Eating the RIAA's lunch

A few disclaimers: Pacifica Fund does not invest in content of any sort, nor DRM or similar schemes (surprise!), and has never gotten close to doing a content infrastructure deal. This is a disinterested comment, for better or worse. I have never made or attempted to make a dime in the music business. I'm well past the prime target demo for the music business (ahem!), can't recall how long it's been since I gave a damn about a top 40 act, and have tastes that would be considered niche. You have been warned.

With that out of the way, onward to speculation:

Most hostile analysis of the music industry has focused on its inability to cope with the transition from material scarcity to digital abundance in the distribution portion of its business. However, the labels have been equally hapless when it comes to exploiting the Internet as a medium for promotion. Specifically, their promotional model still hinges on the scarcity of play slots on radio stations, and the label's ability to control them through payola promotional spending. Even P2P market intelligence operations such as BigChampagne are primarily used to drive allocation of promotional slots. And, as in the distribution side, promotional abundance models such as streaming net radio have been treated as anathema and attacked as threats to this scarcity element of control. This alternate history gives a real idea of how oblivious the labels have been to the promotional possibilities inherent in the Internet.

This is a vulnerability of the industry which is ripe for exploitation. Greatly increasing the efficiency of promotion (decreasing the search cost component of transaction costs), allows the acceptance of greater costs in other parts of the transaction, including a lot of slippage on actual payment. To put that into plain English, suppose an artist is right now getting ten cents each of net royalty on sales of 100,000 CDs. If using a new promotional model, he can reach 1,000,000 listeners, of which only 1% pay him just a buck for one song, he's even on the game, and anything better is gravy. Actually, it's even easier than that to get ahead, since as a recent NYT story pointed out:

Musicians tend to make more money from sales of concert tickets and merchandise than from CD sales. In fact, many musicians offer free downloads of their songs on their Web sites to market themselves.

Most of the artists, most of the time, see their hoped-for royalties swallowed in their label's accounting for the costs of the promotional system.

The majority of alternate music business models that I've seen start from the bottom of the power law curve, trying to empower the new or niche act, the indy artists, either out of natural sympathy or to sidestep the lockup of established artists by the labels. To be sure, this does exploit a differentiating capability of the Internet-as-medium: lengthening the portion of the power law curve of attention in which money can be made. It avoids head-on competition with the labels, since their business model is simply nonfunctional at such low volumes. However, even if some of these plans work, it's going to be slow. The tail of the curve is a place of organic growth, and it's a challenge to come up with a model better than artists could manage themselves with a blog, a few banner ads, some MP3s, and a CD ordering form and tipjar.

If you're interested in tearing the heart out of the beast, or at least taking bloody chunks off its hide, you have to go to the other end of the curve: the mass market, home of the top 40, where the power of the RIAA seems unassailable. But I'm not so sure that it is. Already the top acts' gross is dropping at a 19% CAGR, if you believe the industry's numbers. Some of that's audience lost to the tail of the curve or other media, some may be piracy, some may just be because the acts suck. Our exercise is to help along the decay of this most profitable of the labels' segments.

This kind of high grossing big act isn't going to go away. There's always a top end of the power law curve. And there's a social role for them: For the 15-25 year old segment that are the dominant buyers, they are objects of common attention that symbolize group membership, a sort of media plumage that's part of the adolescent socialization process. But they aren't really scarce. There are thousands of appropriately aged males and females out there, with decent vocal abilities and capable of wiggling their tushes in time to the beat and looking good doing it. What's scarce is the support of the hype and promotion machine that gets behind the latest act. The Britneys and Justins of the world don't grow organically into their roles, they are anointed by the RIAA labels. (And it isn't just in the good ol' US of A this happens - check out Canto-pop and the Japanese music scene.)

So the emergence and competitiveness of new top end acts is directly linked to the existing promotional model, which it should be possible to attack with an abundance strategy. What would that look like? First, let's note that the 15-25 target audience for new acts are already big downloaders - with at least 61% saying that P2P downloading is OK. They are also the heaviest users of various flavors of instant messaging on the Internet, most of which have some form of multimedia capability. Ditto they are the fastest growing audience for data capable mobile devices, with ring tunes and/or MP3 playback. Get the picture? This target market is primed and ready for someone to pull off a guerilla word-of-mouth campaign, a sort of Britney-Blair Witch hybrid. And to do it in a way that the labels cannot match without subverting their obsolete scarcity value models.

Ah, yes, but how shall we make money, once we give away the MP3s in the promotional campaign? Well, there's always merchandise, and higher quality MP3s and CDs, but mostly I think it's concerts. According to the quote above, that's the source of most of the artist's revenue now anyway. The take from actual music sales is eaten up by the costs of promotion, and in record label expenses and profits. If they are a zero sum game, and you can promote without the labels, just ditch 'em. Ticketmaster could care less how the acts in their venues are promoted, as long as the seats are filled and they get their pound and a half of flesh. Barry Diller, their ultimate boss, is in the process of unwinding his last entanglement with the music labels, (Vivendi) Universal Music. One might say Diller's empire is now perfectly positioned, with a combination of TV and Internet promotional channels, the ticket revenue extraction machine, and nothing to lose. Hmmm.

And we have at least one existence proof, right? The Dead. The whole long strange trip was built on concert revenue, and letting the fans pass the word and tapes. Someone's going to do it again, and figure out how to make the process repeatable, with the 'net as the vector. Could be Diller, could be an entrepreneurial promoter out there somewhere. But the labels' lunch is ready to be eaten.

Next: Ideas for the mid-market [Due Diligence]

5:03:19 AM