Business models, free music and pay-for options: the Spotify site

Since the IP Finance weblog is much given to reviews of new IP commercialisation business models, or in some cases to improved and refreshed versions of existing ones, the blog is indebted to a law student, Andrew Logie who writes in to extol the potential of Spotify (www.spotify.com). Says Andrew:

"I think it really shows the future of music delivery and marks an acknowledgment by the music industry that 'free' music is not necessarily something to suppress, in fact quite the opposite.

Aside from a slick interface, the great thing about the service is that its 'free' to listen to high quality (160kbs) full albums. If you choose the free service, you will occasionally be served an advert, and by that I mean about one thirty second add in an hour of listening. I suspect that the frequency of adverts may rise as the service grows in popularity, but for now it's a fantastic trade-off bound to attract the masses.

If you want a completely ad-free service you can either take a day pass for 99p, or pay a monthly subscription of £9.99. I suspect the £9.99 is a little overpriced when you consider that the music can't be format-shifted (ie put on your iPod), a service that Napster offer for £14.99 a month, but it's certainly not beyond most budgets.

The most important thing about the service however is the sheer number of tracks available. Lots of services allow free streaming music, but very few give such free access to such a massive database of full albums. Spotify, who are based in Sweden, have managed to team up with major labels such as EMI, Sony BMG, Universal and fast growing independent 'distributors' such as CDBaby.

The success of Spotify, I believe, will accord with The Long Tail principle advanced by Chris Anderson which says that as the cost of inventory falls, the efficient inventory falls. In other words, as the cost of storage and bandwith falls, it becomes reasonably viable to have huge store collections, bigger than the world has ever seen.

Access is important. It is no longer acceptable simply to store the major albums as might a bricks and mortar store. As Lessig points out in his recent book Remix, 25% of Amazon's sales come from the the 'tail' - titles which are not available in a bricks and mortar store. A library could never be big enough and never afford to store all the world's books, just as HMV can never afford the retail space to sell all the world's music, and so on. But in the digital world people demand all the music in the world, and will come to expect is as standard.

Not only do people want all the music in the world, but they want it for free. So how does the market solve this problem? How do artists get paid?

A 2007 decision by the Copyright Tribunal (here), which concerned the Music Alliance and download services such as iTunes, set out certain minimum royalties that such services must pay. This includes 8 per cent of gross revenues from online music service providers for on-demand services including downloads and subscription streaming services, 6.5 per cent of revenues for interactive webcasting services and 5.75 per cent for non-interactive webcasting.

The framework for free stuff, at least free music, is beginning to take shape. Services such as Spotify can exist because labels are now willing to accept free streaming of their music in return for a share of advertising revenue, pay per click, or other such models.

I tend to see this as a negotiated peace deal between the music industry and the Internet. The invention and rise of file sharing advanced like an army against the traditional model of content delivery. Feeling under threat, the music and film industries declared war, and sought to crush the revolution. After a heavy exchange of blows from either side, a peace deal has been reached, the boundaries re-drawn, both sides accepting compromises. In other words, free music is here to stay, but in return we will listen to the occasional advert or pay a subscription. Free stuff is no longer necessarily a threat to the creative industries, but the revenue model has most definitely changed".

Thanks, Andrew, for this insight.

In Rainbows: was it worth the risk/effort?

In issue 10 of the MCPS-PRS's Economic Insight, Will Page (Chief Economist, MCPS-PRS Alliance and Eric Garland (CEO Big Champagne) provide some close analysis of Radiohead's much publicised experiment with 'pay what you want' downloads. In their article, "In Rainbows, on torrents", they explain:

"Radiohead's 'In Rainbows' ... marked a paradigm shift for the music industry. Here was an established rock band, free from its recording contract with EMI, delivering content directly to the consumer. Commencing on the 10th of October 2007 with a 'pay what you want' downloadable album, this was followed by a 'made to order' deluxe box set and then concluded with a conventional CD and iTunes release.

Whilst the project has gathered unprecedented worldwide media coverage, with much speculation on what the 'average price paid' might have been; there is another less intuitive but far more relevant question that has yet to be asked, or answered. That is, did their offer of their album 'for free' succeed in diverting traffic away from
Torrent sites, and (back) towards their own 'venue' of InRainbows.com?"

The authors conclude:

"... anyone who has made it to the end of this paper and assumes that the project was a failure has missed two critical points: firstly, lots of people bought the album in any one of its three formats and lots of people went to see the show - and the word 'lots' is robust no matter which comparative measure you use. Secondly, the wider purpose of this paper is in many ways echoing the tone of the recent article in The Economist: 'Piracy is a bad thing. But sometimes companies can use it to their advantage'. Hopefully the reader will now be able to at least ask (or ponder) how many of those torrent users signalled a willingness to fork out £50 for a concert ticket, which led to the second date being added at Victoria Park in London?

So, did the offer of their album 'for free' succeed in diverting traffic away from Torrent sites? Our answer is yes, but with a twist. ... both torrents and legal downloads would appear to be complements, not competitors. Think of the meaning of the term 'complements' in the context of popularity, where there is now a wealth of information and a poverty of attention. The challenge of achieving popularity (or attention) when the old rules of scarcity and excludability don't apply (to information goods) the way they used to, changes the monetisation game completely.

Radiohead, and their management, undoubtedly got people's attention with the information embedded in their unique offering in October, regardless of whether those people were fans or not. With that attention, came consumption - from those who were established fans, and those who were just curious. Of that latter 'curious' segment, there will be a sizeable portion who were already locked on torrents, and its plausible to suggest that it is largely this segment who didn't switch to InRainbows.com. The reverse logic is that the 'fans' will have been made aware of the project, and its intentions, through Radiohead.com and will have been more likely to have switched - but the ratio of Radiohead fans who were converted from torrents to the total number of 'curious' torrent users will be miniscule. To complete the migraine, the size of the total torrent market means that traffic which was displaced from the torrents to In Rainbows will be overshadowed by a disproportionate uplift in additional 'curious' torrent activity. ... we argue that an awful lot of curious torrent users will have downloaded 'In Rainbows' without knowing of InRainbows.com - and would not have downloaded it otherwise, had it not been for its unique media coverage and popularity.

... the band are still on a phenomenally popular global tour, which may act as a catalyst to eventually getting the conventional album sales past the two million mark - and that's not accounting for all the significant pre-2008 activity. So, hopefully, this
report will have moved the current file sharing debate away from a simple zero-sum game ('you were a pirate, and are now a law abiding citizen') to a rather more complex question of additionality and popularity in a market that's increasingly hard to define. In a digital arena, consumers go to venues where they feel comfortable, and what we've learnt from the ambitious and admirable experiments of Radiohead and Nine Inch Nails is that a large part of that comfort is the ability to stay anonymous. Is there a trade-off between gaining attention and acquiring information? Perhaps. And if we can solve that, then the question of monetisation can properly be addressed. ..."

It's refreshing to see a discussion that is based on empirical evidence -- but the big question is how far a single instance can be realistically generalised: Radiohead started off with a large following and goodwill in the band's name, which made this outcome possible. How would the same business model work for a band that was unknown?