Understanding the New Economics of Music: Three Necessary Realizations for Artists

The music industry is changing. Actually, it already has changed. Technology has transformed everything from production to marketing and distribution. The business side is still trying to catch up with technology, with major labels suddenly trailing the pack.
But if you’re anywhere near the music industry, you know all this already. The question is “How can I survive in the new music economy?” The answer is not easy. It requires a complete change of mindset from traditional music business thinking.
As an artist, there are three basic realizations you need to come to in order to understand and survive in the new economics of music: your band is a business, the traditional model is broken (for good), and your fans are your best assets.
I’ll lead you through these necessary realizations, but much of the rest is up to you. The beauty of this shift is your creativity gets to spill over from music into the business side of things more than ever before. There will be plenty of people to help you along your way, but ultimately it’s you making decisions for yourself.

Realization #1: Your band is a business
Take a minute, let it sink it, get comfortable with it. It’s difficult because you think of yourself as an artist—don’t lose that! The key is that you are an artist who needs to make a living. You are an employee of your band. Pretty sweet job, eh?
Traditionally, bands have at best been brands in a larger corporate label structure (yes, even the indie labels). If you weren’t in one of those structures, you weren’t a professional musician. Well guess what-- labels, in the traditional sense, are irrelevant today (a point we will hit in greater depth later). With the labels gone, you are your own entity.
The thought might be scary at first, but the fear should become an element of excitement for the opportunities this freedom affords you. You now have complete control over everything related to your music, and for the first time you can realistically make a living while keeping that control—there are no more middlemen.
Sure, you will have to learn more about the business aspects of music, but there are many of us here to help. Just remember, as your own business you are no longer fighting for the attention of a few label execs who will magically make you huge, you are fighting for the individual ears of every possible fan out there.

Realization #2: The traditional business model is broken. For good.
In the traditional model, a band worked for the attention of major labels, as the labels collectively had near monopolistic control of all distribution channels. This control allowed them to essentially dictate who succeeded and who did not.[1] Additionally, the only way an artist could get a quality recording made was with the financial backing major labels offered.
The result of all this control was a set of contracts that meant any band that was good enough to get signed, but not good enough to sell literally millions of records wound up in debt to the labels. For an overview of how a band can sell 250,000 copies and still lose money, see: http://www.negativland.com/albini.html[2]
I added the “For good” part to the section title because major labels still seem to be desperately grasping for every element of the old model that still remains. They don’t understand the new economics. In fact, Doug Morris, CEO of Universal Music admitted in an interview with Wired:
"There's no one in the record industry that's a technologist," Morris explains. "That's a misconception writers make all the time, that the record industry missed this. They didn't. They just didn't know what to do. It's like if you were suddenly asked to operate on your dog to remove his kidney. What would you do?"[3]
Now is your opportunity to get ahead of the majors. Kick them while they’re down and reclaim total control in the name of artists everywhere.

• Talking Point #1: You don’t need a label
  This is a tough one for most bands to realize—all your favorite bands growing up were on labels, and you may have dreamed of being on the same label as they were. But think of what a label’s primary functions are: financing recording, handling distribution, and providing marketing support. Well guess what: you don’t need any of that anymore.
  Recording is practically free. Yes, you still can shell out loads of money for studio time at the best studios with the most famous producers, but with the advent of Pro Tools and other recording software, the costs of doing so now generally outweigh the benefits.
  Distribution is practically free. Self-distribution options, selling directly to your own fans, are coming very soon. In the meantime, you can pay TuneCore what you’ll make on two or three copies of your record and they’ll distribute your music to all the major online retailers (I’ll hit on the advantages of self-distribution later, but both options are important).
  Why has the traditional distribution structure broken down? Simple: physical space in stores (and in warehouses and delivery trucks) costs money, digital space on servers essentially doesn’t. What does this mean to you? It means that instead of getting at best 7-10% of record sale profits (after paying back the record label in full for recording and distribution investments) through royalties, you get about 70% of all sales. Period. In a best case scenario on a major label, you still have to sell upwards of 10 times more copies to make the same amount of money.
  Marketing is dead. At least in the traditional sense. Marketing is no longer direct advertising, as labels still believe it to be—people have become immune to traditional advertising. Andy Sernovitz, author of Word of Mouth Marketing, states “Advertising is the price of being boring.”[4]
  So what are the new goals of music marketing? Enable and encourage existing fans to help build your brand, and know your potential fans better than they know themselves, so as to get them to discover you in the way in which they are most susceptible to being hooked. Are people finding you through MySpace? Are they passing mp3s around between each other? Are they avid blog readers? What blogs? I’ll touch more on the importance of your fans later, but it’s your job now to know them as well as you possibly can.
  
• Talking Point #2: The pricing model is broken as well
  You’ll see this more in the next section with “The 80/20 Rule,” but static pricing is not reflective of the real value of music.
  Let’s look at an example: One fan listens to your album multiple times daily, it’s struck such a chord that she knows every line and her MySpace screen name is one of your lyrics. She’d drive hundreds of miles and pay hundreds of dollars to see you live (she already watches all your live videos on YouTube, over and over). Another fan had your music recommended via Pandora, heard a song, decided to buy the album on iTunes, put it on his iPod, and listens to it about as often as anything else. If you come to town, he might go if he has nothing else going that night.
  In the end, both fans paid $10 for your album and $20 to go to your concert. For one, it was every penny he was ready to invest in you (if you put on a great show, maybe he bought a $20 t-shirt as well, and maybe you began to convert him to be more like Fan #1—each individual product he buys (music, live show, t-shirt) strengthens his ties to you). For the other, she would’ve gladly spent hundreds more dollars on you had she been given the opportunity (you only print 3 styles of t-shirts and she owns them all already).
  The situation with Fan #1, which happens far more often than bands realize, is called Consumer Surplus—in economic terms, the demand exceeds the supply. In real terms, this means lost revenue for the band.
  The ideal solution is a sliding scale pricing model. The issue with adopting such a model initially is that fans wouldn’t know where to start—they are unsure of how to value your music as well. A compromise is to offer more options—sell your B-sides, make a live DVD, print collectors-edition posters. Unfortunately, those kinds of compromises are just that: compromises.
  One possible implementation of a sliding scale involves touring. With gas prices rising, more bands are going to have to get more monetary support to justify going on the road. Now say they asked their fans to help them come on the road. The top fans, like Fan #1, those who would stop at nothing to see the band succeed and to see them live personally, would donate. The fans like Fan #2 would not.
  Beyond simply asking for donations, the band could offer simple rewards for donations and let the fans know how their money is being spent—say, everyone who donates money gets a personalized picture of the band using your money (holding a sign with your name on it—it could be in the tour van if they spent it on gas, or in a restaurant if they needed food). To help the fans visualize what their money will be used for, you can set up some suggested donation levels and examples of expenditures from each: $5 buys a band member a burger, $20 buys new guitar strings (if you don’t get them free), $50 fills up the van with gas (okay, maybe closer to $150), etc. Perhaps the bigger donations warrant a phone call from the band as they spend the money. Perhaps an extra-large donation gets a private acoustic session for you and your friends. None of these interactions inflict any extra cost on the band, but they let the fans know how their money is spent and make them feel wanted, which in turn makes them more likely to spread your word even further.
  

Realization #3: Your fans are your biggest asset
“But wait,” you say, “how can someone I’m just selling stuff to be an asset to me?” And there’s the trap: you don’t have to merely engage in single, one-sided transactions. Your relationship with your fans shouldn’t end when they put you on their iPod—if they like your music, they don’t want it to end there, and neither should you.
There’s a phenomenon in Economics that goes by a number of names: The 80/20 Rule, Pareto’s Curve, Zipf’s Law. Traditionally the rule meant that the top 20 percent of companies in a given market controls 80 percent of the revenues in the market. But as distribution has changed in music, so too has The 80/20 Rule. Now the rule takes on new meaning: your top fans are responsible for the majority of your marketing. As a rule of thumb, the top 10 percent of your fans carry about 90 percent of the weight.
So who are those 10 percent and what can you do with them?
Have you looked in the front row of your concerts lately? Have you seen those screaming fans who melt when you make eye contact with them or hit that high note in the bridge of their favorite song? Do you have any idea how early they bought tickets, how early they got to the concert to make sure they were as close to you as possible, how late they’ll stay after the show in the hopes of catching another glimpse of you as you disappear into your tour van? Do you know how many friends they’ve told about you and how many message boards they’ve posted on about you…in the last week? They would do anything for you.
All you have to do is ask. Help them help you.
How can they help you? We already established that traditional marketing is dead. Your existing fans are your best outlet for generating new fans. They’ll put your songs on mixes, bring friends to shows, talk you up on blogs and message boards, and anything else they can do to spread the word. Additionally, they are likely to be your best individual sources of revenue.
Up to today, much of online distribution has mimicked physical distribution, just in a more accessible format. However, as previously stated, there’s no reason the relationship between artist and fan should end when the music is purchased and put on the fan’s iPod—neither side wants it to end there.
Think of the information Amazon, iTunes, and Ticketmaster get from the fans that you as artists never get to see: e-mail addresses, locations, what else the same fans bought (or listened to and didn’t buy). Many fans want you to have some of that information so you can best stay in contact with them and cater to them, but they don’t want to go through the hassle of looking for where and how to give it to you.
iTunes recently started releasing specifics of sales by zip codes through a service on TuneCore.com. This data can help you get a better idea of where people who are buying your music are located, but it still doesn’t give you statistics across all mediums of consumption (ie-Amazon, MySpace, imeem, etc), nor any way to get in contact with those individuals apart from booking a tour nearby and hoping they find out about a show and come.
Soon artists will be able to sell their music and other wares directly to the fans, possibly on a sliding scale, and receive and maintain the personal information the fans want to share. Artists will be able to utilize that information to increase communication to their existing fan base and maximize their reach to new fans.
However, ditching the existing outlets in favor of nothing but selling directly is also generally a mistake. Remember what we said was the new marketing ideal? Know your potential fans better than they know themselves, so as to get them to discover you in the way in which they are most susceptible to being hooked. This means you need your music to be accessible to as many of your potential fans as possible—forcing them into a single distribution method puts you in the same trap the major labels fell into, and you’ll lose many potential fans in the process.
You can try to influence new fans to see the advantages of doing business directly with you (via links on your MySpace and YouTube videos, and encouraging your existing fans to drive their friends to your site, among other ways), but if they don’t want to go beyond simply buying mp3s through their favorite retailer and throwing it on their iPods, they’re frankly not worth your time and effort. Yes, it’s great that they bought your music, and it would be great if they came to a show, but remember our version of The 80/20 Rule—if they aren’t willing to put in the effort to count themselves among your top fans, they have a relatively low utility to you.
Concentrate on your top fans—they will help you the most in any number of ways.

Case Study: The Format made the new economics work for them
The Format was dropped by their major label, Atlantic Records. Twice. Many bands would pack it in, but best friends Nate Ruess and Sam Means weren’t giving up on their dream. After an initial thought towards seeking another major label, they looked into the audience at their shows and saw a devoted fan base that was more than they could ever ask for. They didn’t need a major label to get their next album in the hands of those fans.
So they took their severance check from Atlantic and recorded Dog Problems the way they wanted to. And with major labels lined up out the door trying to buy the rights to their sophomore LP, they made the difficult decision to self-release it on their own aptly named Vanity Label.
Nate and Sam gave away a free acoustic EP including some of the songs from Dog Problems to their fans about two months before the LP’s release to help get them excited. Then a month before release, they posted 30 second snippets from four possible singles and had the fans vote for their favorite.
When it came time to release the LP, they paid for distribution out of their own pockets and were among the first to embrace SnoCap’s widget to let fans purchase and download MP3s directly from their MySpace page.
The result? Dog Problems debuted at #77 on the Billboard 200 in July of 2006, a chart virtually untouched at that point by bands without labels.
Then, a year later, seeing sales slow to virtually nothing, The Format did something a major label would never consider: they gave away Dog Problems for free, as long as you signed up for their mailing list (and no, you didn’t have to confirm your e-mail address—if you didn’t want to put in a valid e-mail address, you didn’t want to hear from them, so what good would it do them to e-mail you?).
Over the course of a month, 40,000 people took them up on the free album, and another 29,000 downloaded individual tracks from the album. The Format’s e-mail list grew immensely (how much would a major label pay to get 69,000 more fans on a band’s mailing list in one month?), and as a result of that their next tour had far and away the highest turnouts they had ever seen. All without spending a dime on marketing, and all profits going into their own pockets.

Conclusion: YOU can do it
Undoubtedly, this sounds like a vast amount of work and responsibility above and beyond what you anticipated when you first joined a band. Fear not—tools are on their way to help you sift through all the clutter and make your life much easier. Sure, they won’t be free (all those employees put on the street by the labels need to make money somehow), but they’ll be far preferable to signing 98% (or more) of your life away to a label. If they get their act together, labels will still be able to participate in the new music economy—but they’ll be much more like business consultants to you than corporate overlords.
Control is now in the hands of the only two crucial entities in music: the artists and the fans. How are you going to build and maintain a strong bridge between yourself and your fans?

[1] The “hit machine” of major labels is a predictive force, which only works when options are limited. When fans have all the choice in the world, hits are determined by the fans themselves—hits are made reactively to fan response and viral spreading. Instead of what the fans listen to and like being determined before an album comes out by some guys in a board room, the best albums are elevated to the top by aggregation of real fan interest.
[2] In his book Confessions of a Record Producer (Backbeat Books), Moses Avalon shows how a million-selling artist can still easily wind up in debt to a label.
[3] http://www.wired.com/entertainment/music/magazine/15-12/mf_morris
[4] Sernovitz XXV