Friday, February 8, 2008

RSS - a Great Tool For Artists

RSS - Don’t Be Left BehindThe way people use the Internet changes faster than yesterday’s socks. If you are exploring new ways to make money from your music then you need to understand how humans are interacting with the web. RSS is a relatively new way to use the web and the use of RSS is exploding.RSS - Really Simple Syndication or Rich Site SummaryFrom a consumer or fan perspective, RSS is a service and a tool for selectively managing information feeds from any number of websites and blogs. From a content creator or artist perspective, RSS is a service that enables you to publish a stream or feed of information. This feed is formed from the sequential updates you make to your website or blog.

http://www.unsprungmedia.com/unsprung-lessons/2007/12/3/2007-rss-a-great-tool-for-artists.html

Create An Elaborate Plan

To persuade fans to tune in, to fall in love with, and to spend money on your brand, you need an elaborate plan that goes way beyond the album or singles decision. You will have go far beyond creating a MySpace page that features five of your songs and ten pictures of your band.

You will have to rethink what it means to be entertaining on the Internet.

name of your brand, the URL you use, the first word you type, the sequence in which you release your songs, your lyrics, the images you feature, the videos you release, the messages you type, and everything you put into your online presence should be part of an elaborate plan to seduce fans. The concept of seduction does not have to be sexual. I use the concept of seduction to convey complexity and long term planning. Map out a two year or three year plan that elaborately pulls people into your world of images, poetry, lyrics, stories, music, mystery, hints, clues, energy, characters, plot, storyline, drama, intrigue and excitement.

A regular old website or MySpace page is not the ideal vehicle for building a brand upon. Your name and your image may not be the ideal vehicle to build a brand upon. Start by thinking like the creator of a television series. What do you call it? What is it about? How many “seasons” will it take to tell the story? Make the presentation simple and compelling, but make your plan to seduce - elaborate, intriguing and complex.

To Build a Brand on the Internet - Brand Together

This post will argue that the one of the most effective ways build a brand on the Internet is to join forces with other artists. Building a brand in any industry is difficult.

Building a nationwide or global brand in the music industry is a colossal undertaking. When it comes to entertainment, there are dozens of alternative and competing product categories, and when it comes to music there are millions of options to choose from.

If you are looking to build a business in music that generates ongoing revenue, the only real option is to build a brand on the Internet.

If you have a strong brand on the Internet, your live show traffic will increase, you will sell and stream more music, you will sell more merchandise, and you will attract sponsors and advertisers.

According to emarketer

While the total number of US music consumers has more than doubled to 96 million in 2006 from 45 million in 1980, annual per capita music expenditures have dropped drastically to $120 in 2006, from $198 in 1980.

April 2007 - Solutions Research Group reported that approximately 24,000,000 American men and 18,500,000 American women have an iPod.

April 2007 - Apple announced that is sold its 100 millionth iPod. Apple has also sold 2.5 billion songs, 50 million television shows and 1.3 million movies.

March 2007 - Combined sales of CDs, digital tracks, and ringtones are down 10% so far this year

2006 - MySpace is home to 2.2 million bands, 8,000 comedians, thousands of filmmakers

2006 - MySpace has more than 100,000,000 unique profiles

2006 - The iTunes store features 3.5 million songs

2006 - iTunes is selling 5 million songs per day, or 58 songs per second

2006 - 55% of the music bought through iTunes is sold as individual tracks

2006 - Americans spent 500 million on ringtones last year

2006 - 9.3 million people share music files each month

2006 - One billion tracks a month are traded worldwide on illegal file share networks

2006 - 800 music stores closed in 2006

2006 - 1 billion people speak English

Radio numbers declined

Radio numbers declined to their lowest level since Arbitron began keeping statistics in Fall 1998. Radio usage dropped in every cell except 50-54s. Steepest declines continue to be among teenagers and young adults, as their attention is increasingly diverted to other media. That’s especially true among males, with Men 18-24 and 18-34 cells posting the biggest year-over-year declines. But the crowded media world is also taking a toll on the 25-54 money demo, which fell 15.1-14.9. There’s also a disturbing trend among female demos. In the Summer book not a single female cell saw an increase in listening. All but two (50-54 and 65+) declined. Compare that to male demos. While older women mirror the trend of listening less, the Summer book shows Men 45-64 were listening to the radio more.

From The Long Tail

Concerts and merchandise: UP (+4%)
Digital tracks: UP (+46%)
Ringtones: UP (+86% last year, but probably just single-digit percent this year)
Licensing for commercials, TV shows, movies and videogames: UP (Warner Music saw licensing grow by about $20 million over the past year)
Even vinyl singles (think DJs): UP (more than doubled in the UK)
And, if you include the iPod in the music industry, as I'd argue a fair-minded analysis would: UP, UP, UP! (+31% this year)
Only CDs are down (-18%). They're around 60% of the industry not including the MP3 players, but just around 25% if you do include them.

Digital Music New reports:

More than one-third of all PCs worldwide now have LimeWire installed, according to data jointly released by Digital Music News and media tracking specialist BigChampagne. The discovery is part of a steady ascent for LimeWire, easily the front-running P2P application and the target of a multi-year RIAA lawsuit. For the third quarter of this year, LimeWire was found on 36.4% of all PCs, a figure gleaned from a global canvass of roughly 1.66 million desktops.

According to eMarketer:

37% of the US adult Internet population used online social networking at least once a month - this year.
70% of all US teens visit social network sites on a monthly basis - this year.
49% of all online adults and 84% of online teens in the US will use social networking each month - by 2011.

From Pew Internet via TechCrunch

39% of online teens share their own artistic creations online, such as artwork, photos, stories, or videos
33% create or work on webpages or blogs for others, including those for groups they belong to, friends, or school assignments
28% have created their own online journal or blog, up from 19% in 2004.
27% maintain their own personal webpage
26% remix content they find online into their own creations

According to Billboard Magazine

While not one track sold more than 500,000 digital units in 2004, 114 did in 2007, almost double the 61 tracks that crossed that threshold in 2006. Meanwhile, 36 tracks passed the 1 million sales mark, more than double the 17 in 2006.

The reality is:

The reality is: creators of packages or decks (artists) are actually uploading assets (music, images, video, schedule info, lyrics, etc.) to a database that resides on a system of servers (The Open System), and what users (fans) are manipulating, sharing or sending is a package of “links” that are tied to a Matrix of Permissions.The Matrix of Permissions is actually what ALLOWS things to happen.

Let’s say for example, an independent software developer wants to make a web-based music player for social networks that enables fans to “upload” any number of FAT Packages into a widget that features a slick cover flow interface; let’s call this widget the “FAT Cover Flow Player”.If the software designer has done a great job, the user will perceive that he or she is uploading, dragging, dropping and sorting a bunch of FAT Packages.

In reality, the user is transferring pointers or links to the assets that reside in The Open System, and when the “transfer” occurs, the Matrix of Permissions allows the FAT Cover Flow Player to access the assets within each package, and based upon the permission settings – do something with those assets, such a play music and display images and lyrics, and with or without advertisements. Conceptually, the same thing would happen when a user wants to transfer Packages to a portable device.

This seems much more complicated then tossing around MP3s, however the systems, the software, the devices and the networks we use now are much more powerful and capable than how we devote them to loving MP3s. If we want to restore the recorded music industry to growth and profitability, we have to invest in these types of seemingly-complex systems that are capable of TRANSPORTING value; that is, the type of value that consumers will pay for.

CS - COOL STREAMS

CS - COOL STREAMS – THE NEW RADIO
If a FAT Package is the new “album” that fans acquire when they believe in an artist, then a Cool Stream is the new “radio” that consumers will use when they want to passively listen to music.

CS - COOL STREAMS ARE CUSTOM STREAMS
Music recommendation engines combined with music streaming services will enable anyone, almost anywhere, to dial into their own custom stream of music. Simple interfaces already enable users to funnel and filter music like never before. Basic programming options such as these (basic examples below) will continually shape the streams of music we passively listen to.
Enter twenty songs you like.
Enter five songs you hate.
Press/Click here if you never want to here that song again.
Press/Click here to skip that song into next week.
Press/Click here to put that song into heavy rotation.
Slide this dial to balance your playlist between existing hits and new music.
Press/Click here to add that song to your favorites.
Enable my friends to add songs to my playlist.

CS - COOL STREAMS EVERYWHERE
It won’t be long before you can listen to your own cool stream everywhere. Cool streams are already available on your computer, and more and more handheld devices will offer this capability. The automotive industry is embracing this technology, and you will even be able to push your stream into the locations you are traveling to such as bars and nightclubs, albeit with some restrictions.CS -

CROSS STREAMING
What happens when 100 people are trying to push their streams into the same bar? The "stream god" puts all of the streams into a funnel and plays what makes sense – given everyone’s lists and preferences.

CS - STREAM BIDDING
Want to listen to your Cool Stream in the pub between 9:00 PM and 10:00 PM? Using your mobile phone, outbid the other patrons for the right to listen to your stream. Stream bidding is another example of the “user interfaces” that will change how music is consumed.

CS - GETTING IN WILL BE EASY
Have you heard the phrase “an ass for every seat”? Music recommendation engines will become so freaking useful over the next three years that it will be possible for the listeners that enjoy your exact flavor, color, genre, niche and brand of music, even if it’s just one listener, to FINALLY find your music. Every artist will have an opportunity to find the perfect genetic mate between his/her music and the fan(s) that may love it.

CS - EVERYWHERE AND ANYWHERE
The type of streaming services described here will be EVERYWHERE and ANYWHERE. This is a bit of important redundancy, however this stuff will be so prevalent in life that it will seem like “pennies from heaven” for artists. Meaning: your music will be placed into so many streams, so often, and in so many places, that the micro revenue opportunities will be endless. Remember, these things will find the “ass for every seat”.

CS - GETTING PUSHED OUT WILL BE EASY
While getting into these streams may just mean passing some quality threshold standards, I believe getting pushed out may be just as easy. Let’s say your new song has been streamed 99 times, and on every occasion someone pushes the “I never want to hear that song again” button - well, your song may be on the way out of the system for good - or at the very least, your play frequency will drop to minimal.

CS - WITH ADS OR WITHOUT
It’s probably obvious, but services offering Cool Streams will make streams available with ads or without. In the case of without, consumers will purchase buckets of ad-free time. Either way, you will share in the revenue streams that are generated from the use of these services.

CS - HOW MUCH MONEY WILL YOU MAKE?
Unfortunately, I believe that the amount of, or fraction of “pennies” you may make from each stream is still unsettled, or it has not been clearly established in my mind. Some services are paying artists directly, while other services are using the established industry-royalty-infrastructure. What’s more clear to me is this: while today’s music industry can be characterized as “hit driven”, tomorrows music industry will be characterized as a “slow burn”.

CS - THE SLOW BURN
Let’s say for example that you have just created a very good (subjective - I know) alternative rock song; you entered the song into the recommendation-god-machine, and then you went about the business of your life. Given the complexity of the machine, the ebb and flow of popular culture, the size of the population, the amount of songs in the machine, and the durability of good songs – I would say that it MAY take two years to generate a return you can make a car payment with. Of course some songs will go like wildfire, but other songs may just slowly burn until they have been filtered into the adoption curve; which is continually shaped by culture and technology.
CS - WHAT CAN YOU DO NOW?
As I said at the top of this post, go back to making great music; that’s the best thing an artist can do period. There are a couple of other things you should consider: The Copyright Royalty Board is going to rule on the royalty rates that webcasters must pay when offering services such as those described here; you should consider how this may impact your future. I plan to look deeply into this – stay tuned. Also, be careful about tossing around your publishing rights. You may not be generating much of an income from publishing now, however this may be the horse that generates all of your winnings in the future.

Here are some questions I have been asked about FAT Packages, and my broad answer to all of the following questions.

QUESTIONS
How would packages be played in a song/media player?
How would one use packages on a social network?
Can I add my own content to a package before sharing it?
Can I break a package apart?
How can I use a package when disconnected from the Internet?
How would I use a package in a device?

ANSWER
The visual metaphor of a package or deck (shown here) is great for enabling users to grasp the concept of something larger and more powerful than an MP3; it is also great for building user interfaces around; as a software designer can enable people to perceive that they are truly building, managing, sharing and sending something concrete and tangible

FP - FAT PACKAGES

FP - ROLL YOUR OWN
In the near future, you will be able to sit down in front of something I will call your Digital Asset Browser; it’s something like iTunes for ALL of your digital stuff - including: your songs, your images, your blog entries, your videos, your show schedule, your fan widgets, your multi-player fan games, your friends list, your comments, your art, your lyrics, your links, your ringtones, YOUR advertisers, and etc. You will then be able to CUSTOM ROLL all of this stuff into a tidy FAT PACKAGE and sell it to your fans.

FP - RUNS ON EVERY DEVICE AND EVERYWHERE
Your Fat Package will run on every single capable mobile and desktop device on earth including television, and it will be deployable upon every social network on the planet.

FP - THE FREE AD-SUPPORTED VERSIONThe FREE, sharable, tradable version will be ad-supported. You will receive a portion of the ad revenue when users interact with your Fat Package. If you are worried about a world gone crazy with advertising, then you should know that this type of package would be one of the most attractive advertising vehicles on earth. The matrix of quality user info (iPhones spitting out profile data for example) combined with the “information-generating” value of this type of engaging content will attract higher CPMs (dollars per thousand impressions) then web pages do now.

FP - THE NO ADS VERSION
Consumers will purchase buckets of ad-free time, and they will have the option of applying these minutes to playing with your FAT Package without being molested by intrusive ads. You will also have the option of turning features on and off depending on which version (ads or not) of your FAT Package fans are using.

FP - THEFT WON’T MATTER
As soon as it’s “stolen” these things will switch to ad-mode. So, it doesn’t matter; theft (sharing) becomes a good thing.

FP - DYNAMIC PUBLISHING
Everything you change from your songs to your schedule is automatically reflected in every FAT Package you put into the marketplace. This isn’t MySpace or Facebook, this is your own FAT Package of things you will simply publish and sell. These things can appear everywhere and anywhere; fans will collect them, display them and trade them.

FP - HOW MUCH MONEY WILL YOU MAKE?
Like anything that is desirable or not, it depends on the quality of your package. Over time, I believe a single copy of a FAT Package will generate twenty times the revenue of an MP3. And don’t forget, you will be updating your package continually; thus increasing its’ value over time. FP -

PREPARING FOR THE FUTURE
Since this stuff is not in the marketplace yet, you should be asking yourself what you could do to get ready for the future? I am going to follow up with more on this later, but my primary advice is to learn how to be “episodic”. Your FAT package will have more value when fans know that it’s constantly and continually updated with a stream of good stuff. You may want to reconsider the notion of a “band”; team up with a filmmaker, a writer, a cartoonist, a photographer, and/or other creative people. At the very least, you should reconsider the notion of an album and/or what a song is. Where a song was a permanent snapshot in time, and an album was a time capsule, with FAT Packages this no longer has to be the case; songs could evolve forever, and albums will become journeys. You have to learn how to think like a television series writer; tell a story, develop characters, create drama and mysteries, lash your music to visuals, release things over a multi-year period, and continually evolve your “art”. (etc. etc. etc.). Yeah, this raises the bar and makes life more challenging, however think about this: in 2007-2008 there is barely a circumstance where people listen to music – when a screen or monitor is not present; this includes the car, the gym, the desk, and the pocket. The ability to have a visual or interactive component is always there now. This is not unprecedented; think back one hundred years – this was the only way music was experienced – live, with visuals, and/or attached to a story.The notion of JUST listening to music without experiencing something visual, physical or interactive is only 100 years old. All throughout the rest of time, “music” was always more than just an auditory experience.

Freaking Out About The Future - Don’t

CHILL OUT
The sky isn’t falling, and your music will have value beyond the pennies you are currently making from selling MP3s. The future is bright. Go back to making music and let the industry get over this unpleasant hump. Things are going to change and you will make money.

GIVE AWAY YOUR MP3
regularly advise artists NOT to hold out for download revenue. You can read to find out why I recommend giving away at least a demo version (or better) of your MP3s.

THE CD IS ALL DONE
no longer consider selling CDs as a serious revenue option (depends on the genre). Hoping that CD sales will magically rebound is for dreamers. This blog and this post are for those that have moved beyond the CD. You may sell some CDs in 2008-2009, but beyond 2010, CDs will become the novelty item that vinyl is today.

THE MP3 SHOULD BE ALL DONE
The MP3 sucks as a package; it was invented twenty years ago when Jimmy Carter was president, and at a time when computers had about as much power as today’s Happy Meal toys. The MP3 was a necessary evil that changed everything, but its’ time has come. It’s a blasted little invention that

TRANSPORTS
(key term here) nothing but a hearing problem. When Apple can transport 60 minutes of color television programming, soundtrack included, to your pocket for $1.99, you know the MP3 is a dinosaur in comparison.

YOU WILL MAKE MONEY
Here’s why you don’t have to freak out about the future: Fat Packages (FP) and Cool Streams (CS). (I know what you’re thinking – it’s a physical contradiction.)

The Future of Music Coalition

The Future of Music Coalition released a study in partnership with the Media Access Group that found radio consolidation to be detrimental to artists and listeners. Among the many findings of the study was that "A small number of companies control what music is played on specific formats. Coupled with a broad trend toward shorter playlists, this creates few opportunities for musicians to get on the radio. Further, overwhelming consolidation of these formats deprives citizens the opportunity to hear a wide range of music..

"Radio's Big Bully"

he history behind the radio conglomerates and the effects radio consolidation has had on the industry. "Thanks to laissez-faire regulators in Washington," he writes, "Clear Channel quickly has put together a stunning piece of vertical integration in big-money pop culture," he writes. "Last year, the company spent $4.4 billion to purchase SFX Entertainment, the nation's dominant concert venue owner and touring promoter. Clear Channel also owns a radio research company, a format consultancy, regional radio news networks, an airplay monitoring system, syndicated programming, radio trade magazines like the Album Network, 19 television stations and 700,000 outdoor billboards worldwide. With so many resources at hand, the company has all but cut off its business with outside vendors."

did the industry really die ?

Radio is so horrible right now. I don't even understand what the FCC was trying to accomplish. I just am like, what was the goal of this again? I thought you were supposed to be creating opportunity. You gave monopolies. You basically created monopolies. The richest and the strongest took over.

It's such a complicated game that it's hard to maneuver. If you've got a record that's working, and you're on there, you love the system. If you have a song like a "Hey Ya" that all thousand Clear Channel stations are playing, you're in heaven.

But if you have a record that none of the Clear Channel stations are playing, you're out. What do I do? Like, who do I have to pay? It's not good. There's no competition, there's no originality, the playlists don't entertain new artists. There's no new energy. …

Speaking Out

Clear Channel is always referred to as, you know, this great Satan, or the worst example of this. They've done nothing different from what other businesses would do given the state of their industry, what the FCC deregulation of the industry has said, that you are allowed to own thousands of radio stations if you want to. I mean, it makes sense that a businessman would say, "Well, let's do it. And then let's use our clout to make even more money."

I think it's a bit of a red herring when people say that the music industry is all screwed up; it's Clear Channel and all this kind of thing. It's actually the way business is done in America that's kind of messed up. Because this is not unique to the music industry. I mean, look at the pharmaceutical industry and how business is done in that industry with free samples and holidays and going to doctors and all this kind -- I mean, this is how business is done in America today. It's not just the music industry.

So it shouldn't surprise us. So why are we surprised?

I don't know why we're surprised. I guess most people don't take too much notice of this stuff. You know, we all go about our lives. Everybody has got their lives to lead. We have to worry about paying the bills, the mortgage and getting the kids out of the house in the morning. Now, people are not worried about how the music industry is squeezing independent artists out of getting airplay.

But, it's only when we think back and we say to ourselves, "my God, for 30 years I've been listening to the Rolling Stones and Elton John and Madonna and The Beatles. And 30 years from now what am I going to be listening to, because I can't find anything I like on the radio?" I mean, maybe that's when you suddenly say to yourself, maybe this matters.

Well, maybe if you're our age, you're thinking that. But, if you're 20 you're not thinking that, because you weren't there when that golden era of FM radio was there and independent music did get heard, and record labels signed artists that actually expected it to take three albums before they brought them in. We know that because we were perhaps around then. But the younger generation of music listeners is not aware of that stuff. This stuff is not a surprise to them.

Does it matter?

Sure, it matters. It matters because in a society where artists are squeezed out of being heard or seen, whether it's in music or any other art form, then you're really not getting a challenge to the status quo. So, if music is being made by an independent artist, but is not being heard, then things are not going to change. There's no challenge to the accepted norm. And that's really what the artists are for, and that's the role that they play throughout history. …


what do you have to say on this topic

Clear Channel controls the vast majority of the radio stations in the country. By any normal standards it's a monopoly. So instead of having lots of program directors, and maybe the guy in Philadelphia is a little crazy and he'll play a record nobody else will play, and people start hearing it, and requesting it, and the record takes off by itself. No more. Clear Channel is in control. If they don't want it played, it doesn't get played. The public doesn't get a chance to call in and vote, and speak.

So now if you can't get through Clear Channel, or you can't get through MTV, how does anybody know your record is out?


Opinion made about the music industry

There's essentially, I don't know, two or three radio stations for all intents and purposes right now, which limits the ability of music, different music, to get out there. Program lists are being devised on an almost national basis for certain kinds of formats. The independent thinker as used to exist in the radio station is no longer allowed to exist.

In the early days of the music business, the record business, you could find a DJ in Cleveland, like Alan Fried, or in Buffalo, who would fall in love with a record, start playing it, people would react to it, and you could start a record off that way. It's much more difficult to do now with two or three conglomerates controlling all the radio formats. These problems beget their own solutions.

Satellite radio may end up being what radio is about. Pirate radio has been a result of the consolidation of radio stations. And the lack of power of radio really, in terms of affecting people's lives, is a result of its dumbing down to a bland, one-dimensional approach to music.


the way the music industry die

The radio business, in the early '90s, had really started to suffer. There were lots of stations that were doing poorly financially, and the broadcast lobby, which is a very powerful lobby in Washington, successfully lobbied Congress to raise the limits on station ownership. So, whereas before a company would be limited to owning roughly 40 stations nationwide, when this 1996 legislation was passed, there was suddenly no limit of what you could [own]. Thousands of radio stations changed hands and companies that wanted to really get on radio were able to pull up some enormous multi-billion dollar mergers. And suddenly a company that once owned three-dozen stations could suddenly own a thousand.

And so you just had forces emerge that couldn't have legally existed before because of this change, and that's really revolutionized the music business.

The effect has been?

... All of a sudden you have these companies emerge where they controlled every station in that city or they controlled a small station that you used to be able to hold sway over. But they also have a huge station that held sway over you, and they can use that to leverage the record companies. So, the bounds of power really shifted toward the radio conglomerates.

And this idea of 20-song playlists, you're talking about a funnel being narrowed?

Right. I think it's difficult to measure exactly what the effect on playlists has been. But, I think there's statistics that show at least at the top of the playlist, there are fewer new songs that are getting the heaviest rotations. So what you're seeing is essentially a trend where in most radio formats there's a small number of songs that get played over and over and over again. And the number of songs that get that opportunity has definitely shrunk.

And so if you are someone who believes, as a lot of record executives do, that radio is the most powerful promotional tool that you have, and a big part of your week is spent trying to get spins on radio stations, that's a big problem. Because now you've got few opportunities to get into that pipeline where exposures would seem to translate to record sales.


Fixing the Business Model

What we’ve discovered so far are two critical things: First, the implicit contract between the principals and the agents in the music market, far from creating the right incentives, in fact produces a moral hazard – because it doesn’t take into account problems in monitoring the record industry. Second, technology has allowed music listeners to take matter into their own hands, creating a double moral hazard.

Does understanding this help solve the record industry’s problems? Yes – in a major way. If the record labels can’t resolve the information asymmetries that let it operate under extreme moral hazard, and that cause listeners to retaliate with their own moral hazard, it should do exactly what these economics suggest: provide listeners with insurance. Of course, it would be better if the industry could resolve these information asymmetries, but I’ll leave that for another time.

How can the record industry offer insurance without creating a double moral hazard? The surest way is to offer a subscription service instead of charging for discrete bits of music. Otherwise, it might offer limited guarantees – the opportunity, for example, to sample any song in it’s catalogue an unlimited number of times, but to only download it once. It’s important to note that low quality 30-second snippets don’t really cut it – they most likely don’t provide enough information to ensure to consumers that the industry is doing it’s job.

But the simplest way might be to actually offer insurance – just like the standard model of the insurance industry. That is, for a fee (the deductible), offer consumers the ability to sell their risk of buying music they don’t prefer. For example, users might pay $20 a year, for the ability to return a certain amount of music.

Another way is to offer listeners a contingent contract. Contingent contracts are where payment is dependent on some property of a good, like quality. You sell a contingent contract every time you order from Domino’s: if it’s not there in 30 minutes, your pizza’s free. The points is that these contracts offer another form of insurance, by matching quality to price – and so create the incentive for agents that are also good for principals. Because they make up for quality slip-ups, contingent contracts help sell goods when quality is uncertain, by reducing risk. It’s difficult to see how this can apply to information goods like music – since the price is paid before the quality is discovered. But there are innovative ways to do so. For example, shipping companies offer rebates when they deliver late. Similarly, the music industry might offer rebates when the aggregate sales of a top singer’s latest album are less than expected.

A third way is to offer multilateral contracts, which offer the potential for risk-sharing among listeners. Multilateral contracts are made by one party, with many parties – but, crucially, whose terms to any one consumer depend on the acceptance of the contract by other consumers. For instance, labels might offer downloads from a given artist at a discount – but only if enough people offer to buy the good. Alternatively, they might try a pricing scheme where the industry offers steeper discounts the more people offer to buy an artists’ goods. The point is that schemes like this make private information and expectations public, allowing people to pool and share their risk.

All of these are essentially ways to let consumers hedge the extra risk they take selling a broken contract to agents they know are operating under conditions of extreme moral hazard. Right now, consumers only have one viable way to hedge that risk, and eliminate the moral hazard – by parceling it out, and sharing it with other listeners, via file-sharing.

So we’ve helped explain three crucial things. First, why many music listeners feel so much antipathy to the music industry – because they understand the moral hazard and large agency costs implicit in the risky broken contract they’re being offered. Second, why many feel morally conflicted about file-sharing, but continue to do so anyways – because they have no other risk-mitigating mechanism. Third, crucially, what the music industry can do in the face of these kinds of contract dynamics to revolutionize it’s business model.

Current Models

We can now take a look at what’s wrong with the latest efforts to market music over the net. Immediately, we can see that the most successful business model over the net will utilize prices to convey information rather than price everything at exactly the same value, and crucially, provide a mechanism for consumers to hedge their music risk. Sadly, all the major new services provide none of these things. They’re essentially the same old business model, minus physical distribution costs. Not a surprise from an industry that’s more afraid of change than death.

Itunes, for example, standardizes prices across most of its products – providing consumers no information about future value or risk. It also entirely ignores the role of the positive consumption externalities users produce, because it provides no mechanism to share playlists or file directories. Finally, and most importantly, the only mechanism that iTunes provides consumers to mitigate risk is 30 second sound samples. It’s unlikely that this is enough to eliminate the moral hazard labels operate under. But that’s besides the point: what it really means is that iTunes can be outcompeted easily by any service which provides everything iTunes does, as well as a more efficient risk-mitigation mechanism, such as more complete insurance, contingent contracts, or a limited and rights-protected file-sharing scheme.

Whatever the mechanism the industry decides to help listeners hedge risk, it’s important to note that it should be one that makes strategic sense. There is one simple risk reduction mechanism that would be even more destructive to the industry than file-sharing, and that the industry should avoid at all costs: price competition. If prices drop low enough – singles cost $0.99 on iTunes – listeners’ risk effectively disappears. But so do industry margins and the industry’s business architecture. It would be more strategically effective to construct a mechanism that creates value by hedging risk, eliminating the double moral hazard – and one that the industry can then trade for additional profits.


File-Sharing and Double Moral Hazard

Every major label 's setting up an iTunes these days. They're all, in the immortal words of Johnny Cash, 'born to lose, and destined to fail'. Why? The music industry doesn't understand the microeconomics of it's own business. If it did, it would see that it's business model is not just misguided, but broken- because, DRM or not, the implicit contract it signs with listeners is being broken in both directions.

I reached this conclusion because, as I was scoping BoingBoing one day, I read Cory's statement, and it struck me as exactly right. For many people, digital music's more about risk than it is about music itself. Not legal risk - but transactional risk, the kind of risk you take when you buy a used car. Now, this statement has deep economic meaning. I'd like to explain why.

Fundamentally, I'm going to argue that consumers download music, as much to derive extra value from getting something for free, as they do because they want insurance against buying something they didn't want in the first place. File-sharing is as much about risk-sharing as it is about the 'theft' of value. Technological changes have made this possible - but the way the business model of the music industry is at odds with the implicit contract it signs with listeners is what makes it probable.

Here are the basic economics of the music industry: The major record labels assume market risk in exchange for value. They take on the risk of assuming search, development, and distribution costs, in exchange for uncertain profits.

We can also look at this through the lens of contract theory. Contract theory says that principals contract agents to do things they're unable - for whatever reason - to do. In every such transaction, we can say that there are extra costs incurred. Economists call these costs agency costs.

So we can say that labels are agents hired by music listeners - principals - to perform a function they don't have the time to do - find interesting and entertaining musical artists. The problem is that this simple transaction creates massive information asymmetries. There's no monitoring mechanism, so listeners can't see what the labels are doing; conversely, labels can't really tell what listeners' preferences are. Even worse, the principals can't influence the agent unless they can coordinate amongst themselves to do so.

Now, in most real-world markets, information is an issue. Neither side in a transaction is perfectly well-informed about costs and benefits. But in most markets, prices are considered the central economic mechanism of information transmission, because they convey information about future benefits and future risks. This point is intuitive if we think about it: prices reflect the scarcity of a good. Think of the price of blue-chip stock, for example.

But, partly because of massive buyer power (the influence the biggest retailers exert over the record labels), prices in the music business have long since failed to carry any pertinent information. Prices have become, if not fixed, as many suspect, certainly standardized. And this robs consumers of a vital means to gauge how much future value they derive and risk they take when purchasing different music goods. It also robs labels of the ability to really understand consumer preferences.

So this forces listeners to rely even more on the record industry's - the agent's - choices. In this case, the principals are kind of blindly reliant on the agent - they have no mechanism to monitor the agent.

So what if, under such a contract, the interests of the record labels - the agent - diverge from the interests of the listeners - the principal? What if, for business reasons, the labels are more interested in economies of scale, scope, and brand than providing music listeners with music they value?

In an extreme case, the labels might begin to impose agency costs beyond the search costs the listeners are exchanging value for - making transactions with record labels provide negative value for listeners. Conversely, we can say that listeners might find it more efficient to take on their own search costs. And this is what's happened today. Many people are more happy to spend time searching for new music on the net than they are simply buying the goods the industry selects and promotes.

It's traditionally argued that the web reduces search costs. But this argument helps explain a very curious phenomenon: why music today is one of the few markets in which people, are, curiously, willing to pay very high search costs.

So the net actually begins to make it possible for people to pay higher search costs at all. They do so because they replace the agency costs imposed by the music industry - which provide them little value - with their own search costs, which do result in a transaction that provides them value. Before the web, people had little option but to pay the agency costs the music industry demanded.

Economists have a name for problems like this: moral hazard. Moral hazard happens when the actions of an agent can be hidden from a principal, creating agency costs - because the agent is able to shirk, take additional risks, and generally not deliver on his end of the bargain. In this case, the moral hazard is that the record industry, because listeners can't monitor or influence it, can effectively shirk, and choose artists not based on listeners' preferences, but based on business efficiencies. This is effectively what the record industry has been doing - adding massive agency costs that replace the search value it is supposed to provide. It's compounded by the fact that music is an experience good, whose value is not directly knowable to buyers - another fact the music industry has been exploiting.

The way to change the incentives implicit in such a moral hazard-creating contract is straightforward in economic terms - insurance. Insurance provides an incentive for the recording industry to choose only acts listeners value. At the same time, insurance means that consumers don't have to pay agency costs - the costs of the music industry selecting acts no one wants to hear.

But doing so would create a double moral hazard. The second moral hazard is trickier: offering insurance to listeners provides listeners an opportunity to hide their actions from the recording industry. Listeners might take advantage of the insurance, and renege on buying music altogether. If the industry offered consumers the ability to simply return any music they didn't like, consumers might return all the music - even the music they did like, after having copied or consumed it.

But this is exactly what the internet has done - offered music listeners a second moral hazard, in opposition to the first. The net offers a kind of gigantic way to renege on buying music goods produced under moral hazard, and completely eliminate the risk listeners take in buying such risky experience goods.

The point is this: the net offers listeners insurance against the music industry itself. File-sharing isn't simply theft. Rather, file-sharing is risk-sharing - against an industry with the freedom to undertake hidden action in the extreme, and not live up to the contract it has written. Remember, the contract said that labels would assume the risk in exchange for dollars from listeners - so when moral hazard lets labels try and push risk to listeners, is it any surprise that listeners try and minimize it by parceling it out? In fact, we could go even further - saying that file-sharing is a way for principals to punish agents operating under extreme moral hazard, with the hope of bringing the agents incentives into line.

In this sense, we can see that the music industry has played a large part in creating it's own problems, which we can call a massive double moral hazard. Next time, we'll examine how it can begin to solve them.

poetic justice

The Music Industry, artists and recording companies alike, grew rich over the last 40 years by corrupting the youth of the world. Their current troubles are an illustration of Karma in action. What goes around comes back to bite you in the butt.

big big picture in my opinion

(This might be obvious to everybody but I'll babble it anyway)
Whether the music industry are screwing the consumer or being screwed by the consumer I think theres a bigger picture.
Record companies historically made their business by discovering or creating talent, then marketing the talent to millions, and finally distributing their product.
As it turns out there is now something much bigger than them that can do all those things even better, more efficiently and in a more democratic process. I don't need to tell you what that is.
But what will become of the poor millionaire musicians now if their music was freely traded? Well it turns out they make a LOT of their money from tours (so much the record companies try to get a piece of it)
There probably is a hard limit to touring (factors of time and audience size) so Britneys unrealized extra millions will probably distribute out over smaller acts.
This will hurt the talent that prefers to stay in the studio or maybe they can figure something else out after the boy bands are crashing and burning without relentless record company marketing and promotion.

Music Industry Problems: Maybe The Music Just Sucks

Well, it's good to see some of the more mainstream press picking up on this idea. CBS Marketwatch is suggesting to the music industry that maybe (just maybe) the music industry's problems have less to do with all this downloading activity, and more to do with the fact that, well, um, we hate to break it to you, but most of the music coming out these days really (no, really) sucks. The article describes "musical lulls" between great periods of music creation, where most musical acts are more about "McDonald's rock" - taking a successful manufactured act and copying it over and over again. The article also suggests that the world has fragmenting tastes. That is, not everyone likes the same music, and not everyone wants to be forced to listen to yet another boy band. This, of course, is the perfect situation for the internet, where the music industry could produce much more customized niche acts for all the varied audiences. However, they've grown so accustomed to producing for the lowest common denominator that now that this plan has backfired, they've turned around and started blaming (and suing) their own customers.

When the passion of music is real

When the passion of music is real