Much as described for journalism, the economics of the music business also remain highly problematic. The revenue pie for recorded music is a fraction of what it once was, and artists/creators complain that they are seeing only crumbs out of what little remains. At the same time music is more available—and artists are closer to their fans—than ever. The problem is that most listeners pay little, if at all. In fact, music was the first major content industry to face serious disruption by digital (“Napsterization”).
Music could benefit greatly from FairPay, but the complex, centuryold supply chain of the mainstream music business makes change difficult. The independent music business might be the easiest place to start.
The video/computer games business has many similarities to music in terms of industry structure, with independent artists/creators/developers, who work with studios/labels, and often sell through distributors, so much of this discussion applies to games as well—and the good news is that industry practice is less entrenched. (More on both is at FPZLink.)
Continuing Turmoil
The music business has been turned upside down by the challenges of Internet distribution and related piracy, to the point that the prominent band Radiohead offered its 2007 album for download on a pay what you want (PWYW) basis (Pareles 2007). While a reported 60 percent of downloaders did not pay at all, 40 percent did (paying an average of $8.05 in the United States and $4.64 elsewhere), enough to make that experiment modestly successful, and that led to similar offers by other groups.
Even though the crisis has eased a bit, as first iTunes, and later subscription services such as Pandora and Spotify, are convincing many people to pay something, business models remain besieged. The 2016 Global Music Report (IFPI 2016) refers to “a value gap”
The value gap is about the gross mismatch between music being enjoyed by consumers and the revenues being returned to the music community. Today, music consumption is exploding, driven by streaming services and in particular by the rapidly-growing use of user upload platforms such as YouTube.
The report lists the number of users paying for music subscription services as 68 million, compared to 900 million using free or adsupported services. Clearly any strategy that can get a reasonable fraction of those listeners to pay has very large potential.
Radical models of disintermediation, with artists/creators (performers and songwriters) going directly to fans and even selling on a PWYW basis, have shown that we are ripe for new ideas, but none have yet proven broadly workable. There continue to be numerous pleas for new business models for music. Sounds like a job for FairPay!
Revisiting the Economics—The Size of the Pie—and the Portion of the Pie
The core problem is that the value and the economically efficient price for recorded music is not well captured by any conventional model. Primary criteria are:
A fair price to the listener based on value received
A fair portion to the artists/creators (performing artists and songwriters)
A fair portion for distribution
A fair portion to other services such as A&R development support and marketing, whether done through labels or special services hired by the artists/creators.
Consider first #1 and 2, revenue in to the distributor, and then passing through to the artists (via whatever convoluted path through labels and rights organizations):
Sales of albums, and now album or track downloads (typically $1 or $10 for unlimited play), had been the mainstay of the business, but the flaw in their economics is clear, now that alternatives are more available.
Buying music is a good value for the user only if they play it many times. Lightly played albums are very expensive per play. Conversely, heavily played albums are a huge bargain (one that neither the distributor not the artist fully shares in).
The payment to the artists/creators (via whatever path) is roughly tied to unit sales, and so depends on how many people buy, not how much value they got (measured by how often they play it and other factors). That disproportionately favors production of pop hits over music with more subtle but perhaps more lasting appeal.
“All you can eat” (AYCE) subscriptions (typically $5 to 10 per month) to unlimited numbers of plays per month from a massive library (the “Celestial Jukebox”) are gaining market share, but this too has perverse economics:
Flat rate subscriptions have a one-size-fits-all price that actually fits very few. Ultimately the price must be set to earn the distributor a reasonable margin on average over a widely varying user base. Some will play many hours per day, resulting in little revenue pass through per track—or a net loss if the distributor pays rights holders a set fee per track. Others will be in a range that generates reasonable profit. Some will pay full price for light usage (for an excess profit), but many will refuse to pay the monthly fee at all, and stick with less profitable ad-supported free versions (or piracy). For light users, the standard monthly price will rightly seem exorbitant. The irony here is that distributors earn little (or even lose money) on the dedicated music fans who should be their best customers!
Depending on the subscription service, the payment to the artists/creators (via whatever path) may be based on revenue, or on tracks played. If on revenue, the usage-related inefficiency passes directly to the artists/creators. If on tracks, the artist/creator is less harmed by heavy users, but still loses out on those who opt out, or makes less on “free” versions with ads. Overall, this results in a licensing structure in which per track fees to rights holders must be very low because of this economic inefficiency. They may get paid per track, but as they say, the payments are woefully small—not because the distributors are exploiting them, but because the distributors are caught in the middle of an inefficient pricing model.
Neither of these current pricing models produce an economically sound result in which users pay at a level that corresponds to the value they receive. Prices are too high for many listeners, leading them to avoid paying at all. From an economic perspective, it would be far more efficient and fair to all if users paid based on usage (with some volume discount). But usage-dependent pricing models have generally been unpopular because users fear unpredictable billing levels and nasty surprises.
A Better Value Proposition with FairPay
FairPay promises to change the game—primarily, by making the total revenue pie bigger (by attracting more paying customers)—and secondarily, by making the artists/creators share of that pie bigger as well (by getting customers to pay based, in part, on the share going to the artists/creators). The essence is that it enables prices to be individually set to match the value exchanged. Instead of a flat price for (a) an unlimited number of plays of a purchased track or album forever, or (b) for an unlimited number of plays of any music in the catalog per month, FairPay can track to the amount of music played in any month, and can also factor in other aspects of value, including very subjective factors. (FairPay can also make song and album download models more effective, an item-oriented use, as explained earlier, but here we emphasize increasingly popular subscription models.)
With FairPay, users are given usage reports and suggested prices for their monthly listening, and get to decide what they think is fair—and give their reasons why. Distributors let them continue to do that as long as they generally pay an amount that seems fair enough to the distributor, given their individual context. Thus a light user might, in fairness, pay less than the $5 to 10 per month now charged, and a heavy user might be convinced that it is only fair that he should pay $15 or even more per month. (This process can be simplified once a pattern is developed, so that a customized pricing pattern can continue automatically, with the user intervening to change it only when desired.)
This expands the total revenue pie by exploiting the Long Tail of Customers. It gets some (existing, tall head) subscribers to pay more for their music, as heavy listeners, and as patrons of the music they love. It also brings in many more paying subscribers (the long tail, who now seek free alternatives like YouTube or other unlicensed sources because the subscription prices are too high)—even if many of those added subscribers pay less than the current set subscription price.
This usage sensitivity alone can help the artists/creators, since they can now get paid for more plays—and by more people. But FairPay can go farther, since it engages patrons in “dialogs about value” that center on the fairness of the price, and that fairness includes factors like how much of the price goes to the artists/creators. Daniel Ek of Spotify speaks of the need to increase transparency in this obscure area (as does the Copyright Office [McKinney 2015]), and FairPay can greatly leverage the power of that.
Distributors (or their artists) can disclose their rates for passing through revenue to rights holders, so that customers can choose to use services that most generously sustain the artists/creators who produce the music—and can feel better about paying when they know a fair share is going to the artist/creator.
FairPay can go further by enabling bonus payments to favorite artists, either by explicit direction of the user, or by indirect signals of value such as “thumbs up,” inclusions in playlists, or frequency of play. Such adjustments might come out of the base pricing, or out of added patron bonus payments and might pass through 100 percent to rights holders.
All this can enable a more direct linkage between fans and artists, and a more direct exchange of value in which fans more fully take on the role of “patrons”—to sustain the artists who produce the music they care about. Crowdfunding models, such as PledgeMusic and Kickstarter, have demonstrated that serious fans are willing to spend much more than just the price of albums to support artists they care about. Amanda Palmer said:
I see everybody arguing about what the value of music should be instead of what I think the bigger conversation is, which is that music has value, it’s subjective and we’re moving to a new era where the audience is taking more responsibility for supporting artists at whatever level. (Peoples 2013)
The core of FairPay is its systematic process for building individualized relationships in which creators/suppliers are rewarded by patrons for providing value that meets their individual needs. This can work through multiple levels of the value chain, to enable artists to most effectively tune and position their work to appeal to the audience who values and patronizes them.
FairPay creates a dynamically adaptive cycle of offers, prices, feedback, and further offers that rewards those who pay fairly and cuts off those who do not. Of course, this may not be very effective for a single music group (or game developer) who can make only infrequent offers of new products—but can be very effective for a music label or distributor that has a large and expanding library of products to offer for sale.
When it becomes clear that most of the price goes to the artist (and the people they chose to help them produce and distribute the music), and not just into the coffers of some faceless corporation, listeners will be more willing to pay a fair price for their music. FairPay can provide a process for working with each patron to jointly find that fair price.
Changing a Complex Industry
Making it happen will take work, and experimentation—and the entrenched powers of the music labels and the licensing rules and rights organizations will adapt slowly—but there is no reason why this can’t be made to work far better than our current inefficient models.
FairPay may start most easily with the indies (independent artists/ developers/studios/distributors), with their simpler business model infrastructure, and then migrate to the major labels (to the extent they remain relevant). Indies tend to be most hungry for exposure and growth of a fan base—and are the ones most willing to try PWYW—and thus have proven to be amenable to the risks of giving customers a say in pricing. (See discussion of indies and platforms in the following chapters.)
FairPay should be especially attractive for distributors who make it known that the artists (or game developers) get the dominant share of the revenue. Buyers will be more motivated to pay at reasonable levels if they know that their payments are going to the artist or developer—rewarding them for a good product, and providing the compensation they need to enable them to continue to produce future products. This can work for studios as well, especially if they position themselves as being very supportive of their artists (or even owned by them, as in the early days of United Artists).
Of course FairPay is also applicable to large recording studios and music and game distributors. As an item-oriented example, iTunes or Amazon could easily make FairPay offers across their entire inventory of downloadable music, or just across some subset. They might experiment with some selection of songs or albums. Perhaps they might start with less popular and familiar items (or whole genres) that might especially benefit from the try-before-you-set-the-price features of FairPay, to increase sales (and revenue) even if the average unit prices are reduced. Similarly, subscription services such as Spotify, Pandora, and Rhapsody could apply FairPay to their subscription offers (in much the same was as described for newspapers or video services in the previous chapter).
In summary, FairPay can be a win–win solution for all of the parties:
Growing the pie—consumers will feel more respected and empowered by the added transparency, trust, and flexibility, and thus more willing to pay their fair share to support the music (or games) that they love.
Some existing subscribers (such as light users) will pay less than the standard going rate, but the most dedicated fans will pay more.
Most importantly, many of the large numbers who now decline to pay for conventional subscriptions (or downloads) as too costly (whether because of low usage or low ability to pay) would be willing to pay something more reasonable, and still profitable, for a FairPay service— bringing in a potentially large source of added revenue.
Sharing the pie: This pie can then be divided more fairly among the creators and value-adding intermediaries, based on the detailed data on what the customers value and are willing to reward.
Recorded music has huge value, and that value is consumed more widely than ever. But our business models for capturing that value in the form of consumer revenue, and distributing it fairly to the providers, are broken so badly that musicians have turned to live concerts, merchandise, and other revenue streams as the only way to survive (and some even withhold their music from subscription services that they deem to pay too poorly). FairPay promises to help reverse that economic failure. With a more direct linkage between value creation and monetary reward, the artist can again find sustainable income from recorded music that is costly to create, even if it can be distributed at almost no cost.