The future of music

Relationship is where the value lies

I recently tweeted about a new book called Against Intellectual Monopoly by Professors Michele Boldrin and David K. Levine, who argue that the current laws on intellectual property rights, especially copyright and patent laws, are killing creativity and innovation. Using examples such as Napster, Disney and the pharmaceutical industry, Boldrin and Levine argue that there are other and better ways to reward people for their ideas or creations.

As a perfect case study we have the news that Google is switching off access to commercial music videos for UK users from March 16th because negotiations with the Performing Right Society (PRS) have broken down. PRS, which represents the record labels and some artists and negotiates prices for public performance of recorded music in the UK, wants Google to pay more because user numbers have grown; Google says PRS is overpricing. Without a PRS license, it’s illegal for Google to share this content in the UK. The result is that the public loses access to the music – which means that everyone loses.

Then there’s the launch of Spotify. Legal for private use, Spotify streams music at reasonable quality, completely free of charge and with no buffering. It contains hundreds of thousands of tracks from almost all the major labels, and is a joy to use. It’s currently accessible only in Europe, and UK users are among the first to be able to sign up without being invited first. Spotify will never replace my own music because I prefer listening at full bandwidth: I use Apple Lossless codec (see my earlier post about compression). But a recent survey by Jonathan Berger, professor of music at Stanford, has shown that young people actually prefer the sharp, tinny sound of compressed MP3 to the richer sound of full quality audio. If this is true, Spotify and free streaming services like it are the future of music.

The challenge to the music industry is this: if all we need is one copy of a work on a server, streaming to millions of people simultaneously, where does the revenue come from?

So far the industry has attempted to transfer its product-based business model from selling physical units to selling digital units, in other words charging for downloads. The Battle of Napster and this latest PRS/Google conflict are encounters resulting from this effort. Whether you believe the industry is cleverly getting the last few pints from the cash cow before it finally dies, or you see the industry as King Canute refusing to acknowledge very wet feet, there is no doubt that this model is doomed. Digital recorded music will soon be consumed without being owned or paid for.

Value is based on scarcity, which is why the most enduring revenue stream for musicians is live performance. But there are limits to how many gigs an artist can play each year, to audience sizes, and to ticket prices. This revenue stream is simply not scaleable enough to replace product sales.

Another obvious revenue source is opening the band-brand conversation and securing sponsorship deals. This is growing fast and has some way to run. But again there are limits: many artists will have ethical issues about which brands they promote, and consumers will lose interest in artists who dissipate their own brands by selling out too obviously.

The third revenue stream is public performance of recorded work, where royalties apply – Internet broadcast, background music in public spaces like shops, sync rights for TV, film and advertising, and commercial radio plays. I have posted before about my belief that music is not the most appropriate sound for every public space, but I expect this revenue stream to continue – as long as the industry agents like PRS can get their act together and create a sensible and consistent pricing model. However in a world of free personal music, public performance royalties will become increasingly anachronistic, and in any case they will never amount to more than a tiny fraction of the money lost with the demise of product sales.

Fourth there is patronage, or commissioned work. The great musicians and artists of previous centuries has no copyright protection and no recordings or duplicates to sell. They were paid by patrons, and produced much of their work to commission. Expect to see a renaissance of the patronage model as copy sales dry up.

But it seems to me that the future business model for all artists must be driven by a revenue stream that has only just started to trickle so far: the monetisation of the relationship between the artist and the fan. In this model the record companies have little or no role to play at all. Artists have their own teams handling a database of fans, who all choose where they want to be on a relationship continuum that stretches all the way from a single free download to personal meetings with the artist.

As the fan chooses to move up the scale, buying an album, signing up for a newsletter, joining a tiered loyalty programme, getting exclusive merchandise, buying tickets for fanclub-only gigs, getting signed merchandise, being in direct communication with the artrist, and attending small-group private audiences or gigs, the annual subscription goes up accordingly. And the music, most of the time, is free.

This model applies some of the best lessons from business and marketing – relationship marketing, database marketing, disintermediation, customer-centric business, virtual business, atomic business, web 2.0 – and applies them to an industry which is all about relationship. The fans crave relationship with the artists. So far, record companies have simply been in the way of that. Radiohead and others have started to explore this new direct model; the new wave of artists who don’t need expensive recording studios, large advances or teams of suits to manage their entourages will leapfrog these efforts in the coming months and years. Using social networking, and new musician-specific tools that are already becoming available (see Gen-Y Rock Stars for some of these resources), artists will create their own communities, and connect directly and openly with them.

Within a decade I believe the music will be free – and the money will be in carefully managed direct relationships. Relationship is where the value lies – and it can never be pirated.

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