take a holistic view of relationships, not just transactions,
  --the power of a simple shift to "Pay as You Exit," an opportunity that has generally been ignored, and
  --the opportunity to apply a new level of detailed market research that is fully integrated with every transaction.

All of the speakers noted how important it was was know your customers and track them in real time, and how some aggregators/distributors (notably Apple) impede that critical task in a way that can ultimately be very limiting to sellers of digital offerings.

I was very pleased with the response to my presentation of FairPay, and to my latest attempts to make it easier to understand.  The challenge is that while FairPay is quite simple in its basic concept, it changes many of our core assumptions about doing business at many levels, and has very deep ramifications in ways that take some thought to fully understand and appreciate.  The discussions and questions on how and where FairPay works indicated that many people found food for thought.

The posted slides may show some of this, and I expect the video should be available soon (to be linked below).  I also plan to adapt this presentation to add better explanations to the Web site and this blog.

My thanks to the other speakers, and to the audience for a very stimulating session.

...And for anyone who wants a really detailed preview of what I suggest are groundbreaking ideas on where the future of digital media business will go (or just needs help getting to sleep), the USPTO published my FairPay patent application yesterday.

=================================

Video (full event, by speaker)
MITEF-NYC event page, with video and slides
=================================

FairPay Presentation

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.

An Open Letter to Radiohead and Seth Godin -- How to Make Much More Money

For those who have not noticed, Radiohead might be releasing another album soon, and Seth Godin is ditching his publisher and going direct. Both are in the vanguard of content disintermediation. This is an open letter to Radiohead and Seth...]

--------------------------------------

I have a suggestion on how you (and others like you) can make much more money than you realize.

You both obviously know that by ditching the middleman and going straight to your public, you get a much larger piece of what you sell. And you both clearly know how to reach your public without the help of a middleman, and that you and your public are partners in a collaboration.

But what you probably don't know is how a radical new pricing process, a sort of Pay-What-You-Want (PWYW) on steroids, can significantly increase your total revenues -- and profits. Radiohead knows that PWYW can be a very effective way to reach your market, getting far more people to buy, and many of them to pay reasonably well. But both of you know that many pay nothing at all. ...PWYW is is participative, but flawed.

FairPay (Fair PWYW) is a radically new pricing process that builds on the flexibility and participation that PWYW offers to buyers, but motivates them to pay fairly. It works where there is an ongoing relationship of continuing sales, and tracks how fairly buyers pay. If they pay fairly, the seller continues to extend more FairPay offers to them. If they do not pay fairly, they lose the privilege of continuing to buy on a FairPay basis, and must pay a conventional set price for future purchases. Unlike PWYW, FairPay is a two-way dialog that creates consequences for not paying fairly.

Because of this cycle, this FairPay process may not work so well for single sales, like one album or one book, but can be very powerful for an ongoing series of sales. For example:

• Individual songs from a collection of albums, offered in series, one at a time, or in small bundles...
• Individual items from a catalog of book chapters, articles, podcasts, or videos...

The process begins with one of a few low-value items, to test how the buyer sets prices. If the prices are reasonable, a few more items are offered. As the buyer builds a reputation for pricing fairly, more FairPay credit is extended (but never so much that there is too much risk that the buyer is done and will pay nothing for a valuable bundle). So perhaps it might better be called Pay-What-You-Think-Fair, because that is the result.

I suggest FairPay can produce far more sales than any set-price offer, and far more revenue and profit than any simple PWYW offer.

• For Seth, this may be easy to apply now to the extensive library of materials you already offer, and have full rights to control.
• For Radiohead, this might work when you have at least a second album you have full rights to offer songs from.

This FairPay process can be even more effective if you can aggregate a larger collection of content that will sustain an even richer and more extended relationship with your buyers. This might be done by teaming up with other content creators who appeal to the same buyers, perhaps in a cooperative selling service. With such a deep (and preferably growing) catalog, buyers will have even more incentive to develop and maintain a reputation for paying fairly, and will generate more

offer-pricing-reputation

cycles for the feedback process to fully develop. The task of developing the FairPay e-commerce platform will be spread across more sellers, and the buyers' FairPay reputations will be shared by all of the sellers.

This could be a back-end service, so that you can keep your direct relationship with buyers, and you can sell to everyone interested in buying at a price they think fair -- and you control the offer decision process, to limit your exposure to the few buyers who pay what you do not think fair.

Much more detail is given elsewhere on this blog, and the FairPay Web site -- the FAQ is particularly recommended.

To Radiohead and Seth, I suggest you think about this. If you want to try it, I would be happy to assist.

To other content creators (including video, games, apps, software, etc.), I suggest the same. Think of this as the next step in C2C (Creator to Consumer) commerce.

To entrepreneurs and developers looking for a killer business opportunity, I suggest this is it. Again, I would be happy to help.

And to Amazon and Apple, of course you could do this too, as described in an earlier post. A FairPay Zone within your store could offer products from creators and/or publishers who agree to offer FairPay pricing, and you could facilitate the offer-pricing-reputation(-offer...) cycle.