Which One’s Pink? The Business of Music
The idea of separating business from pleasure has been commonplace in society for some time now. For example, historical 19th century Australia saw the Stonemasons pioneer the “8 Hours Labour, 8 Hours Recreation, 8 Hours Rest” model in trades representing the mental schism between work and play.
Similarly, many of us students spend a couple of hours during the day studying, or working part time gigs before retreating to a state of fun and relaxation. Personally speaking, one of my favourite pastimes has been discovering and listening to music – a natural extension from my hobbies in playing guitar. This has perhaps taken an unhealthy obsession where according to Spotify, I logged 184,234 minutes listening to music on the app in 2020 (this represents almost 8 and a half hours of listening a day).
However, like many others, my enjoyment of music does not simply stop at the play button, but understanding the underlying personalities and quirkiness of these musicians. For most of these artists and bands, their paychecks are still dependent on a function of releasing more and well received music, the marketing and distribution avenues of their music, and the different monetizable streams of their content. This article will introduce some of my favourite artists/bands, and take some creative snippets of how they have demonstrated these business concepts in their work.
Vulfpeck is a funk group based in Michigan, USA – its name representing the phonetic German word for “wolf pack”.
Recommended Songs: Animal Spirits, Dean Town, Wait for the Moment, Cory Wong, Daddy, He Got A Tesla, Beastly
As many users of music streaming apps understand, artists get paid a percentage of the advertising and subscription revenues from app users – pro rata on the total share of streams each artist receives (ie. royalty model). For example, if an artist was responsible for 1% of Spotify’s steams, for every $100 of Spotify revenue, he/she would receive 1%*100 = $1. (Of course, this is a simplified model but illustrates the general concept).
In 2014, Vulfpeck decided to utilise this payment model to their advantage – releasing the album “Sleepify” that contained 10 silent tracks, and subsequently encouraging fans to play the album while they slept at night.
Consistent with the thematic, the track listing is as follows:
Of course, as fans looped the album while taking their snoozes, each stream paid US$0.005 to Vulfpeck. A 7 hour sleep cycle would then accumulate $4 in royalty payments, so 100 people doing this each night would pay the band $400. This ploy continued until Spotify had to pull the album off its platform, without providing a specific reason for violating its terms of service. Of course by then, the band had collected over US$20,000 in payments from Spotify and used the proceeds to fund a free tour for fans around the USA. In hindsight, this was not only a successful ploy financially as the band was able to leverage a significant loophole in Spotify’s royalty model (essentially “money for nothing”), but also generated grassroots marketing for the band, followed by a viral media streak as the band’s frontman Jack Stratton was hilariously interviewed on CNBC to comment on Spotify’s IPO before its listing (to which he expressed bearish sentiment towards).
Spotify aside, Vulfpeck recently employed another interesting monetisation method in their latest album “The Joy of Music, The Job of Real Estate”, where they auctioned off their 10th track in the album on eBay for US$70,000 to the band Earthquake Lights.
This led to the song listing “Off and Away” as the last track of the album. Consistent with the album’s title , the band managed to literally sell off their music as real estate.
Price Discrimination: Radiohead
Radiohead is a UK outfit, celebrated as one of the most influential bands in rock history for albums such as OK Computer and Kid A.
Recommended songs: Weird Fishes/Arpeggis, Where I End and You Begin, There There, How to Disappear Completely, Paranoid Android, Everything in its Right Place
Conventionally in goods and services markets, prices are set by the seller and adjusted according to demand and supply factors in the market until settling at a natural equilibrium. This includes elements such as the elasticity of the product, existing substitutes, spare capacity, and so on. Additionally as a seller, I want to extract the highest price each individual buyer is willing to pay to maximise my producer surplus. As a buyer, I don’t want the seller to know this information as I want a bargain on my purchase, this being a high spread between what I am most willing to pay and what I do pay to maximise my consumer surplus. A basic microeconomics course will teach you that. First degree price discrimination seems more of an abstract concept than a practical application in the real world.
However, this was not the case for Radiohead. Off the success of an infallible 6-album discography, the band completed their contract with label EMI. Going into temporary hiatus, the band emerged with their 7th album “In Rainbows” in 2007. The album received critical acclaim, entering the Billboard chart, UK Album Chart and United World Chart at number 1.
The catch here was that without being in contract with a major label at the time, there was no need to release the album through a distributor nor were there any covenants to comply by. This meant complete freedom and discretion towards the making, pricing, marketing and distribution of the album. This was initially set up as a digital download from the band’s website, bypassing the need to distribute the album through a middleman.
Placed in this unique position, Radiohead released the album in a format never done before: the “pay what you want” model. In this sense, fans could receive the album in exchange for whatever they were willing to pay, even for free at $0. At the time, skeptics were rampant, with Fortune magazine listing the pricing experiment in its “101 Dumbest Moments in Business” article. On face value, this may have been the case, as statistics show that 62% of customers set their price at zero, with the remaining 38% setting an average price of $6. This comes to an average price of $2.28 per customer, considerably lower than the retail prices of conventional album purchases.
However, diving deeper, we come to realise that lower average selling prices do not necessitate lower profit. How could this be?
Firstly, consider the move of cutting out the middleman and zero material costs. On a general level through traditional CD channels, the retailer’s slice of profits is 38%, distributors 8% and marketing 8% – leaving around 12% for the artist and 4% for the music publisher. At a conventionally priced CD at $8, Radiohead would have received around $1.28 – lower profits than their pay what you want model. The result? An instantaneous $3 million from downloads under the unconventional model for Radiohead.
But the real magic comes within the ability to set price discrimination. To explain this, imagine 10 customers are willing to pay $10 for the album, 100 customers willing to pay $2, and 1000 customers who will only listen if the price was $0. If you price the album at $10, then you will only capture the 10 buyers and make $10 x 10 = $100. If the album was priced at $2, then you capture 110 buyers and make $2 x 110 = $220. In this case, we see lowering the price makes more bottom line due to volume compensation.
In the most extreme example, we offer the album in a pay what you want model. This indeeds opens us to the risk of the $10 WTP or $2 WTP buyers naming a price of $0. But consider the possibility of extracting some positive amount of revenue from the $0 WTP customers, as a free listen is similar to a taste test sample, and enjoyment of the album makes them more likely to buy the next album or recommend it to their friends.
This form of price discrimination by Radiohead actually resulted in better financial success than the digital downloads of all their other studio albums – which was particularly forward looking at the time where physical CDs were starting to die a slow death and online streaming was on the rise. Moreover on an intangible basis, the experiment helped generate the band immense cultural currency from media attention for their ploy, and established a greater intimacy with their fanbase with a great deal of traditional corporate filters removed. The following 3 graphs demonstrate the monumental success generated for the band:
Since then, the “pay what you want” and other similar derivations of this pricing model has been adopted heavily in the music business. For example, the indie-jazz instrumental group BADBADNOTGOOD’s initial albums were released under a “name your price” format for downl0ad on Bandcamp. Or take the eccentric Australian band King Gizzard and the Lizard Wizard who released their studio album “Polygondwanaland” under an open source license – to which the public could freely listen, or even edit the master tapes for personal use.
In many cases, this illustrates a pursuit of making music for its own sake, where the itch for creative expression is held above the monetization of their projects. On the other hand, whether intentional or not, it demonstrates compelling economics where low barriers to entry through essentially zero pay unlock and capture a greater total addressable market, controlling end user value chain to better connect with their audience, and leverage grassroots marketing from a fanatical fanbase to drive down acquisition costs while exploiting other monetization avenues such as merchandising. These tactics are especially employed by unknown artists that could be thought akin to companies in a growth phase – aiming to capture scale of their listeners and refine their sound before justifying pricing power.
Parallels of Music and Gaming
In fact, how the music industry has progressed can be compared to the gaming industry and its parallel emergence of “Free to Play” games as an alternative towards the traditional “Purchase to Play” pricing format. Demonstrated by early pioneers such as Riot Games’ “League of Legends”, lowering the potential user’s barrier of entry (especially kids who do not possess their own discretionary income to purchase games) led to a larger potential market, and easier conversion at lower cost.
Moreover, much like other social systems like a Facebook or a Twitter, it was integral to scale the platform in order to leverage the network effects as a community based game. The ecosystem is self-reinforcing in the sense that the more people join, the more interactive the platform which enhances the user experience, thus reducing churn and improving customer lifetime value (LTV).
After establishing a formidable base platform, revenue opportunities were unlocked through selling virtual clothing called skins – which contrasted to merchandise in music is even more lucrative considering gaming skins can be made and sold at near zero marginal cost digitally. This same model has been more recently featured in blockbuster games such as Fortnite or Counterstrike.
And this phenomenon is not limited to a niche cohort of “gamers”, as gaming has found a place among the mass market given a common distribution infrastructure in our smartphones. The large majority of App Store games are free to play, with revenue sources generated from advertising space and item/level upgrades. Think your mom who only allowed you to game on the weekends now hypocritically spending her commuting and waiting time playing Candy Crush. While it is true that mobile gaming caters to a lower spend per customer demographic, it is more than compensated by insanely high volumes that mobile gaming now dominates the gaming industry. Illustrative of this, in 2020, SP Global reported mobile gaming contributing the lions share at 57% of overall revenues for $100 billion, with consoles at $0l.61 billion and PC at $34.12 billion.
Victor Yan is the Vice-President of Publications for UNIT – University of Melbourne, specializing in financial investments and economic policy.
Netflix: League of Legends Origins
SP Global: https://www.spglobal.com/marketintelligence/en/news-insights/blog/global-console-mobile-and-pc-gaming-drives-175b-in-content-revenue-in-2020
Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.