The Inevitable Rise and Liberation of Music 2.0 [Unabridged]

[Original full-length version of this post published on February 11, 2008]

I’ve been marinating on this post for a few weeks now, but haven’t gotten around to it because of some other events I’ll blog about soon. However after only being reminded that the Grammys were tonight by the fact that two people I know were looking to give away their tickets, I felt this was an appropriate night to dig in and get ‘er done.

Everyone, even the labels at this point, knows the music industry as it has existed for the last 20 years is dead. But, there doesn’t appear to be a lot of clarity on what’s next. I’ve had a fuzzy idea of my version of the shape of things to come since nearly a year ago when Ian and I sat down to do a little scheming and I started writing a list of *all* the potential revenue streams for a musical artist (incidentally, it was over dinner later that night that he revealed he would soon be named GM of Yahoo! Music). The record industry has historically been synonymous with the *music* industry, and the future (actually, more like the present and recent past) requires that to change. The record industry is a packaged goods business, it is built on 2 things that technology has rendered all but obsolete at this point:

  1. Exploiting a stranglehold on physical distribution channels and an artificial limitation of distribution
  2. Marketing formulae designed to package product in a manner that aggregates large audiences via broadcast media

Leaving the record industry’s arrogance, greed, and disdain for their customers — which undeniably contributed to the acceleration of its decline — aside, the above advantages did actually add value to the pre-digital system. The fundamental problem for the record industry, and why if it continues to exist at all in the future, it will only be a small subset of the *music* industry as a whole, is that digital distribution changes how the valuable functions of creative development/A&R, distribution, and promotion are handled in a way that not only opens the record industry up to new “low-end” (in the Christensenian sense) entrants but also puts the incumbents at a disadvantage.

In a presentation titled “Losers Wish for Scarcity, Winners Leverage Scale,” Ian says “[w]e’re moving from a world of limited distribution channels and therefore abundant attention…to a world of unlimited distribution and therefore attention scarcity.” In this world, you don’t push content down consumers’ throats, you enable and convince them to pull it. It’s the world of the snowball over the blockbuster, and it’s a world that can’t support a packaged goods business, at least not one as bloated and inefficient as what the record industry has become.

So, what will the music industry look like once the record industry has met its imminent fate? I think it will look a lot like Saul Williams, in honor of whom this post is titled. Saul Williams, Photo by: nsdesigns via Flickr Saul’s latest album, The Inevitable Rise and Liberation of Niggy Tardust, was produced by Trent Reznor of Nine Inch Nails and quietly released in October in a manner very similar to Radiohead’s In Rainbows — with consumers being able to choose between downloading an inferior version for free or paying to download a higher quality version (both DRM-free). Not many people noticed until a few weeks ago when Reznor, unlike Radiohead, posted the sales figures on the NIN blog (which for some unfathomable reason doesn’t have publicly visible archives — but, you can read the original text here) and said he found them “disheartening.” His subsequent interview on the subject with CNET provides a view into the mind of someone who looks at the Internet and digital distribution as basically new tools to propagate the legacy record industry business model.

If that had been all, I would have just chocked it up to music business as usual. But, then Saul jumped into the mix and pretty much blew my mind. In his own interview with CNET in response to Trent’s, Saul basically defined the archetype of my vision of the musical artist of the future, and in so doing illustrated where IMHO the music industry is headed. In contrast to Trent, Saul characterized himself as “extremely optimistic” based on the results of the online promotion. This polar opposite reaction is illustrative of a fundamental difference between the two artists that is best summed up in Saul’s own words:

I think Trent’s disappointment probably stems from being in the music business for over 20 years and remembering a time that was very different, when sales reflected something different, when there was no such thing as downloads. Trent is from another school. Even acts that prospered in the ’90s, you look at people like the Fugees or Lauren Hill selling 18 million copies. That sort of thing is unheard of today. But Trent comes from that world. So I think his disappointed stems from being heavily invested in the past. For modern times, for modern numbers we’re looking great, especially for being just two months into a project.

He goes on to talk about the importance of what the record industry has historically characterized as secondary revenue streams, like concert ticket and merchandise sales, to his livelihood. The irony is that the record industry has generally viewed these revenue streams mostly as promotion for their recorded music/packaged good business, in no small part because the artists and their management keep the bulk of the touring revenues and the labels keep the bulk of the record sales. However, touring has now become such a profit center for artists that Madonna now has an event company as a label. And just like how in the late 80’s and early 90’s artists started making songs with the music video in mind to take advantage of the emerging promotional power of MTV, you now have “ringtone rappers” overtly writing music to maximize the extremely profitable mobile revenue stream. By locking out emerging artists and ripping off established ones, the record industry has forced them to make money from sources other than recorded music, thus sowing the seeds of its own destruction. As a result, the new breed of artists now sees recorded music not as a primary revenue stream but as promotion for other revenue streams that go (more) directly into their own pockets.

So, that takes care of the record industry’s distribution stranglehold. But, what about the promotional machine the labels have honed to slice and dice focus group data like a Ginsu? At the end of the same interview with CNET, Williams talks about how, even with Reznor’s backing, they couldn’t find a label that could wrap its head around what Williams was trying to do. It basically boiled down to the fact that none of the labels’ marketing departments had a promotional formula set-up for a black alternative artist. While defying the ability to be pigeonholed into a particular genre is to be admired artistically, it’s the kiss of death in the record industry. Because it’s a packaged goods business with high fixed costs (advances, studio time, sample clearances, mastering), relatively low variable costs (pressing and shipping CDs), and extremely high opportunity costs (promotion and shelf-space could be going to that Rihanna record that’s a lot more likely to sell), the model only works if you can aggregate a substantial audience around any given product. The marketing formulae the labels use are designed to predict and maximize the probability of aggregating the largest possible audience. And black alternative acts just don’t cross that bar.

But, the cost structure of digital distribution (mostly the even lower variable costs and the diminimus opportunity costs) lower that bar considerably. 154,449 people downloaded Niggy Tardust (of those, only 28,322 paid) in the first 3 months with no paid promotion, that’s almost 5x what Williams’ self-titled first album has done in nearly 4 years since its release. So it’s not the fact that no audience exists for a black alternative artist, it’s the fact that audience isn’t big enough to make money from CD sales. But it’s apparently plenty big for Williams to make a living from touring, merchandise, and other revenue streams. Last weekend I was over at Ian’s and we were talking about the Yeasayer album, which I only recently discovered but Ian told me was a blog favorite of 2007. We agreed it was an album that probably wouldn’t have even been made 10 years ago (or if it was, would have resulted in the sacking of whatever young A&R exec snuck it through). But through the magic of the interwebs, these guys are now going on tour and selling out shows in LA and SF.

As we all know, the Internet has the power to unite people around a common interest, creating substantial audiences where little to none was thought to exist before. The result of this is that the tens of discrete genre-based marketing formulae Hollywood has relied on to program popular culture through mass media for the last 50 years are being atomized into a spectrum that represents the fluid reality of cultural tastes. For those of you familiar with calculus, it’s like the labels’ marketing departments are trying to do integrals by adding up the area of boxes under the curve and the web has just shown up with a graphing calculator. I’m particularly fascinated by this aspect of the entertainment business’ (not just music, but video too) evolution, and will continue to explore it in more depth in future posts. But for now, I refer you to thesixtyone.com, which I think is a pretty interesting and novel take on putting the right music together with the right audiences.

Yes, Saul Williams isn’t even a blip on most consumers’ radars today, and artists like Trent Reznor, Ghostface Killah, and Robbie Williams, whose management has publicly objected to EMI’s stated aim of cutting the conspicuous excesses for which the record industry is infamous, are still dominating the charts. But at this point, there are more and more Saul Williams and fewer and fewer Trent Reznors coming up everyday, and so the shift in the balance of power is only a matter of time. While Doug Morris is frantically trying to figure out how not to be the Shmoo (and Rio Caraeff is frantically trying to keep Doug Morris from sounding like a moron), the artists the labels have written off as not viable in the legacy system are out there pioneering a new system in which they are. Back in the day, Overture decided to ignore small “tail” publishers because the margins sucked and Google decided to instead find a way to make the margins better, which resulted in AdSense and Google ultimately being able to come after Overture’s core “head” publisher business with margins that were that much higher. Christensen calls it the low-end disruption, and it’s an economic force of nature. Like Ian sez:

Environmental forces are easily ignored. Do so at your (or your company’s) peril.

So, what will the music industry of the future look like? I think it will be many more artists individually making less money on average than today, but collectively making a ton more for 2 reasons:

  1. The diversity of choice that will be available to consumers means more of them will find more things they enjoy more passionately and engage with more deeply resulting in them being willing to spend more money
  2. The decreasing importance of the recorded music revenue stream will spur innovation in exploitation and business models in a way that was impossible with the labels trying to protect their packaged goods cash cow

I firmly believe music will be a profitable business in the future, just not as profitable as it is now (but a hell of a lot more sustainable). If you love making music and you’re good at it and work hard, you’ll be able to make a good living — not an MTV Cribs living, but an upper middle-class living — and your music will touch more people who will identify with it in meaningful ways. If you love making music but don’t want to work as hard or aren’t that great, you’ll still be able to get some recognition and maybe even some money on the side of your day job. And most importantly, if you love listening to music, you’ll have an exponentially wider variety to choose from, a greater chance of finding artists you really like, more opportunities to engage with those artists in myriad new forms, and a real feeling of value from the time, energy, and money you spend. Sounds like a pretty bright future to me.

In case you couldn’t tell, this is an area that really fascinates me and one I will continue to explore on this blog. In the meantime, those interested in following my research in realtime can check out my ‘media 2.0′ del.icio.us stream.

Photo by: nsdesigns via Flickr

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