The Simple Maths of the New Music Industry

The pre-modern music industry could be navigated with some very simple maths. Bands made records, record labels sold them to shops. Wholesale revenue wasn’t that much more complicated than units x price. And what mattered to most bands was the size of the advance, even if recording contracts were adept at slicing percentages here and there.

The modern music industry seems much more complicated. Alongside unit sales we now have subscription and advertising supported streaming in the mix. In 2015 the world’s largest market, the US, passed through a point where it was roughly divided into thirds between streaming, download sales, and physical sales. As streaming grows in importance it becomes more urgent to understand its hidden complexities. There are however some simple ways to understand the new model, and to build strategies to make the most of the modern music industry. Here are a few.

Zero slumming it, or, permanent total war…

In subscription services there is at any point in time a fixed number of subscribers, and therefor a fixed pool of money. This means it is impossible to win without some other artist losing. It’s known as a zero sum game – each unit of gain is balanced by a unit of loss elsewhere in the system.

The math involved here can be seen in windowing strategies, which are basically a gamble on whether over the short term fans will pay more than the streaming services would. Arguably this is good for the industry as a whole as it helps consumers understand that buying a music service does not guarantee access to everything in the world.

The caveat is that deploying windowing indicates to the music fan that you consider them a cheapskate who is there to be fleeced. For sure some will consider this part of the deal with fandom – if it doesn’t hurt the wallet it’s not nearly so much fun. So to decide whether or not to window you need to know the degree of pain an artist’s core fans want to suffer. If they are a hardy bunch you can take £8.99 off them in the first week or two; if they are lily livered then ubiquity on day one is called for.

Pricing in and out of bundles

Pricing is a dark art, and commonly misunderstood. The possibility of windowing tells us something important about price, and that is that the right price is different for each and every potential buyer and each product has its very own profile. Let’s take a hypothetical product and see how it works.

An artist might have 1000 fans, each of which is willing to pay £8 for the next album. It’s not a given by a long way that a lower price would magically increase the sales. If it did, a £1 reduction would need to deliver 1143 sales and we’d need 889 sales at £9 to be evens on total revenue.

Bundling makes sense in music just as it does in other businesses – would you buy lace up shoes without laces? And in music there are bundles all over the place, from albums, to subscription services, to playlists. Done right the practice delivers higher value to both producer and consumer, and doing it right means that each buyer gets the items they value within the bundle, rather than all buyers simply getting a lower cost for their goods. An example might be selling that £8 album in a £25 bundle with the back catalogue for newly converted fans.

Arbitrage – arbitrary + outrage?

This exotic word covers a very easy idea, which is that given two sources of the same thing, you have the privilege of choosing and selling the cheaper. It’s important however to have a sophisticated idea of what the thing is that is being bought and sold for profit.

In music, for a very clear example of arbitrage in action it is only necessary to look at the way Amazon builds a range of offers around a single product in its music store. Sadly, The Very Best of Prince is currently number 1 on the Amazon music chart and may be obtained for £4.50, plus postage and packing. But it’s never that simple with Amazon:

20 new from £4.50 2 used from £10.00 1 collectible from £29.99
Buy the MP3 album for £8.99 at the Amazon Digital Music Store.

Some of these offers come with free p&p as part of a larger order, some are sold by third parties, and Amazon’s includes a set of MP3 files delivered to your cloud account, which is itself a separate source of value. It’s a fun game to try to trace all the different ways Amazon can make money from just one album, right from the use of its cloud storage product before the music has been delivered from the studio. Algorithms can manipulate the relative price and visibility of each of these, ensuring that Amazon gets the ideal outcome. No other party to the transactions has the same command over the data and the environment to do that.

A more disturbing arbitrage in music is the way that licensed and unlicensed music sit alongside each other in UGC and search engines, with the advertising driven platform owner able to influence the consumer’s choice, and therefore the content cost of any click-through. In public performance, soundalikes are close to arbitrage, as are catalogues licensed privately in competition with collecting societies.

The new programmatic content marketing industry is built around a frenetic matching between personal profiles, content, and marketing messages; platforms attempt to maximise the value differences between essentially equivalent content and marketing impressions. Music has yet to play in this game at any scale, but the possibilities are exciting. Perhaps a track or a video could be more valuable for 24 hours outside any sales or subscription service, in the wild west of the new algorithmic web!

If you’re not doing maths, it’s being done to you…

These three examples show how different the new music industry is from the old, but also how an awareness of the way that digital platforms make decisions arms the music industry to fight back and win in the battle for value.

It’s easy to feel helpless in an unequal fight driven by forces way beyond the comprehension of most of us. After all, hardly anyone can play Go, let alone develop software which can beat the world champion, as a Google owned company has recently achieved. But all three techniques described above can be managed with some simple strategic thinking, and some readily available tools. And where it’s tougher, we can, as an industry, come together to explain our fears and ask for help, such as with the flaws in ‘notice and takedown’ for dealing with UGC copyright arbitrage.

And we do have a great strength, which can make much of the new maths irrelevant. People develop personal relationships with music, and with creators and performers, and even sometimes have a romantic attachment to record labels. It’s a privilege which the owners and operators of all the maths in the world don’t have, to be able to speak directly to people who love what you do, and ask them to support your work.

This entry was posted in markets, strategy. Bookmark the permalink.