Background and theory

Music and creative destruction

Fluxus artist Dick Higgins (1966) declared: “A composer is a dead man unless he composes for all the media and for his world.” It is not competitors but the new game in town which is weakening the music industry, today in a period of ‘creative destruction’ – the process of transformation that accompanies radical innovation with the old giving way to the new (Schumpeter,1942). The popularisation of MP3s threatens the dominance of labels and retailers, yet the shift is radical, that of disruptive innovation, a theory by Christensen which draws on Schumpeter’s ‘discontinuities’ which create a new game – whereas disruption destroys the old game. Disruptive innovation trades off performance for convenience or affordability, bringing new customers into the market. MP3 is not a superior technology but it is ‘good enough’, trading off high quality for user experience.

Across the media industries, new business models are being developed to match these new patterns of consumption: ‘360-degree’ deals (artists signing rights to publishing and live as part of an enhanced record deal); Groove Armada’s sponsorship and investment from Bacardi (2008); in 2008, on the same week distributor Pinnacle collapsed, Mail On Sunday launched a record label to distribute to its two million readers. Emusu.com horizontally aggregates ‘360-degree’ solutions for labels with centralised downloads, CD sales, concert tickets and merchandise, enabling labels as they do not have expertise in e-commerce or telecoms. These models are innovative but may yield only short-term gains: a‘360-degree’ signing represents a power shift to the artist but breeds disloyalty, is not favourable to investment from majors and only engenders short-term interest.

Future value models

Theorists have proposed many new value models for digital music: ancillary products with free music downloads; a media tax on MP3 players or a levy on ISPs; encouraging voluntary tipping; blanket licensing or subscriptions for peer-to-peer services; or bundling volume or types of content. Distribution scenarios predicted include limiting consumer choice, DIY artists and labels selling direct to consumers or accessing digital content through a state-run system that taxes consumers according to use and rewards creators according to popularity.

Bourreau (2008) proposed three value models for the future music industry:
1. Star system – although music is theoretically open to everyone, only those who benefit from mass media promotion will succeed. This echoes Adorno’s view that “the less the mass discriminates, the greater the possibility of selling cultural commodities indiscriminately.” (1941);
2. Structured pull – independent labels dominate (‘the happy few’) in a segmentation model neither favourable to artist nor label, relying on the collective approach of many labels;
3. Free pull or ‘Consumartist’ – record labels merge into decentralised relationships between artists and the public, with strong relationships leading to a greater willingness to pay, but this system is less favourable to intellectual property and auteurship, therefore works may lose their sacred status. Chuck D from Public Enemy envisages “a million artists with a million labels”.

Increasingly in the convergent media landscape, music has symbiotic relationships with other media rather than being an attractor in its own right. Coke established a music download website and Diesel an unsigned artist website to strengthen the ‘cool’ perception of their brands. Music becomes a commodity, perhaps even a loss-leader, with which to sell other value-added services and products. Computer games and film are another route to promoting new music: Blink 182’s ‘Feeling This’ debuted on Madden in 2004, becoming the band’s bestselling hit. This shifts the context as music becomes a media rather than an arts-based cultural product. This could weaken the music industry as music is valued not in itself but for how it is consumed in relation to other products, e.g. as a theme song from a blockbuster film.

Music ‘free like water’

In a 2002 interview with the New York Times, David Bowie, an artist who personifies the changing nature of popular music, said, “I’m fully confident that copyright will no longer exist in ten years…music itself is going to become like running water or electricity.” His remark prompted Berklee academic David Kusek and music consultant Gerd Leonard to write ‘The Future of Music: Manifesto for the Digital Music Revolution’ which prophesized radical ways in which music, like photography, could become a service-led rather than product-led industry:

“Imagine a world where music flows all around us, like water or like electricity, and where access to music becomes a kind of ‘utility’. Not for free, per se, but certainly for what feels like free. Fans, artists and all kinds of music communities drive business rather than being driven by corporate powers.”

The challenge is how to up-sell: music could be on tap and consumed by the gallon (e.g. as a subscription service) or there could be a market for selling premium bottled music (e.g. limited edition premium products). The authors declared: “The MUSIC industry is alive, the RECORD industry is dead” – file-sharing is the new radio”.

The economic viability of this proposal is questioned by industry leaders and economists and whether it disproportionately favours corporations over independent producers. The excellent Cynical Musician blog reviewed EFF’s Voluntary Collective Licensing on estimates of most broadband users giving $5 month to music, showing major labels would make significant gains but independent artists might only average $583 a year each, making most production financially unviable under an ‘all-you-can-eat’ model; as more works are produced, the value of each work decreases. The only way to profit is to become an aggregator rather than a producer of works.

‘Freemium’ and monetizing the ‘long tail’

Chris Anderson writes in Wired advocating ‘freemium’ business models which give content away in exchange for advertising or building a user base for premium products, believing, “free music is a good way to create celebrity, and monetizing celebrity is a problem we should all have.” He previously formulated ‘The Long Tail’ theory which showed there is a greater market collectively in the ‘tail’ of niche products and back catalogue than in the ‘head’ of best sellers as 98% of titles on the major online distribution platforms sold at least once per quarter. Consumption patterns are evolving as the mass market is turning into a mass of niches. However, his theory has been disputed by Will Page, Economist for PRS For Music, whose study diagnosed that 3% of tracks accounted for 80% of sales, and 80% sold nothing at all and are unlikely to have merited the cost of making them available, therefore “the future of business is definitely not selling ‘less of more’.” It may also dramatically increase competition, deflating prices.

Journalist and blogger Kevin Kelly offered a solution to monetizing ‘The Long Tail’, proposing that an individual artist needs only ‘1,000 True Fans’ to make a living, quoting Steadman’s theory of the ‘micro-celebrity’ – someone who is famous to 1,500 people. He defines the true fan as near obsessive, buying every version of a product and travelling 200 miles to see their favourite artist play. Getting fans to spend one day’s wages per year provides the artist’s salary.

Research findings

Find out more about the research background, methodology and see the full survey findings here.

Tastemakers and gatekeepers

The digital economy offers new models of product financing and new product forms, yet to access the market requires new entry points through a network of ‘tastemakers’ and ‘gatekeepers’.  Gatekeepers have always dominated the music industry, yet the growth of digital gatekeepers sees online music controlled by even larger corporations than the majors, e.g. MySpace’s buy-out by Murdoch’s News International corporation. The old music industry relied on business and personal networks, whereas digital gatekeepers are outside the music industry (iTunes), use collaborative filters (Last.fm) and bridge the old and new music industries (NME.com).

Many digital gatekeepers are not primarily music companies, using music to sell hardware (iTunes, Nokia) or advertising (MySpace) but they fail to invest in talent or product development, at the heart of the recording industry which is a high investment sector, spending 15% of turnover on R&D, more so than computer software (10.3%) or aerospace (4.6%).

The dominance of a limited number of digital gatekeepers was unfavourable to half of survey participants as “one evil replaces another”. The latest social networking tools become cutting-edge with indies leading the uptake (e.g. Twitter) until successful web start-ups are “brought into the fold by the big music corps”.   Online networks offer wider communications than in the old major/indie model during today’s transition process of “destroying and rebuilding”.  The opportunity for independents to get their music onto iTunes through independent aggregators like CD Baby is “a big step towards a resurgence in independence in music”.  Their attitudes reflect ongoing opinions of larger corporations as ‘the man’ whom independents position themselves against with corporate gain driving the online music marketplace.

Tastemakers are the consumer’s accomplices, guiding them through the maze of new content where “90% of everything is crap”, although the volume of quality music has increased with supply.  This means approaching the same audience through many more people as, “it takes a lot more bloggers than it does Terry Wogans to get heard”.  Personal recommendation and interactive engagement draws audiences to seek, find and remark on amazing content (Dubber).

The discovery of music

Technologies, such as ‘web 2.0’ interactivity, ‘web 3.0’ evolutionary search, meta-data, and user-recommendation are evolving the curatorial and taste-making process. Digital servants help users to navigate content and boutique stores act as curators e.g. Bleep.com carefully selects high-quality electronic tracks. Deciding what to listen to next is what Jennings calls “the ‘problem’ of discovery” –some gather around the ‘hits’, some gorge on everything, but many are “free-range foragers” finding things from all sources.

Some participants felt that consumers’ depth of engagement and relationship with music was weakened by its superficial and omnipresent access. Serendipity played a large part in many people’s early experience as music consumers, whereas today’s consumers use targeted digital tools for discovery:

“I found in a burnt-out car a tape of ‘Satanic Majesty’s Request’ which was a really bad copy and when I bought the vinyl I was really disappointed that it didn’t have all this atmosphere and crackle and nastiness… But maybe YouTube is the equivalent of that, a poor copy of something, but the longevity is not there because it’s an ephemeral thing on the computer.” (Junga)

DIY and new value models

Established artists are perplexed about the exponential rate of change, likened to: “The Wild West…the rule book’s been torn up.” (Neil Tennant,The Brits,2009).  Independents are the “brave frontier men” (Wenham) pioneering new technologies and business models.   Prince gave away an album free to Mail On Sunday readers to promote his live shows; The Arctic Monkeys hired cinemas for a one night only ‘performance’ to promote their Live At The Apollo DVD; Brighton independent Martha Tilson sold her paintings of album artwork on stage to pay for her album’s manufacture and marketing costs.

New DIY business models create many opportunities but “you need to use your own imaginative model” rather than aping an existing artist. DIY culture creates a strong framework for content creation and new content forms, although the term “was invented by the music industry to make us sound like we were amateurs” (Shillingford). The current DIY scene emulates the original 1980s ‘indie’ scene when anyone could release anything and it was “left to float on the sea” (Junga), but today’s scene provides exciting direct connections and more potential routes forward than in the 1980s (Simian).

Economics and opportunities

The survey revealed 39% of independents are professionalising due to more opportunities, whereas 19% can no longer survive.  This shows the online economy is growing opportunities for the professionalization of musicians, albeit creating more middle-class musicians than superstars, dividing those with a passion for music who will win and the industry of limos, advances and lawyers who will lose.

The economics of self-releasing can create greater sales increases compared to record contract models. Shillingford has increased recording sales 1,000% compared to his major label releases.  However many artists are heavily reliant on touring and syncs (media licensing) to maintain income – although this was likely to always be true for all but the best selling recording artists.

Online music video is a new source of audiences and income. The 2009 stand-off between PRS For Music and YouTube over royalty negotiations pitted the Google-owned corporation against rights holders where an unviable remuneration model cannot sustain the cost of production.  It is difficult for independents to monetize online videos which “people forget about the next day” (Oyewole).  Rhodi Marsden, in a quest for fame, shot a pop video for £870 which became the most watched video that week on YouTube, but only sold 58 MP3s.

Physical music products

The most cited tactic for increasing  physical product sales is developing ‘deluxe edition’ packaging as standard CD jewel cases are “a waste of time” (Shillingford).  Limited edition products create scarcity, lacking in the digital download market.  Ownership of the database is crucial, producing only the amounts existing markets want.  Many independents still desired physical products but perhaps through nostalgic associations, “possessing a product, holding it, made in your own hands…” (Simian) whereas the CD was a poorer retail experience compared to vinyl – a “statement” (Junga) – as “it was a piece of f**king plastic – useless”, but nostalgia is “complete nonsense” compared to the rich vein of discovery and possibility of artists’ websites (Shillingford). Digital formats have advantages after the collapse of distributors as “digital stock can’t go down” (Junga).  This re-invention and premiumisation of music products is a continuation of ‘format shifting’, the introduction of new formats which expanded music sales in the 1970s-90s.

Music as a service

There was mixed uncertainty and disagreement from participants about Kusek and Leonard’s theory that music should be free like water with many questioning how this would work in practice.  ‘Music on tap’ removes the joy of selection and purchase and favours the big producers.  The phrase ‘Devaluing’ recurred as “each work should stand on its own”, with the system potentially weakening the cultural value or “sacred status” of individual works. It may favour the talentless as equally rewarding the talented, however, bit-torrenting may have already made the concept “de facto, not a theory”.  Spotify was cited as a good model for creating value, although commentator Keith Jopling believes streaming services negatively impact on overall consumption, with more time listening equating to less music purchases.

‘The Long Tail’ (Anderson,2006) was cited as a potential economic model, but “the jury is very much out” on if and how it works and the challenge is “to be at the thicker end of the tail” (Wenham).  Rather than favouring the longevity of obscure artists, it allows the selling in volume of small things.  Bundling tracks or building a scene are successful tactics, where the artist is not a star or auteur but is approachable as part of a bigger sub-genre (Dubber).

Simian’s band Dawn of the Replicants gave away 1,000 copies of their first 7” in 1997 on John Peel’s BBC Radio 1 show. This approach gained them fans, the product became collectable, it got attention from labels (culminating in signing to Warners) and created a database.  Fast forward a decade and free music, for better or worse, is a commonplace model.  Creating value from ‘freemium’ content is a thorny challenge for independents.  On his New Music Strategies blog, Andrew Dubber (2008) wrote:

“Giving stuff away for free is NOT a business model. You’ll find it very hard to make money if ALL you do is give things away. But equally it’s very hard to make money UNLESS you give things away.”

The article received 158 comments.  Of those citing an identifiable opinion, 25 agreed, 16 disagreed and six were undecided – reflecting overall uncertainty.  Many favoured the principle but supported a plurality of models where ‘choice’ was essential in the producers’ rights of use.  In support, “free downloads are the new radio”, benefiting from reducing the expense of promotion, with wide exposure leading to concert and album sales, and commissions.  Those against believed free music led to the “Creative Commons traps”, stripping creators of their rights, with the future “fairly bleak” if losing their main product income.  Blanket free music sends out the wrong messages, ascribes little value, proper releases create a discography and establish credibility (Tom Robinson, BBC Radio 6).

In common with their views on bit-torrenting and copyright, independents desire a plurality of funding models, an enabling choice by the creator which respects their right to monetize or limit distribution, although this can be hard to achieve with the pervasiveness of bit-torrenting.  Like Walter Benjamin (1935), independents embrace mass media technology to enable democratic production but potentially losing ‘aura’ with the circulation of unlimited, lossless digital copies of works.

Financial models

The digital economy creates opportunities to develop new financing models like micro-patronage (e.g. a ‘tip jar’ or donations) or pre-financing an album’s production costs.  This offers important opportunities for artists to maintain creative and production control outside of the financing and distribution models of the mainstream music industry, but ironically favours artists with a pre-existing fan-base best developed in the ‘old economy’. Independents should strive for ‘self-sufficiency’ over the ‘self-help’ approach characteristic of music industry financing.

Two highly successful proponents of DIY business models are Radiohead, whose pioneering sales models include a PR stunt of ‘pay-what-you-like’ for In Rainbows, and Trent Reznor (Nine Inch Nails) who has created a strong fan community, giving away component tracks and videos for mixes and marketing directly to his database of two million subscribers, independently selling 250,000 copies of ‘The Slip’ album.  Reznor’s business model is connecting with fans plus offering a compelling reason to buy.

Jake Shillingford was the founder and singer in Britpop band My Life Story, signed to Parlophone before forming Exilophone Records, the first to use ‘Investor Angels’ to co-finance releases.  The scheme now has 32 investors at £500 – half fans of his music, half fans of the idea of the scheme.  Shillingford took the idea from patronage of the arts and British film, “I always just loved the idea of Toulouse Lautrec being given a roof over his head and oils and canvasses and stuff.”  He interacts with and learns from other DIY proponents like Marillion, despite little musical common-ground.  Although investors act as informal advisors, the model places Shillingford in creative and management control.

Subsequently various venture capitalist funded dotcoms like SellaBand and Slice The Pie offer micro-financing models for fans to invest in new artists.  When investment levels are reached, the company helps to produce and re-sell the album, however, these models are questioned as to whether they are ethical or driven purely by profit, particularly as they may ask bands to sign over their copyright (Shillingford).

Reznor, Radiohead and Shillingford all demonstrate the power of mass marketing from major labels to establish a fan base, coupled with innovation and business acumen to monetized fan relationships in a ‘post-major’ scenario.  However, there are fewer success stories from unknown artists succeeding without the intervention, at some stage in their career, of a major investor or corporation. Investigating web phenomena like Lily Allen or The Arctic Monkeys reveals early investment and PR financed by established labels or management companies. This evidences complex financial alliances between majors and independents, with the mass media playing a crucial role in the financing and distribution of digital content and the creation of its stars.

Read part 6: Business skills and entrepreneurship
Independent music online research index