New business models for music



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18 VLSELJ 63

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18 Vill. Sports & Ent. L.J. 63






Villanova Sports and Entertainment Law Journal

2011
Article
*63 NEW BUSINESS MODELS FOR MUSIC
Henry H. Perritt, Jr. [FNa1]
Copyright (c) 2011 Villanova University; Henry H. Perritt, Jr.


      I.

 


       Introduction

 


      65

 


      II.

 


       The Problem

 


      70

 





       A. The Old Model

 


      72

 



       1. Recorded Music

 


      72

 





       2. Live Performances

 


      84

 





       3. Publishing

 


      86

 





       B. Effects of Technology's Latest Revolution

 


      87

 





       1. Effects of the Demise of the CD

 


      88

 





       2. Limited Potential of Downloadable Digital Files

 


      89

 





       3. Potential of Live Performances

 


      91

 





       C. Law's Role

 

      93

 



      III.

 


       Who Makes Music Now? Why and How?

 


      96

 





       A. Hedonic Values

 


      97

 





       B. Making Money

 


      103

 





       1. Why Money Matters

 


      103

 





       2. Day Jobs and Opportunity Cost

 


      107

 





       C. Career Paths

 


      111

 





       1. Life Cycle of a Band

 

      111

 






       2. Two Case Studies of Successful Entrepreneurship: Vampire Weekend and Fall-Out Boy

 


      112

 





       a) Vampire Weekend

 


      113

 





       b) Fall Out Boy

 


      118

 





       c) Common patterns

 


      125

 





       3. Plateaus of Popularity

 


      128

 





       a) Established celebrities

 


      128

 





       b) Striving Entrepreneurs

 


      129

 





       c) Hobbyists

 


      131

 





       d) Balancing the motivations

 


      132

 





       e) Artist exit

 


      135

 


      IV.

 


       Who Consumes Music and Why?

 


      136

 





       A. Demographics

 


      137

 





       B. Musical Preference

 


      138

 




       1. “Quality” of the Music

 



      139

 





       2. Vicarious Association with Celebrity

 


      147

 





       3. Music is Modeling

 


      148

 





       4. Popularity of the Music

 


      151

 





       C. Finding What You Like

 


      151

 





       D. Formats

 


      153

 


      V.

 


       Music Market Intermediaries

 


      154

 




       A. Need for Intermediaries

 


      155

 





       B. New Intermediaries

 


      158

 





       1. New Distribution Channels

 


      158

 





       2. New Matching Services

 


      159

 





       3. New intermediation technologies

 


      162

 





       a) Statistical Classification

 


      162

 





       (1) Factor analysis

 

      162

 






       (2) Identification

 


      163

 





       b) Open Source Technologies

 


      171

 





       4. New Intermediary Entrepreneurship

 


      172

 


      VI.

 


       Structure of the New Marketplace

 


      173

 





       A. Matchmaking

 


      173

 





       B. Role of the Bottom Tier

 


      174

 




       C. Breaking Through

 



      174

 





       D. Investment Capital

 


      176

 





       1. Capital Sources

 


      176

 





       2. Sources of Subsidy

 


      177

 





       a) Cross subsidy From Day Jobs

 


      177

 





       b) Direct Subsidies

 


      180

 


      VII.

 


       Business Models: the Money Part

 


      181

 



       A. Elements of a Business Plan

 


      182

 





       1. For Musicians

 


      183

 





       a) Costs

 


      183

 





       (1) Recorded Music

 


      183

 





       (2) Live Performances

 


      185

 





       b) Revenue

 


      186

 





       2. For Intermediaries

 


      188

 




       a) Revenues: Tapping New Revenue Streams

 



      191

 





       (1) Live Performances

 


      192

 





       (2) Publishing

 


      193

 





       (3) “Merch”

 


      194

 





       (4) Ring Tones

 


      195

 





       (5) Music Tracks for Movies

 


      195

 





       (6) Advertising

 


      196

 



       (7) Access to Celebrity

 


      198

 





       (8) Revenue Results

 


      200

 





       b) Costs

 


      201

 





       (1) Total Costs, Including Costs of Tapping New Revenue Sources

 


      201

 





       (2) Bribes (“payola”)

 


      202

 





       3. Capital Requirements and Return-on-Investment

 


      204

 





       4. Uncertainty

 

      205

 






       B. Effect of Declining Efficacy of IP Protection: Making Money from Free Music

 


      208

 


      VIII.

 


       Conclusion

 


      211

 



*65 I. Introduction
      The popular music industry is in the middle of a technology-driven revolution.  It is clear that the old order has been swept away, but it is not yet clear what form the “new order” will take. The major labels are on life support and will not survive in anything like their previous form. Compact Discs are dead as a distribution medium. Copyright is unenforceable and hence essentially irrelevant except at the margins of the “new order.” Barriers to entry have been reduced dramatically as the costs of producing top-quality recordings have declined by a couple of orders of magnitude. Portable music players such as the iPod permit consumers to listen to music all the time and this enormously increases the potential demand for music.

      The amount of new music generated by indie musicians will increase as the demand for music increases because of its portability for consumers.  Copyright protection, in the form of digital rights management (“DRM”), will become even less effective for recorded music and technological protections and will be abandoned altogether. The result will be continued downward pressure on prices for recorded music and soft demand for paid record sales.

       *66 Increased supply and demand mean increased search costs--how are musicians and their potential fans to find each other? As in the past, intermediaries must match consumers with the music they like, but this will happen in new ways. As music MySpace pages and independent websites proliferate, the burden of finding new music only increases. Someone has to perform the matchmaking function formerly performed by the major labels and the radio-station chains. Who will do it? Innovation and experimentation will increase as new kinds of intermediaries try to find the best way to connect musicians with their potential fans. A handful of these will become the dominant gatekeepers.
      The increased competition and the demise of traditional gatekeepers signal a sharp reduction in prices--approaching zero--for recorded music.  This means a reduced revenue stream to support anyone in the industry unless demand increases so heroically as to outpace the downward pressure on prices.  This is unlikely.  What business model will support the post-revolutionary space?  In this climate of increasing competition, musicians and their sponsors will try to fill the revenue gap for established musicians and to support new entrants by shifting their focus to live performances, ring tones, new forms of fan-performer interactions, movie scores, and advertising.

      All the evidence supports the proposition that most musicians will make music; even without a business model.  They say that they want to “get to the next level”--that they want to make a living from their music. But their behavior makes it clear that they will perform for pennies or for free to get their music in front of any crowd--live or virtual--even if limited to their friends and to the friends of other bands appearing on the same bill. It may become easier for a few new musicians to break through and to achieve a significant following among consumers, but most will continue to labor in obscurity. Many of them will make good music, but it will be listened to only within a modest circle of associated musicians, their families and friends.

      It is unlikely, however, that potential intermediaries, necessary to perform the matchmaking function, will work for free.  Even if a business model is unnecessary for the musicians themselves, it is necessary for the intermediaries. [FN1] Unless such a business model can be framed, embraced, and sold to investors, the “new order” in the music industry will be one in which hundreds of thousands of *67 artists making very good music go essentially unnoticed by those who would enjoy their music.
      The demise of the major labels will not be the end of the “music business.” The major labels were never the true innovators. [FN2] Nevertheless they channeled capital to anonymous musicians and enabled a handful to become famous, as the labels poured money into attempts to build a following for those they adopted. The big questions about the future of popular music are who will aggregate and allocate capital? Who will perform the gate keeping, advertising and promotion functions historically performed by the major labels?

      Metaphorically, this is a struggle between dinosaurs and beavers, with herds of amiable and talented sloths on the fringes, providing background music.  The dinosaurs--the major record labels, their defensive myths, and their lobbyists and lawyers--are trying to crush an environmental phenomenon that threatens to make them extinct.  The beavers--the indie musicians and the entrepreneurs who are experimenting with new forms of intermediation--are largely oblivious to the thrashing of the dinosaurs, and are heroically working to construct structures that work in the new marketplace.  Because most beavers focus on the individual trees rather than the forest, most will fail; but some will succeed in proving the viability of a new business model. [FN3]

      This article is the fourth in a series by this author seeking to explore the impact of the technological revolution in the music industry.  The first three built the case for three propositions concerning costs, copyright, and DRM, while this article explores the question of what economic incentives will suffice to facilitate an effective market in the absence of intellectual-property or copy protection. [FN4] It bases its analysis, in part, on empirical evidence collected from interviews with musicians and music consumers.
       *68 Following this introduction, the article first defines the problem; explaining why the old business models have eroded in the face of new technologies and of the changing role of the law--especially copyright law. Then, it builds on the author's work in his New Architectures article, explaining who makes music, who consumes it, and why. These sections explain that while money plays a role in the marketplace for music, it is secondary to “hedonic” factors both for musicians, who make music largely for self-expressive and self-affirmation reasons, and for consumers, who listen to music for reasons including idiosyncratic perceptions of its quality, a desire to be part of a particular crowd, and vicarious identification with or attraction to the performers.

      This Article then explores the essential role that intermediaries play in the marketplace.  This section acknowledges that the new kinds of intermediation needed in the new technology-driven market place will not occur unless intermediaries can make money.  Building on this foundation, this Article develops the elements of a business model that can sustain new forms of intermediation.  The result will be a robust market for popular music that will provide more opportunities for a wider variety of musicians and result in greater consumer satisfaction than past models.  For viable business models to exist, entrepreneurs striving to stake out roles as new kinds of intermediaries must creatively monetize access to the celebrity that they build in their clients through new technologies including not only social networking and videogames, but also technologies for classifying music to reduce consumer search costs.

      Whatever insights this article offers are the product of the author's involvement in the grassroots music, theatre, and film communities in Chicago, often known as the “indie” (in the case of *69 music and film) or “storefront” (in the case of theatre) communities. [FN5] The author writes and records songs under the name Modofac, which has so far released two albums. [FN6] Beginning in the summer of 2008, the author wrote a musical, and produced it in 2009 and again for an eight-week run in 2010. [FN7] The musical played to sold-out audiences during its initial run in a storefront Chicago theatre. Now, the author is working with a group of indie filmmakers to make a feature-length film based on the story embodied in the musical.

      In the course of that effort, he collaborated with and formed friendships with a growing group of indie musicians, theatre people, and filmmakers, mostly in their twenties and thirties, who write *70 their own music (or plays or screenplays), perform it live publicly, and dream of making a living with their art. On the whole, they approach life in ways significantly different from the author's multiple generations of law students. Interested in their philosophies, their experiences, and their formative influences, the author interviewed several of them in depth and wrote a series of profiles for publication on the Web. [FN8] The profile-writing effort expanded naturally to include several enthusiastic consumers of popular music, in the same general age group.

      The author joined the advisory board of the Chicago Music Commission, a non-profit group devoted to improving Chicago's climate for musicians and its visibility as a music city.  Simultaneously, as a vice-chair of the Chicago Council on Global Affairs' Global Chicago Project, he investigated the role of grassroots music creation and of independent theatre and film work as determinants of success in the global competition among cities.  In the course of these activities, he organized and moderated several focus groups in which musicians and their professional facilitators discussed the environment for music activities and the hallmarks and pathways of success.
II. The Problem
      Harvard economics Professor Richard Caves summarized the characteristics of the music industry as follows:

       1. The goals of the creative process strain against the economic resources available for the task

       2. Musicians face an “anguished” contact with the gatekeepers who select among the many available artists and their creative output

       3. Ecological forces in the marketplace determine the organ-ization of the gatekeepers

       4. Gatekeepers may function in a sequence so than an artist may be admitted by one, but denied entry by another--necessary--one.

       5. “The many would-be creative workers who suffer rejection either [give up], toil in dedicated poverty or settle for humdrum work, while those who experience creative success*71 reap adulation and wealth in what tend to be take-all contests”

       6. Uncertainties reign in a market structure in which costs at each level are sunk, before the gatekeeper who controls the next function decides whether to risk investing. [FN9]


      Caves's “ecological forces” change over time, causing upheavals in the organization of the industry. Printed scores, broadcast radio, recording technologies, and audio amplification all changed the way music was made, distributed and consumed. All of these technological innovations, like the more recent proliferation of small computers linked to the Internet, rendered existing forms of organization obsolete and provided opportunities for entrepreneurship in redefining how musicians would find and interact with their audiences.
      The popular preoccupation with recorded music delivered to consumers in the form of CDs is a misleading way to think about popular music.  Dominance of recorded music as the revenue engine of the music business is a phenomenon of the twentieth century--mostly the latter part of the twentieth century. [FN10] Recorded music pushed publishing and live concerts into the background only toward the end of the century. Radio was a big driver of discovery and celebrity.
      Technology has produced a new “ecology” in which all access to recorded music is essentially free (broadcast radio had always been free). This has upended a business model based on billions of dollars annually in sales of recorded music. The resulting crisis in the music industry really is a crisis only for enterprises that depend on recorded music for their profits.

      This part of the article analyzes the development and erosion of the model on which those enterprises depended and contrasts it with the new model that is replacing it.  This section concentrates most of its attention on recorded music, but also describes briefly how live concerts and publishing enter the picture.



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