Music
Business
Model
Disrup0on


MIS
446

 Some
History

•  1880‐1915:
Edison
cylinders

•  1910s‐present:
78
45

33
1/3
records

•  1920s:
Radio

•  1950s:
Mul0‐track
tape
recording


•  1965‐2000:
Compact
casseJe

•  1981:
CD
and
MTV

•  1991:
MP3
standard
finalized

•  Late
1990s:
DVD

 Implica0ons
of
Recording

•  Pre‐1880,
only
way
to
hear
music
was
live

–  Community
bands

•  Ability
to
hear
any
music,
any
0me,
is
new

•  Evolu0on
of
recording
from
capture
of
reality

to
art
form
in
itself

–  Mul0‐track
produc0on
remix

•  Exis0ng
music
as
resource
for
jazz

•  Exis0ng
recordings
as
resource
for
sampling

 Music
Business
Model:
Pre‐2000

•  New
product
development:
A&R
people
find

new
ar0sts

•  Profitability:
Exploit
ar0sts
with
contracts

•  Informa0on
goods

–  Sampling:
Radio

–  Pricing:
Bundle

•  Technology
evolu0on:
Resell
consumers
music

they
already
own

–  LPCDDVD
(SACD)

 Music
Business
Model:
Pre‐2000

•  Look
for
blockbuster

–  Thriller
#1
all
0me:
~110
million
worldwide

–  6
of
top
7
all
0me
date
from
1973‐82

•  Layer
on
overhead


Source:
Wired
12/07

 Contract
Details
1

•  Hypothe0cal
band
signs
“good”
contract:
15%
and
debut
album
goes
Gold

•  Gross=
500,000
CDs
@
$16.98
=
$8,490,000

•  Royalty
‐‐
15%
of
retail
‐‐
=$1,273,500

•  “Packaging
deduc0ons”
of
25%;
gross
drops
to
$6,367,500

•  “Free
goods”
charge
(promo
copies
to
radio,
etc.)
=15%;
gross
drops
again,

to
$5,094,000

•  Royalty
now
is
$764,100.
(Record
company
keeps
the
packaging
and
“free

goods”
funds)


•  500,000
@
$9.99
wholesale
price
to
record
co:
$829,900

•  $3,500,000
balance
goes
to
retailers,
assuming
they
sell
the
record
@list


•  Band
advance
=
$300,000;
spent
$200,000
recording
the
album
(includes

$50,000
advance
to
the
producer)

•  Band
keeps
the
remaining
$100,000

 Contract
Details
2

•  The
label
spent
$100,000
making
one
video
(gets
played
on
MTV2)

•  Band
owes
all
advance
money
back
to
the
label;
royalty
drops
to

$364,100

•  Band’s
producer
also
earned
a
4%
royalty
of
$203,760
($50,000

already
paid)

•  Band
owes
producer
$153,760,
reducing
their
royalty
to
$210,340

•  Band
makes
$310,340
(which
includes
$100,000
of
the
advance)

•  Band
owes
manager
15%:
$46,551

•  Band
owes
2%
of
the
total
deal,
or
$101,880,
to
lawyer

•  Band
net:
$161,909

•  Split
four
ways
=
$40,477.25
each

•  (About
the
same
as
a
city
sanita0on
worker
with
two
years’

experience,
without
health
benefits,
vaca0on
and
re0rement
fund)

 1990s
Industry
Earthquakes

•  1991:
Soundscan
POS
data
used
for
Hot
100

–  Country
(Garth
Brooks)
previously

underrepresented

–  Increase
retailer
power

•  1989‐94:
Unsustainable
back
catalog
sales

•  1993:
Big
boxes
squeeze
out
record
stores

•  PCs
make
CD
copying
easy
+
piracy
at
scale


•  Clear
Channel
consolidates
radio

 1990s
Industry
Earthquakes

•  MTV
retreats
from
music

•  Clear
Channel
consolidates
concert
booking

•  Ar0sts
win
contract
protec0on
in
congress
and

courts

•  “Share
of
ear”
to
cell
phones

•  “Share
of
eye”
to
video
games

•  DVD
becomes
fastest
format
launch
ever

 2000s
Industry
Earthquakes

•  Napster

•  Satellite
radio

•  Lifestyle
retailers
sell
lots
of
music

–  Starbucks

–  Victoria’s
Secret

–  W
hotels

–  PoJery
Barn

 2000s
Industry
Earthquakes

•  Ar0sts
drop
labels

–  Back
catalog
rights

•  Recording
studios
move
to
basements

–  Pro
Tools
on
PC

•  Pop
Idol,
American
Idol

 2000s
Industry
Earthquakes

•  Rock
Band/Guitar
Hero
revenue
stream

•  Madden,
other
game
exposure

•  Vinyl
resurgence

–  2008
sales
(1.9
million)
up
89%
on
‘07

•  Mega‐tours

–  Rolling
Stones
‘05‐07:
$558
million

–  U2
Ver0go:
$389
million

–  Police
‘07‐08:
$358
million

 Apple
and
Ar0sts


Source:
Wired
12/07

 Apple
and
Listening

•  Listening
becomes
private

•  Shuffle
vs.
intent

•  Metadata
and
music

–  Gracenote

 Other
Ventures

•  Rhapsody:
Music
business
losing
money

•  Total
Music:
Universal,
Sony
pull
plug
2/09

•  Ruckus:
Pulled
plug
2/09

–  Could
not
give
away
“free”
music

–  Plarorm
lock‐in
issues

 Radiohead
Experiment

•  “Name
your
price”
downloads
October
10

•  Physical
CD
released
January
1

•  LP
in
box
set
and
standalone

•  Cri0cs:
“Nobody
will
pay”

 The
Cri0cs
Were
Wrong

•  3
million
copies
sold
worldwide

•  Physical
CD
has
sold
1.75
million
to
date

–  Through
a
label;
boxes,
downloads
via
band

•  100,000
boxsets
@
$80

•  17
million
plays
on
last.fm

•  1.2
million
fans
will
see
the
tour

•  #1
LP
seller
2008


•  And
more
Torrents
than
legal
free
downloads

 Business
Model
Lessons

•  Music
as
commodity
(product)
vs.
experience/
service

•  Word
of
mouth:
MySpace
Music

•  Variable
pricing

•  Bundling
doesn’t
always
work

•  Video
(YouTube,
Hulu,
Boxee)
now
on‐demand

just
as
music,
movies
became
over
the
20th

century:

–  How
will
industry
adjust?