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

BitTorrent's "Gated" Torrent Bundles -- Just add FairPay Gating

BitTorrent has introduced "Torrent Bundles" a new "relationship based"content superdistribution bundle.  This is a move very much aligned with the relationship-oriented monetization strategies of FairPay. Both exploit free and gated offers, and both go beyond freemium by doing it in a way that is relies deeply on partnerships with artists and other creators/producers of content.  Torrent Bundles and FairPay are both great ideas, and the combination promises to be even better.

• Torrent Bundles provide a viral superdistribution technology designed to work with various forms of gating, in a way designed to build a relationship.  
• FairPay offers a totally new kind of gating that is based on reputation for fair payment over the course of a relationship, one that can fit very nicely into such bundles and increase their effectiveness in a way that dynamically seeks payment levels that work for both the buyer and the seller.

BitTorrent Bundles are described on their blog as providing a viral download that combines a portion of free content with a portion of "gated" content that can be unlocked.  More background on the business model and planned features is in the Wired interview with marketing head Matt Mason:

The BitTorrent Bundle is described ... as an evolution of the torrent file concept. The user downloads the Bundle, which contains not only free content — in the case of the first Bundle, the Dada Life remix of the Kaskade track “Dynasty,” as well as the trailer for Kaskade’s Freaks of Nature tour documentary — but also a gateway to premium content, as well.

How you open that gate is determined by the creator of the content. For this launch Bundle, it’s simply by sharing your email, but alternatives include pay gates, pay-what-you-want gates, or even links to outside sites like Netflix or iTunes. BitTorrent Bundles, in other words, gives musicians, moviemakers and artists of all kinds more control over how their work gets shared and sold.

 As noted by Mason, Torrent Bundles have Pay What You Want offers in mind.  FairPay is short for "Fair Pay What You Want."  FairPay takes the concept of buyer participation in pricing and building relationships to embed relationship-feedback-based gating directly into the pricing process.  This is described more fully in the sidebar and elsewhere in this blog and the FairPay Web site.

Briefly, the idea is that FaiPay tracks how buyers set price, asks them why they set a high or low price, and uses that information to develop a Fairness Reputation.  It then extends the social contract with buyers, by offering some content only to those who establish a reputation for fairness.  This gating based on Fairness Reputation can apply to premium content, or can apply to all content after an initial period of relationship building.  The result is that the natural human drives to be fair, to reciprocity, to altruism, to confirm to social norms, etc. are reinforced by the incentive of continuing and better offers.  This gives buyers a strong incentive to not try to free ride, and enables sellers to learn what the buyers value and how to deliver it.

Mason's book, "The Pirate's Dilemma," talks about reinventing capitalism, and how enlightened businesses can compete with pirates and gain internal efficiency while bringing greater value to society.  FairPay provides a highly automated adaptive engine designed to do just that in a systematic way.  FairPay solves the price-setting dilemma. (It also changes the game regarding piracy "When buyers set prices, no man will be a pirate.")

I am seeking to reach out to BitTorrent to suggest that it would make eminent sense for them to create a FairPay pricing option within their bundles, and would be happy to assist in that.    Any reader who can assist in making a connection to them (or others with compatible ideas) is invited to do so.  (I can be reached at fairpay [at] teleshuttle [dot] com.)

This is the first I have written here about the use of FairPay in a viral superdistribution context, but that is one of the ways FairPay was designed to work.  Anyone can redistribute bundles that contain FairPay offers, and the recipients can begin to establish their own FairPay relationships (and reputations) to get the added content (if not already in a FairPay relationship).  Of course criteria for pricing of content received virally would be expected to be relatively lenient, to encourage risk-free sampling, so that both senders and recipients feel well treated.)

FairPay is designed to coexist with, and even mimic, other pricing models.  It can operate along a spectrum of free, free for feedback information (including just an email, as in the Ultra Torrent Bundle), conventional non-gated Pay What You Want, and reputation-gated Fair Pay What You Want.  It offers the free plus paid mix of freemium, but in a way that provides a flexible boundary between free and paid, customized to each buyer.

Also relevant to BitTorrent, by creating a platform that supports FairPay, a byproduct is building a FairPay Reputation Database. This can be used to enable any producer of content on that platform to make offers to new buyers based on the reputation they have gained with other sellers, and thus make better offers to those having a reputation for being reasonably fair. (This can be done is ways that do not compromise privacy.) As owner of this database, BitTorrent would build a valuable asset (one that works much like a credit rating database).

BitTorrent Bundles seems to be pointing the way to a more enlightened and efficient model of content distribution. As people begin to see the merits of these ideas, the value of the FairPay pricing strategy will be increasingly clear.

PIPA and SOPA -- FairPay and the Death of Piracy

[Update 9/13/16 -- PIPA and SOPA are long dead, but this issue of piracy and related issues of ad-blocking remain at the center of the content industry.  The larger points here are as relevant as ever.]

Sabers are rattling this week with the consideration of seemingly draconian measures to stop Internet piracy of copyrighted materials.  The FairPay model for monetizing content puts this issue into interesting perspective. It suggests the way to end piracy is not to reduce the supply, but to reduce the demand.

Basic objectives:

First, let's get back to basics. What is the real objective here?  Copyright and ownership of intellectual property are not ends in themselves, but means to a larger end.  This larger end, is clear in the Constitution: "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

• Thus copyright is clearly only a means "To promote the Progress of Science and useful Arts." 
• It would be foolish to apply measures to protect copyright that impede "the Progress of Science and useful Arts" more than they promote it.

The problem with PIPA and SOPA is that they seem to overstep the objective, and to enhance a means at potentially high cost to the desired end.

• The real issue is that the Internet has facilitated piracy to the point that it threatens the ability of creators of writings and other arts to earn reasonable compensation for their work, and thus threatens the progress we seek for society.  If creators lack fair compensation, fewer will create, and society will lose.
• We (society) support IP ownership to the extent that it is good for society, not the other way around. 

So the challenge is to find better ways to ensure the fair compensation of creators for the good of society. The Internet is a tidal change, and we must learn to channel the tide, and harness it, not try to stop it.

Fairness and Piracy:

Robert Levine's "Free Ride" provides a nice summary of many of the issues of piracy, and makes it clear that some level of piracy is inevitable, with a level that depends on a number of factors, including:

1. The ease and effectiveness of piracy relative to any issues of quality and risk.
2. The ease and effectiveness of legitimate sources.
3. The cost of legitimate access (relative to piracy)
4. Social and ethical factors relating to the legitimacy of the IP owner, and the fairness of stealing from them (stealing service, not bits).

It is well known that the Internet has shifted at least #1 and #4 toward piracy.

I suggest the real solution is not laws and other efforts to shift #1 (although some modest improvement may be gained), but to shift #2-4, and especially #4.  The value of shifting #2 and #3 are well known, and summarized by Levine.  What is less clear is how important #4, fairness, is.

Robin Hood, FairPay, and the death of piracy

As described elsewhere on this blog, FairPay is a new model for transactions related to copyrighted content that lets buyers pay what they think fair, within limits.

• When buyers can buy legitimately for a price they accept as fair, the cost becomes a non-issue.  Those who have limited means or get little value can still buy for a price that considers those factors fairly.
• When buyers can buy legitimately for a price they accept as fair, the fairness of piracy becomes clearly insupportable for all but the most sociopathic. It is hard to argue that "information wants to be free" (as in free beer), when it is free enough.

Piracy is a tax imposed by the people on sellers of IP, a Robin Hood tax. When the price of content seems onerous, people feel they should not have to pay for it, and piracy appears justified. It is seen as noble for the poor to steal from the oppressive rich.

Killing the demand for piracy, not the supply

As with any illegitimate product, it is generally easier and more effective to reduce demand, not to choke off supply.  That is best done not by legislation, but by making the legitimate alternative more attractive.

There are a number of interrelated levers to move in that direction:

• FairPay pricing is a significant step in the right direction, one that also supports the following steps. It makes prices more suited to individual buyers needs, values, and ability to pay. Copyright owners are given the right to extract "monopoly rents," but must balance that with the quid pro quo of society's desire to benefit from their creations.
• Making sellers more legitimate in the eyes of consumers is also a major factor. To the extent the IP owners are seen as evil and rigid, faceless corporations that exploit their consumers (and their creators), it is easy to justify stealing from them. Showing that they listen to consumers and can be flexible in pricing will greatly increase perceived legitimacy and deservedness.
• Getting sellers to be more clearly respectful of creators can also have a big effect. Many studios (such as music labels) are perceived as sharing little of their profit with their artists. While they do have real costs of nurturing, marketing, and managing, clearly the Internet is shifting that toward what Seth Godin calls "skinnier" models. IP aggregators must either get skinny, or demonstrate why they deserve the share they get, and be transparent about how much they share with the creators.

FairPay is not essential to all of these levers, but it can contribute significantly to all of them.

When buyers set prices, no man will be a pirate. That may not be true in every case, but it is true enough.

MIT Enterprise Forum of NYC 12/1/11 Symposium will Include FairPay

"Better Strategies for Monetizing Digital Offerings: 
Thinking Out of the Box while Looking across Industry Silos."

[Update: see event report with video and slides.]

That is the theme of the session that I am helping to organize, and will be a panelist at.  The full slate is:

Moderator:
- Dr. Howard Morgan, Co-Founder and Partner, First Round Capital

Speakers:
- Betsy Morgan, President, TheBlaze.com
- Shawn Price, President, Zuora.com
- Richard Reisman, President, Teleshuttle Corporation
- Paul Smurl, Vice President, NYTimes.com

I suggest this will be an outstanding session--we expect to generate a very interesting dialog on strategy and innovation, both incremental improvements, and more radical directions.  (And we may still add one more panelist to represent the music or video industry.)

Register at MITEF-NYC.

The concept is:

Monetizing digital offerings is a continuing challenge. Advertising can generally generate only some of the revenue required, so customer payments appear to remain essential for most businesses. Freemium was a good starting point, and now soft pay walls are being tested. Shifting music and film from purchase to subscription is emerging as a sea change.

What else is new? What can be applied across verticals? Do we need to rethink the value proposition and customer relationship? How successful are strategies to apply social influence and "pay what you want"?

This session will look broadly at how content businesses such as publishing, music, and video are transforming themselves to achieve economic viability:

Among the issues we will discuss:
- What strategies are they adopting?
- What can these verticals learn from one-another?
- How far out of the box can solutions go?

I will present a brief overview of FairPay, and will be available to address questions during the Q&A, and afterwards.

We hope to see you at this exciting event.

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.

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.