The Free Music Business

  Free the music 
  Originally uploaded by Lady Pain.

I've riffed on the notion of free as a business model frequently on this blog. We've even come up with a name for a business model that uses free as its foundational element - ie freemium.

The fact is that the Internet demands a free business model. It's a network where content flows freely in abundance. Scarcity works great for physical goods, but crumbles in a digital world.

We learned this lesson in the print world as it moved online in the late 90s. The first instinct of all print media was to charge a subscription to their content in the online world. Today I can think of just one online property that is paid online, the Wall Street Journal. And when it is bought by Rupert Murdoch, it will go free as well. At least I sure hope so.

But it's also true that many print businesses that have gone after the free online opportunity with a vengeance are making a lot of money now. The New York Times is a great example of this, but there are many more. Online can and should be free because the marginal production costs are basically zero and online advertising is a highly efficient juggernaut that shows no signs of slowing down. Page views are worth a lot more to an advertiser than the amount you can get someone to pay for a subscription to them. And the way media is consumed online, via search and social distribution (emailing links, blogging, etc), requires that the content be free to distribute and consume.

We've seen this movie before and it's time for the music business to watch the movie closely and understand what it says. Free music will be a better business than paid music ever was. Read Bob Lefsetz' rant this morning. He's been saying this for as long as I've been reading him. This is the point:

what we’ve learned is more people want the music than are buying it. Should we try to convert them, or sue them?  Is music failing, or is the SELLING of music failing? 

So let's agree that it's the selling of music that's failing. What should the music business do? Watch the movie. The print companies went free, accepted advertising dollars instead of subscriptions, plugged into Google for traffic, and the money is now pouring in.

As much money as the media owners are making online, the search and discovery companies are making even more money by delivering the right content (and ads) to the audience at the right time. On top of the content layer is the "discovery/nagivation" layer that makes even more money than the content layer online.

Before it's too late, the music business needs to build the "discovery/navigation" layer and take a piece of the action so it can participate in that revenue stream as well. iTunes isn't a discovery/navigation layer. It's an online version of Tower Records, but it's worse. You can't browse the aisles of iTunes and look lovingly at that record you are dying to buy if you can just come up with the cash. iTunes is fine, but I have never found one single artist/song in iTunes. I find it elsewhere (and I won't buy on iTunes anyway until they take the damn DRM off).

Services like last.fm (social networking), pandora (personalized radio), the hype machine (music blog search & listen), and playlisting services like project playlist and iMeem (which is being sued by Warner Music) are examples of this "discovery/navigation" layer. I'd also add "on demand" services like Rhapsody, Napster, and Yahoo Music to this "discovery/navigation" layer except that these services are subscription based today so they don't really work very well to drive music discovery and consumption. Imagine if Google was a paid service. It wouldn't be driving a lot of traffic to anyone would it? I was encouraged to see that lala.com is going to try an ad supported free version of an "on demand" service. I hope it works because this is exactly what needs to happen in order to build a free music business.

The music industry should be doing all that it can to build this discovery/navigation layer because unlike the print industry, the music industry gets paid (or has the right to get paid) every time someone listens to music that is streamed over the Internet. They get paid a compulsory license if someone listens to a stream that is defined as "internet radio" which is about a tenth of a cent per listen. And they get paid a penny a listen if the song is listened to "on demand" like through Rhapsody.

I believe these fees are easily recouped via advertising once the free music business takes off. Certainly the compulsory licenses can be ad supported and I hope lala is right that on demand can be supported with ads as well.

When all this comes to pass, and I sure hope its soon, we will have an abundant free music business where all the music is available to everyone and discoverable via search and social discovery. And that business will print money just like online print media does today. The only question is whether the music companies opt to participate in that business and prosper or fight it to their death.

Additional Thoughts: Since posting this earlier, I've been feeling that I left several important thoughts out. The first is that eventually the music owners will be better off taking an ad revenue share than a per listen payment. That's already part of the deal on both the compulsory license for Internet Radio and for On Demand Services but it's an either/or based on what produces more money for the music owner. I think the music owners should take a revenue share from day one and let innovation in the free music business flourish. The upfront costs of building a free music service where you have to pay the per listen fees in advance of selling the advertising are putting a chill on the market.

The second thought is about file based music versus streaming music. File based music has to exist today because there is no good mobile broadband internet solution. When you are at the gym, in the car, on a run, you have to have files to listen to. You can't get your music via a stream when you are on the go. But that's going to change and I believe within five to ten years, we'll be listening to last.fm, the hype machine, and rhapsody in our cars and iPods and phones. And when that day comes, owning files isn't going to be necessary anymore. It's not necessary anymore in my home. I have several hundred gigabytes of mp3s (all acquired legally by the way) in a server in my basement. We barely ever listen to them. Streaming music is better because it's abundant. I don't own all the music in the world on my server. But almost every song ever recorded is on the Internet somewhere.

The final thought is that there will still be a market for purchased music in a world of free music services. People still buy vinyl. Some people still buy CDs including me. But so many people don't buy music anymore that the music industry has to create a model to service that market and grow the industry instead of shrink it. I think free ad supported streaming services are that model.

When I mentioned the idea of free music to a friend in the music business, he said, aghast, "never". Like that was the end of the music business. I believe that what has transpired over the past 10 years on the Internet tells us the exact opposite. Free music is going to be a great business. It's just taking an awfully long time to get there.

Comments

[jim]

"Today I can think of just one online [print media] property that is paid online, the Wall Street Journal."

The unstated assumption here is that print media = newspapers. But what about magazines/journals? Assuming it's even online, many restrict access to the articles that can be viewed, and most restrict access to the current issue. Once it's archived, it often goes behind a paid wall (this is also by and large true of newspaper sites; usually 7-10 days are available for free).

Maybe this is where music is moving? Because increasingly you're seeing albums available for pre-release streaming through, e.g., Myspace, or a band's website, but once the record releases, its full stream goes away.

Just as we don't get free access to the entire archive of the New York Times, we're not going to get free access to our favorite band's discography. Services like Rhapsody plus a social networking component seem like the path to the future, but we've got to lose this mindset of "free."

[Chris Neumann]

I think you're right Fred. Ad supported is a good business model for music. Seems to be working out for podcasts. I've been thinking about this a bit lately, and there's really no modern equivalent to the mix tape. Why not? My 18 year old sister in law, who is totally into Facebook and all the other stuff you're always talking about your kids being into, was going to give me a CD the other day. I told her not to bother - what am I going to do with that? Import it and have track1, track2, etc in my iTunes music library? No. Too annoying.

Check out finetune.com - cool service.

It's going to require some thought to figure out the formula, anyone want to work on it?

If so, email me.

Chris

[Mike]

I actually think this is good advice for Apple - given there is a single point of sale (the Itunes store) and it's built into everyone's player. Jobs Rank?

[Patrick Woodward]

Opening music up to streaming portals creates awareness in a much broader fashion than any preceding technique.
Awareness breeds interest breeds connection breeds fans breeds loyalty. Loyal fans that keep coming back for more is the underlining goal of every single artist.
Ads on these portals will eventually be a part of the discovery process.

[Sam]

I wish it were true, as record label owner, I wish I could pay for my bands recording time and be able to give the music out free so that anyone that cared to listen could. I'm not a fan of having to be sponsored by Nokia for example to be paid. Our artists feel the same way.

We all want music to be liberated, but it just doesn't feel right to the content producers to make money off of advertising rather than purely off of our work.

I agree that everyone chooses to listen to music in a different way. I'm keeping an open ear to the different types of distribution and business models out there in hopes that something will feel right. Being a lover of the Album format may be a disadvantage for me.

[Janette Toral]

In countries where piracy is high, local artists have to rely on other activities to generate their main source of income and this includes doing shows, concerts, product endorsements, collaterals, among others. Perhaps any new artist should immediately consider having an ad supported website (that has discussion, shopping site, gallery, and video streaming/podcast facility). Perhaps there should be a portal that is so focused and understands them well (need to promote and generate income).

[Michael Long]

So, people who spend years creating albums and writing novels and making movies should just just give that work away for free? People who spend thousands or millions of dollars creating content should forgo trying to get that investment back because the "distribution" costs are free?

Wait. I remember. All content wants to be subsidized by ads. Of course, people also use Tivo to skip ads and AdBlocker to block internet ads. They complain bitterly about Flash and popups and intersitials and prerolls and postrolls. Guess they don't want to see ads either.

Why not just admit that there's a group of people out there who think they're entitled to whatever it is they want? That other people should slave away creating their music and books and movies and software, and all for free? Just because their copy costs nothing more?

Tell you what. When I can get gas and rent and food and clothing and insurance and everything else for free, I'll give all of my content away for free. Until then...

[Dawn]

This entire argument conveniently neglects the interests of the artists themselves.

And exactly where would the advertising be? In the verse or the chorus? Or perhaps you want innane discussion about Coca Cola during the musical bridge.

There are only so many ad dollars. It's not an infinite supply. To suggest that America's high quality of music (relative to the rest of the world) can be sustained by a free model is naive. You may think people create music only because they love it, but eating Raman wears thin. When the parents or spouse is nagging to get a real job, it's the possibility of riches that sustains the creator.

Under your model, an there be obscenely rich Michael Jacksons? Perhaps it's better that there isn't, but you haven't even given it any consideration.

Music is a culture. You can't dramatically change the monetization method without changing the culture.

PRINT EMPLOYEES PEOPLE. There was little disruption regarding the creation of content because the creators still had jobs.

Creators are not employees.

I've got an idea. Why don't you freely give away your millions on this site and then earn it all back and more via all the people who flock here to read your advertings as the demand for your blog goes up? I think free venture capital would be a great business and somebody with your vision and demand for all things free is just the VC to start it, don't you think?

Then again, I've already

[cyanbane]

@Fred:

I have no doubt that streaming will inevitably be the same as file "ownership" at some point in the next 3-5 years. The point is that if there is no difference in listener "Bob" playing a file on his computer or streaming on demand. that IS a success for technology, but I have a feeling that the record companies are going to treat it in the exact same fashion as a user utilizing something they own (streamed or not). At that point it really doesn't matter what the delivery format is does it? and I am sure there will be a big market in "stream recording utilities (aka stream rippers)" at this point.

I think that the free + ads system works for the majority of the net because of it can be boiled down to 1.)selecting ads for a subset of text X", and 2.) display said ads.

I honestly hope music never gets to such a boring point. Therefore the ads (to be relevant) need to be selected by a major set of data (not being a person A likes song B) 'display that for him on any of our affiliated sites', but the value of the data will be more like(people LIKE person A generally like song B). Thats why it isn't a specific users data will be valuable, but the data in mass. CBS has brought out their queen on that (last.fm) and I the more I have thought about it over the week, I think they made a good move in securing that data.

@Dawn:

To suggest that America's high quality of music (relative to the rest of the world) can be sustained by a free model is naive.

Everything in the parens absolutely cracked me up.

Creators are not employees.

Are they not now under the current model? I thought that was part of the problem.

[Craig Huizenga]

There is a big difference between stream on demand being free and all forms of music being free. I don’t see the later happening, I do see the former (although I made that prediction in 1999…). Free (or actually a reasonably priced compulsory license) for stream on demand will allow the discover/explore companies to flourish, with the net results being more revenue for the label and artist. Currently a lot of that ‘money’ isn’t happening because people are just using P2P – how much of that would shift to legal free stream on demand if it were available? Having a percentage of something is still a lot better than all of nothing.

[Chris]

There are some other alternatives you may find interesting here:
http://www.bubblegeneration.com/?a=a&resource=musicrisk2

and "free" isn't really a business model, it's just a pricing strategy ;)

[NICCAI]

I have to say that I'm surprised by the backlash from the music folks on this. I think Fred is moving in the right direction - or even moving with the wave. Free music is the future. Of the professional musicians I know, the majority barely see a sniff from CD sales - so little in fact that I can't understand why they bother with the hassle of labels. Unless you're the Stones, I think your future is better off embracing the web than holding onto your naivete.

I'll add that I think free music doesn't mean giving up the boat. It is promotion - pr - free samples - a business card - a brochure. If you're serious about making money from your music, you need to consider free music as a cost of doing business. Think of it as way to sell tickets or fill seats at your live show - because that is where you will earn your money. Even the Stones know this - I would love to see dollars earned from album sales versus tour and other promotional related income. Suffice it to say, you will be in far better position to monetize yourself if you embrace what the web has to offer - cheap production, cheap distribution, cheap promotion.

Example: I went to see Joseph Arthur recently - an artist that I originally discovered online. Since then I have bought all of his albums and have seen him live three times - and at the most recent show, I bought 2 tickets, 2 shirts, his latest album (hadn't picked it up yet, and I love cutting out the middle man), and a cd copy of the live show. I'll venture to say that he isn't complaining.

My last comment to the backlashers - no one is saying you should give up your OWNERSHIP for free - just copies of your music. Ownership and usage are vastly different. This may be a tough mindset to swallow, but I'll bet you won't be as
successful financially until you do. No matter if you are a musician, a web developer, or Fred - we all give freebies. I'll venture to say that this blog has been worth millions, despite the free time, advice, and cost of production.

@ Fred

The one thing that surprises me is that you don't see musicians (potentially) in the same light as you see bloggers - the new journalists. I think via MySpace, Facebook, and other social nets, musicians are in an incredible position to launch themselves, promote themselves, and sell themselves.

As I mentioned before, I think the company that can bridge free music, ticketing, and the associated data will win big.

[Hockeydino]

I just don't understand how advertising is a good model. As a consumer, I hate advertising. I hate commercials, especially when they are forced down my throat. I know there's no such thing as a free lunch, and someone has to pay...

What I don't get is how it is an accepted science. Why a company would dole out some coin based on the fact someone tells them that x amount of users are looking at their stuff? Sounds like monopoly money moving around here.

So as a company I will pay you x amount because of potential, rather than looking at real sales? It just doesnt jive to me.

With the internet you have your free advertising...just look at Fred's favorite tunes, or the latest blog about a good band.
Seems to me the entertainment industry would do better by getting a pulse of who is playing what and who is talking about it...rather than just throwing money blindly via ads.

far fethched? maybe

[John Dodds]

Why stop at music, let's make everything free and advertising-funded?

[Chris Anderson]

I'm surprised at all the negative reactions you're getting. In the real world of music production, $10,000 is an INSANELY high budget. Most of the records I work on come in at about half that -- including old-media distribution costs, which are going away. Bands don't expect to make money from records, they just hope to be able to make a little money by touring. Most would even do it if they merely broke even.

Find me a band that is just starting out today and doesn't give away as much music as possible online, and I'll find you one no one will ever hear about.

So yes, giving away music for free won't work for the multinational labels and their lawyers, but did we ever really need them anyway?

[Marco Hansell]

Fred,

Very interesting article. I actually just wrote a blog about the "freemium" model of music and a company called we7 that is attempting to approach the industry with an ad supported model.

we7 offers the option to purchase a DRM-free track at the normal iTunes price, or an ad-supported track for free. The ad will expire after a specified time period and then the track is yours to keep.

Hopefully giving users the option of getting the music for "free" while still supporting the artist will be attractive if only to a minute population. I can imagine some variation of this model becoming the future.

Whether this is the model or not, at my company, Fan Force, I talk with a lot of music executives and label owners all the time, and they are certainly at a bit of a loss on "saving the industry". Time and money is being wasted on trying to keep the CD format alive. Even with digital, the industry is nowhere near the unit sales it was seeing in the "pop boom".

This is increasingly bothersome when you realize the industry put out 15,000 MORE album releases this year than last year. So here we are, with more music out there, more people listening to music via discovery engines and less music being purchased.

There a few key facts about todays consumer that makes the "freemium" model almost inevitable:
1. Big media no longer greatly influences purchases, social media does.
2. Consumers can get P2P tracks of their favorite artist oftentimes before the label makes it available for purchase.
3. Music discovery engines are turning users into niche lovers, that tune out the the mainstream and consume more music from unsigned artist.
4. Album sales are becoming a loss leader and projected to be only 29% of music industry revenues by 2011. Licensing, touring and other such alternative streams are increasing.

The winner in this race: an ad-supported P2P with a powerful music discovery engine and social platform. This way users get the content they want for free and artist still get paid via ad networks. Opening the industry to a legalized P2P, similar to what BMG wanted to do with Napster a loooooong time ago, should push music consumption up even more, making a better case for advertisers and increasing alternative revenue gained from each user.

But wait...major labels won't even give away DRM-free tracks so how long before they're open to giving away FREE tracks? Hopefully not before its too late.

Other than the label's own willingness to support this model, I think the biggest concern is how these advertisers will play in this network. Will the ads be relevant and user-friendly or will it just be another interruption in the users quest to music discovery that will cause them to turn on illegal P2P's or turn off the industry?

[Marc Cohen]

Glad to see this attention paid to free music. Absolutely right that music isn't dead but the selling of music is. We now need to measure the recorded music business by time spent listening, not sales. Check out the Ad-Supported Music Central blog:
http://ad-supported-music.blogspot.com/

[Steve Kane]

Fred, you are almost certainly right in your assessment of trends and directions, and your thoughts on next gen media indexing, searching and distribution are (as always) thought-provoking, but I think you are wrong in two of your seemingly basic assumptions:

1) money is not "pouring in" to "free" print publishers. newspaper and magazine and other print publishers and distributors are essentially all on the auction block now, as their rapidly diminishing revenues and margins continue to erode -- despite that essentially all have been investing in new media channels and platforms for more than decade. you cite the NYTimes -- last time I looked, tht company is under siege because new media has not been able to replace th revenues and margins that new media itself has displaced.

2) as some other comments have also pointed out: across the board, writers, editorialists and journalists are employees -- fixed unit-costs to publishers, who can renegotiate rates or reduce costs by downsizing. musicians are not employees; they are creative artists who - -at least until now -- have been treated by publishers and distributors as co-owners of content. it may be the case -- the sad case, IMHO -- that in the future creative artists will be reduced to wage earners, like in the early early days of Hollywood when directors and writers and actors were salaried employees only. but if that is the case, i don't see that as a happy future. in the early days of hollywood, the creative artists was abused while the corporate owners and business managers became oligarchs.

fred you may be right about the inevitability of your vision -- i assume you are. but i continue to hope that we don't "throw the baby away with the bathwater". creative artists rights (and patent and copyright rights and entrepreneurs and inventors rights) are too important to our basic capitalist-democratic way of life to casually toss away, just because our thrilling geeky toys make it easy to do so.

[Dawn]

Amen, Steve Kane! You said it a lot better than I did. I get so irritated by this shallow "free/advertising" thinking, I couldn't even type a response without tons of mistakes in it. :)

[AW]

Music industry execs are conservative and greedy, but the most successful will increasingly need to be a little more adventurous and giving to make more money than they ever dreamed.

[Tony Alva]

Let's see if I'm getting this right...

In 1979 we regularly sat in the basement of our friends houses, smoked cigarettes (and other things), chatted the summer away and spun records from each others collections. Some records we all had, others were potential purchases (each record a cherished purchase). All the “social networking” was peripheral and secondary to listening and digging the music. We played air guitar and often times acted like fools before heading out with an enormous cassette boombox in hand to skateboard or hit the swimming hole.

In 2010, we'll play streams into earbuds while dodging or cursing the annoying advertising, or we sit at a desk searching endless lists of on line free music (stripped of any real personal value or investment) on a PC monitor. The new music, whatever is left of it, pales in comparison to yesteryear since real artists refuse to compromise and take on a “Sponsor” to keep them fed (if you think artists felt beholden to record companies, think of how that will play out with Proctor & Gamble).

I’m forty three years old and haven’t heard of any kids getting together (in person, not on the internet) for the pure pleasure of listening to music in years. Lots of talk about sequestered in a room by themselves (always by themselves) with iPods plugged in.

Sorry folks, it doesn’t matter why, when, or how it happened, it is ruined.

Rock is dead, long live rock!

[jackson]

"Free music will be a better business than paid music ever was."

And this is where you lose me.

It does not follow that the better the business, the better the music.

You've thrown out the baby with the applecart.

It's pandora's box. People EXPECT free music now.

Thanks A LOT guys......

"I believe within five to ten years, we'll be listening to last.fm, the hype machine, and rhapsody in our cars and iPods and phones." Enjoy, I won't be there with you.

I just don't see any of this as healthy for music, but that never mattered to anybody other that those who make music, and we're used to getting fucked.

[David Bethoney]

Rather than fight innovation and changing business models, the music industry needs to adapt to the environment and make these changes work to their advantage (reminds me of the real estate industry). I am 26 years old and an avid listener to Pandora. Most of my friends and colleagues are avid listeners also. I can't tell you how many times after finding a cool band on Pandora, I have either purchased their album online or purchased tickets to a concert to watch them live (most recent example is the Constantines). If it wasn't for Pandora, I would have never discovered these bands, never purchased their albums, never purchased tickets to their shows and never told all of my friends about them. Tools like Pandora are tremendously valuable to consumers and artists.

[David Hendricks]

Interesting take, and it certainly has prompted some knee-jerk reactions. There are musicians out there making money off the free model already, bradsucks a Canadian one man band, got enough attention giving away music to sell some CDs. Bare Naked Ladies, another Canadian band started giving away music on Amie Street music (after starting their own label), but I just can't see the major labels jumping wholesale into this sort of model. I can't imagine the artists themselves would like it too much either, they like to think they produce art, not product. Launching the whole venture would be the big problem. It takes a while to generate ad income so what would the initial artists do for revenue while that base was being built up? The big labels will watch the indies (and I mean the one man shows - write, record produce, sell) to see if they make it. If they don't the majors will never go for it. If they do make it, the majors are dead anyway. The major labels are big marketing machines, that's their biggest value to a musician, but the internet is changing the landscape of all marketing, not just music marketing. I make my living as a musician and I'm not too concerned with the free model taking money away from me. The internet has provided a way to promote myself in a way I never could have done before. That "myself" is what should have the big labels worried - it's what'll make them irrelevant.

[Alexander Zaidelson]

Fred, thanks for the great post.

Indeed, it looks like with the advent of ad-based streaming services there will be much less need for files and consequently for piracy.

@backlashers: it should be understood that the content will not be FREE, only "Perceived Free" by the consumers. Therefore, if and when the ad-funded free music starts working, the musicians and labels will continue to earn, and the successful ones - real big money.

Regarding we7, I am sceptical
Besides the low applicability of conventional ad models for file-based music, the we7 ads are difficult to measure (no feedback when an ad is played) and difficult to react to on the part of the consumer. They can be also easily stripped off which I believe many people will start doing immediately after downloading the free tracks.

I would love to see someone to come up with a really working ad model for file-based music.