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.


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*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

Indie Games Generate $ Millions with Pay What You Want

For those that think there is no real money in Pay What You Want (PWYW) pricing, the growing success of the Humble Indie Bundle suggests otherwise. Their first four promotions have raised over $6.1MM,** with the last one just ending at $2.2MM [now much more**].  It has been reported that the venture behind these offers has raised $4.7MM in VC funding [now more**]. Their model includes payments to the game developers, the distributor, and charities including EFF.*

EFF has posted a nice summary, observing that "While the record labels, movie studios, and video game producers have not figured out a way to compete with free, others have...as the Humble Bundle has shown us, it is possible, with creators and distributors finding new and exciting ways to compete with free. ... when done right – developers, content providers, and even those who provide the business model can successfully compete with free." Additional details are in a Wikipedia entry.

All of this adds to my suggestion that FairPay (which augments PWYW with feedback processes that incentivise buyers to be fair to sellers, as described on the sidebar) can take this from a promotional tool to a mainstream business model for ongoing use.  Indie games and music are a great place to start, since that Long Tail content is where basic PWYW selling is already gaining traction.***

My previous post, How Indies Can Disrupt the Disruptor - A Disruptive Revenue Model for Music and Games, addresses this in more detail -- suggesting how indie distributors can take on iTunes to change the game, starting with the Long Tail, and moving toward the mainstream.

(*The charitable element is also a notable factor in the Humble Indie Bundle, at two levels. One is true charity, in the form of EFF and others. The other is a charity-like feature, in that the structure of the Humble Bundle revenue is for lightweight (and buyer controllable) contributions to the distributor, such that the significant share to the game creator ("developer"), analogous to the artist, musician, etc., provides a social-benefit motivation to pay -- rewarding the creator, and enabling further creation.  See other charity-related posts.)

Updates:-------------

**[9/21/14:  Wikipedia on Humble Indie Bundle reports this as a total of $30MM, in addition to $20 million to charity, as of 8/23/13.  CrunchBase reports funding of $9.2 million. Check there for further updates.] 

***[1/17/12:  For general insight into real uses and experiments see "Pay What You Want -- Still Crazy After All These Years?," and Wikipedia on PWYW.]

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.

Reinventing Subscription Platforms With FairPay -- for Apple, Google, and others...

In the emerging battle of subscription platforms between the Apple iTunes App Store, Google One Pass, and others, the radically new FairPay pricing process offers a better way to play the game, one that benefits the platform provider, the seller, and the buyer in new ways.

As widely reported, Apple has the dominant position, and is using that power to pressure sellers, and claims to be making things good for buyers.  Google is seeking to be more seller-friendly, and to allow more freedom, which might ultimately be better for buyers as well. The larger issues relating to this battle promise to help shape how digital content is sold, and how a major portion of our economy evolves.

• Subscriptions are a critical battleground for competing platforms and business models, one that could set the ground-rules for monetizing digital content and services at the broadest level.  
• Subscriptions get at the heart of ongoing customer relationships, and provide an aggregation structure that works for a broad swath of content and services.
• Subscriptions relate closely to the major pricing alternatives of free and freemium.

FairPay is particularly relevant to subscription businesses, especially those based on cross-vendor subscription platforms (such as those offered by Apple and Google and others).

FairPay is based on some very simple principles, with the idea that what is needed in a revenue model, is not to choose the right price, but to create an adaptive pricing process.

1. Let the buyer set any price he considers fair after the sale (Pay What You Think Fair, post-sale).
2. Let the seller (or a collective of sellers) track that price and use that information to determine whether to make further offers to that buyer in the future.

Instead of a fixed price, this process generates a cooperative and adaptive series of pricing actions, each based on feedback on how fairly the buyer sets his prices. Using this buyer reputation enables sellers to go beyond freemium to offer adaptive hybrids of free and paid service.  FairPay can be used as a complement and enhancement to conventional fixed-price subscription pay walls: Those who pay fairly, rise above the pay wall -- those who do not, must face it. (A diagram of core steps in this process is in a previous post.)

In the context of a subscription, this process unfolds on a (more or less) month-to-month basis:

• As an alternative to the fixed pay wall, a new user can be offered a trial month of unlimited use of a basic class of service, on the basis that at the end of the month they will set a price for what they used, on a Pay What You Think Fair basis.
• The buyer will be told up-front that renewals for additional months will depend on whether the price they set is deemed fair by the seller.
• As the process continues after initial use, buyers will be asked to set their price, and could be given usage reports to remind them of what they used, and how that compares in quantity and value to typical subscribers. 
• The seller can frame the offers and the pricing requests with background on standard set prices, suggested prices, and typical FairPay prices actually set by other buyers, all with respect to the types and volumes of usage by the consumer (such as basic and premium tiers).
• Buyers can be encouraged to give reasons  for why the chose to price as they did, including low or high usage, low or high quality, low or high value realized, economic circumstances (student, unemployed, retired, business use), etc. (all or mostly multiple choice, for automated scoring).
• As long as the buyer sets prices that seem reasonable considering all these factors, the seller offers FairPay renewals, and the buyer enjoys the freedom of the FairPay Zone.  
• For those that fail to pay acceptably, it is back to the pay wall (at least for a time, possibly to be given another chance in the future).
• As this continues, each buyer establishes a FairPay Reputation that characterizes how well and fairly they pay, and whether they do so consistently or erratically.
• Based on this FairPay Reputation, the seller can upgrade or downgrade their subscription offers to include more or less premium tiers of content or service, and added perks.
• At the same time the buyer learns both the value of the service, and the expectations for fair pricing.
• As buyers establish good FairPay Reputations, the seller can extend more FairPay "credit" to include longer periods between pricing, and more value that can be enjoyed before it must be priced.

FairPay takes conventional approaches to subscription pricing and stands them on their head.

• The buyer, not the seller, sets prices (for himself, as a market segment of one). 
• The seller gates the offers to specific buyers, and thus manages the value at risk, at any given time, to each buyer.
• Pay What You Think Fair largely eliminates risks of buyer remorse.
• Price it Backward (after usage) further reduces risks of buyer remorse.
• Buyer price-setting accommodates a wide range of price sensitivities to ensure that anyone who gets reasonable value from a product/service can afford to buy it.
• Sellers need not cut off potential buyers (who may not appreciate the potential value), only buyers who have proven to not value the product (as realized) at an acceptable level. 
• The impossible task of setting a price that is "right" for all is replaced by the manageable task of understanding specific buyers and their sensitivities through a structured dialog.

Given its roots in Pay What You Want, it may take some thinking to appreciate how FairPay can not only result in acceptable prices, but actual profit maximization, and do this with needed simplicity.  Some deeper insight into this is provided in my previous post, Cutting the Gordian Knot of Price Setting: FairPay, Pay Walls, Hurdles, and Simplicity.

FairPay has even more power in the context of a cross-vendor subscription platform:

• FairPay Reputations for individual buyers can be tracked and applied across sellers.
• Sellers can maintain control of offer terms and gating, but manage this better based on a shared FairPay Reputation database.
• Sellers encountering a new buyer (to them) can see if the buyer has already developed a good or bad FairPay Reputation in relationships with other sellers, and frame their offers accordingly.
• Buyers know that their FairPay Reputation is a valuable asset, that enables them to get more and better offers, and that compromising that Reputation can have real consequences, by limiting future offers from other sellers
• The FairPay Reputation database becomes a valuable asset to the platform provider, attracting sellers, and creating a significant barrier to competitors. This can work much like a credit rating database.
• Consumer privacy can be protected by opt-in provisions, and by limiting what data individual sellers can see from other sellers (including the option of none at all other than a simple rating or go/no-go indicator).  

Of course, FairPay can be implemented by a single seller, for use just with their own subscriptions (as long as the platform does not prohibit that, as Apple seems to, but Google does not).  But the power of a common platform and a shared FairPay Reputation database greatly expand on that.

At both the marketplace platform and seller levels, FairPay creates a whole new way to achieve and manage a nearly optimal exchange of value.  FairPay thrives on:

• Ongoing buyer-seller relationships, as opposed to isolated one-purchase stands.
• Aggregation of items in subscription or other bulk purchase contexts.
• Rich dialog on product/service value (as it is realized by the buyer, and with respect to the costs incurred by the seller).
• Building a knowledge base on buyer FairPay Reputations (with full consideration to buyer needs, values, and circumstances).

FairPay processes and platform services can begin with relatively simple structures and criteria, to accommodate initial usage.  As platforms, sellers, and buyers gain experience and familiarity with how the process works, they can evolve toward increasing layers of nuance and sophistication in:

• How offers are managed and framed to users. 
• How prices are set, explained, and tracked.
• How FairPay Reputations are determined.
• Doing all of this with full consideration of all relevant factors and circumstances.

Additional background on the general concepts of FairPay, its grounding in behavioral economics, and its application in various business contexts is provided at the FairPay Web site, and in the many other postings on this blog.

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...]

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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.

The FairPaynomics of Abundance -- an iPad Travel Guides Example

Travel guides on smartphones and tablets (like iPad) present an nice example of some of the richly flexible kinds of pricing behaviors that become feasible with FairPay, the radically adaptive pricing process. I call this FairPaynomics because of the interesting business and behavioral economics issues it creates. One aspect of FairPaynomics is how FairPay can enable nearly unlimited access to content from varied sources, while giving the providers of that content reasonable compensation for the value they provide. The following example suggests the sophistication that advanced uses of FairPay can provide.

A recent article on travel guides for iPads triggered some thoughts on how app stores and e-book vendors could provide new services for buyers, and expand revenues for guide publishers. It points out how guide pricing is a challenge, and how the market is changing from print to mobile. It also noted some limited moves toward slicing and dicing guide content with PDF chapters.

FairPay puts much of the pricing process in the hands of users, and develops a FairPay reputation to select for those who generally pay at fair levels and can be trusted to use discretion in setting prices based on the value received--after trying the product. (A brief explanation is on the sidebar to the right, and fuller explanations are on the FairPay site.)

The challenge in pricing travel guides is that different readers get very different levels of value, so set prices may be too high for some potential users and too low for others. What if I could have access to many guides, and pay based on the use I made of them? It is impractical for sellers to set prices on such a flexible basis, but relatively easy for me to do so (on an intuitive basis, aided with reference to detailed usage data).

Consider the range of situations for using a guide. On some trips I might spend a week or two in one large city, acting as my own guide, and want to make extensive use of one, two, or more guide books to plan excursions, consult while sightseeing, select hotels and restaurants, etc. On a return trip to the same city some years later, I might not need nearly as much help. On a far-away small-ship cruise, I might stay a few days in two terminus cities, plus have day stops in half a dozen small towns in as many as five or six countries along the way (some with guided tours, some on my own). On that cruise trip I might want limited use of one or two guides for each of the countries visited, even though some small ports might have little or no coverage.

Paying a set price for each guide as usually packaged creates significant dis-economies. For my multi-country cruise, buying even a single set of guides to all cities/countries visited is a poor value proposition (well over $100), so I might not buy any. For the single-city first visit, paying maybe $10-40 for one or two guides is reasonable, even a bargain. I probably end up paying less than I would be willing to pay in both extremes. I might be willing to pay more than the set price of the guides for intensive use, and I would pay something more than zero for light use of many guides. Under conventional pricing, I suffer and the publisher(s) suffer.

So how is FaiPay better? Obviously it would be difficult for a publisher or even a full-service bookseller like Amazon or B&N to set multi-factor prices that worked for such extremes of usage. The beauty of FairPay is that they don't have to -- I would set the price. Knowing the list price of guidebooks, I might feel that I am willing to spend $20-40 per week, if I am using my guide(s) heavily, and less if not. I might go higher if covering a lot of cities, and lower if just in one place, and higher if the places are covered in depth, less for small towns with little or no coverage. If I used multiple guides, I would want to divide my payment based on which I used most and which were most valuable (such as tipping me off to good "finds").

How can this work? I would not mind if the sellers had meters that recorded my usage, but I would be put off by knowing that there are set charges per page or minute of viewing, with a meter going ka-ching. I would be OK with such metrics of usage as suggestive of what I should pay, but not as a ticking meter of set charges. With FairPay, I could have it my way.

Amazon or B&N (or Apple or Sony, or whoever) could administer the store, collect the metered usage data, and let me pay as I see fit. As long as I paid at reasonable levels (considering my usage), they would continue to let me get more guides (for my next trips) on a FairPay basis. If I did not pay well, they would cut me off and it would be back to the old way. For my return trip to the big city, they might offer use of an updated guide, and expect only modest payment, resulting in another win for both me and the sellers.

Good for me, some work for Amazon or whoever, but do-able -- but is it good for the publishers? Overall, they might do much better. I would have only bought one or two guides conventionally, for $10-40, so under my FairPay allocation, I might pay $20-40 to those one or two publishers, and so the second might have a sale he would not have gotten. But I would have used other guides in those places as well, and paid something to those publishers, as well. I also would have used guides at various cities on the cruise trip, and paid for the moderate level of usage that was foregone because I did not want to buy guides I would use only lightly (maybe paying $20-30 for those as well). Also, I would feel much better about being able to use and pay for guides accessed my way, not the way the publisher pre-packages them into "titles"that don't fit me, and so would be willing to pay at higher levels. The publisher and the store would get more from me, and I would be much happier about the fairness of the value exchange.

Such FairPay offers might be structured as packages for specific trips, with pricing set by the user soon after the trip. Frequent travelers would place high value on the flexibility this offers, and be careful to pay at good rates to retain the privilege of doing the same for future trips. Occasional travelers, and those on tight budgets might pay at lower rates, but without Fairpay, they might otherwise not buy guides at all. (To prevent low-paying buyers from hopping from seller to seller, the sellers might share their reputation data, just as they do with their credit rating data.)

The bottom line nearly ideal Internet economics. I get access to all the guides I feel I have use for (exploiting their near-zero marginal cost), and pay based on how I use them (based mostly on my intuitive allocation of value, grounded in the reality of usage data). The publisher can sell to anyone who has use for the product, and get revenue commensurate with that use. Doing that with conventional pricing models would be impractical, and the ka-ching of a ticking usage meter would put a damper on the kind of casual use that, with FairPay, might result in added revenue (after the fact, when the value was known). This may sound utopian, but the Internet enables many utopian capabilities. Think about it. It can work.

FairPay for the App Store -- A Radical Pricing Process for Higher Revenue

FairPay, a radically new spin on Pay What You Want pricing (PWYW), could transform pricing for apps. It offers a way to let developers break through the "penny gap" to get a fair price, while giving buyers a high degree of freedom to set their own price.

Apps are becoming a huge business, but the vast majority of them are free. (A recent analysis suggests 81% of iPhone app downloads by volume are free, even though other reports indicate that only about 28% are free by title. This effect has been described as the "penny-gap" -- products go like hotcakes when the price is zero, but demand drops hugely when the price increases to just 1 cent. This makes price setting a major dilemma for app developers. (One attempt to solve this software pricing dilemma was "shareware," in which buyers could Pay-If-You-Want, at a suggested price, but that has proven only marginally successful.)

FairPay can provide a way to bridge this penny gap, using a radically new variation on Pay What You Want, one that still limits buyer risk, but strongly encourages fair prices to sellers. As described elsewhere on this blog, and on the Web, this new variation, FairPay (short for Fair Pay What You Want), uses Internet feedback on what buyers pay, in order to develop a reputation for fairness. The seller (or multiple sellers) then use this FairPay reputation feedback to decide whether to extend further offers to a user based on how fairly he pays. Thus FairPay does not just rely on innate buyer fairness, but looks over their shoulder to help give that sense of fairness real teeth.

(This process also applies to other digital content, as explained elsewhere. The case of e-Books is especially similar to this example of apps. That should be fairly apparent, but I expect to do a blog post more specific to e-books in the near future.)

This process works best with an ongoing buyer-seller relationship, so in the context of an app store, FairPay would be best implemented by the store operator (Apple or Google, or whoever). That way the FairPay reputation feedback is collected across all purchases by that buyer. This enables a dynamically adaptive cycle of offers, prices, feedback, and further offers that rewards those who pay fairly, and cuts off those who do not. I suggest that app store operators should try this (and I would be happy to assist in such an effort).

Such a FairPay pricing process for an app store can be quite simple.

• The store offers to let buyers try a small number of FairPay-eligible apps on a FairPay basis, with the understanding that the buyer can try the apps for a time, see if they like them, and then set whatever price they consider fair (post-sale PWYW).
• The full FairPay process would be explained in detail up front, so buyers understand that future offers will depend on what reputation they develop for paying fairly. Their alternative will be to pay pre-set prices for future app purchases. A suggested price for each app might be provided for guidance.
• The buyer tries the apps, then sets prices, and can indicate why they paid what they did. For example a buyer might explain that they were disappointed in a product, if that is why they decided to pay little or nothing for it. (Of course they can also say the love it, and elect to pay especially well.)
• The store then assesses the prices paid, and the reasons, and decides whether to offer that buyer more items on the same FairPay basis. Criteria might include consideration of app-specific suggested prices set by the developer, and the prices set by other FairPay buyers.
• Obviously those who pay well will get a continuing stream of further FairPay offers (as long as they continue to pay reasonably well). Those who pay well for some, and explain why not for others, might also get a few further offers (effectively on a probationary basis), until it is determined by the store that they either do or do not pay fairly in general.
• Those judged by the store to generally not pay at an acceptable level can be cut off from further FairPay offers, and restricted to conventional, set-price prepaid sales (at least for some time, possibly extending a second chance to try FairPay sometime in the future).
• The cycle continues, based on these evolving FairPay reputations. The longer this process runs, the more meaningful the FairPay fairness reputations of the buyers, and the better able the store and developers are to manage revenue and risk, by controlling what offers are made to which buyers.

Presumably the store would implement and manage this process as a platform service, enabling developers to opt in to offer their apps on FairPay terms, typically in combination with the alternative of conventional pre-set prices. Developers might set suggested target prices and other evaluation parameters, and could change those parameters or opt-out, depending on results.

The result is that FairPay can be a win-win solution for both the developers/stores and for the consumers:

• Buyers will feel more respected and empowered by the added trust and flexibility.
• Some will pay less than the standard going rate, but some will pay more.
• Many who might not make a conventional paid purchase (because of the penny gap) might be willing to pay something reasonable for a FairPay purchase, once they can see that they have gotten a useful app -- the penny gap is smoothed over, and the developer and store get more revenue.
• Developers need not feel they must make their apps free in order to attract buyers (since FairPay gives a try-before-you-set-the-price option).
• The store can (with inputs from the developers) individually and dynamically tune the details of the offers and the process to encourage good payment levels, and to send free-riders back into the hard "pay wall" of the conventional pre-set price.

Fair Pay-What-You-Want Pricing for Music and Games

FairPay, my radically new spin on Pay What You Want pricing (PWYW), may be especially timely for the music business and the video game business. It offers a way to encourage fair levels of pricing while giving buyers a high degree of freedom to set their own price.

The music business has been turned upside down by the challenges of Internet distribution and related piracy, to the point that the prominent band Radiohead offered its 2007 album for download on a PWYW basis. While a reported 60% downloaders did not pay at all, enough did (paying an average of $8.05 in the US and $4.64 elsewhere), to make that experiment modestly successful, and led to other similar offers by other groups. Downloadable games have also been offered on a PWYW basis, with similar modest success.

As described elsewhere on this blog, and on the Web, my new variation, FairPay (short for Fair Pay What You Want), uses Internet feedback on what buyers pay, in order to develop a reputation for fairness, that gives a strong incentive to pay fairly. A key part of this method is that the seller (or multiple sellers) use this FairPay reputation feedback to decide whether to extend further offers to a user based on how fairly he pays. FairPay does not just rely on innate buyer fairness, but looks over their shoulder to help give that sense of fairness powerful weight.

This creates a dynamically adaptive cycle of offers, prices, feedback, and further offers that rewards those who pay fairly and cuts off those who do not. The method works best for an ongoing series of offers and sales. That may not be very effective for a single music group or game developer who can make only infrequent offers of new products, but can be very effective for a music label or game distributor who has an ongoing library of products to offer for sale.

I suggest that labels and distributors seeking better revenue models should try this, and offer to assist in such an effort. I also suggest that individual artists or game developers who prefer not to work with a conventional label or distributer might seek to band together to create a shared distribution co-operative to achieve the modest critical mass of products needed to enable an effective FairPay feedback process.

The FairPay process for such a business can be quite simple.

• A distributor of music or games offers to let buyers try a few items on an enhanced PWYW basis, with the understanding that the buyer can try the item for a time, see if they like it, and then set whatever price they consider fair (post-sale PWYW).
• The full FairPay process would be explained in detail up front, so buyers understand that future offers will depend on what reputation they develop for paying fairly.
• The buyer tries the items, then sets prices, and can indicate why they paid what they did. For example a buyer might explain that they were disappointed in a product if that is why they decided to pay little or nothing for it. (Of course they can also say the love it, and/or love the band/developer, and want to pay especially well.)
• The seller then assesses the price paid, and the reasons, and decides whether to offer that buyer more items on the same basis.
• Obviously those who pay well will get a continuing stream of further offers (as long as they continue to pay reasonably well). Those who pay well for some, and explain why not for others, might also get a few further offers, effectively on a probationary basis, until it is determined by the seller that they either do or do not pay fairly.
• Those judged by the seller to generally not pay at an acceptable level can be cut off from further FairPay offers, and restricted to conventional, set-price prepaid sales (at least for some time, possibly extending another chance sometime in the future).
• The cycle continues, based on these FairPay reputations.
• Unlike most conventional PWYW offers that are restricted to short-lived special promotions, FairPay can be a long term proposition.

Clearly buyers using this FairPay process will recognize that they cannot pay zero, or very little, and expect to get further FairPay offers (except for occasional cases of explainable dissatisfaction). Instead of a majority of buyers paying little or nothing, we can expect a majority paying a reasonable price. And the longer this process runs, the more meaningful the FairPay fairness reputations of the buyers, and the better able the seller is to manage revenue and risk, by controlling what offers are made to which buyers.

This method might be especially attractive in situations where it is known that the artists or game developers get the dominant share of the revenue. Buyers will be especially motivated to pay at reasonable levels if they know that their payments are going to the artist or developer, rewarding them for a good product, and providing the compensation they need to enable them to continue to produce future products. This can work for studios as well, especially if they position themselves as being very supportive of their artists (or even owned by them, like the old United Artists).

Of course FairPay is also applicable to large recording studios and music and game distributors as well. For example, iTunes or Amazon could easily make similar offers across their entire inventory of downloadable music, or across some subset. They might experiment with some selection of songs or albums. Perhaps they might start with less popular and familiar items that might especially benefit from the try-before-you-set-the-price features of FairPay, to increase sales (and revenue) even if the average unit prices are reduced. Similarly, subscription services like Rhapsody and Pandora could apply FairPay to their subscription offers (much like newspapers or video services, as described in other recent posts).

In summary, FairPay can be a win-win solution for both the artists/developers/distributors, and the consumers:

• Buyers will feel more respected and empowered by the added trust and flexibility.
• Some will pay less than the standard going rate, but some will pay more.
• Many who might not make a conventional purchase might be willing to pay something reasonable for a FairPay service -- added revenue to the seller.
• Sellers can individually and dynamically tune the details of the offers and the process to encourage good payment levels, and to send free-riders back into the hard pay wall of the conventional sale price.