Episode #0083 - The future of the recorded music industry

Pricing College Podcast

In this episode of Pricing College - we look at the recorded music industry and the pricing model.

We discuss Spotify and what a lack of live concerts is doing to revenues in the Covid restrictions era.

What can bands and artists do?

This episode is about recorded music. The business and pricing model in the recorded music industry. Interestingly, we've actually had a lot of problems with our zone this morning. So this is the second tick at this episode. We could do with professional music recorded to help us.

In the music industry, if you compare now to the 1970s, you'll find that sales in music across the board have dropped by almost 50%. The market size is contracting. And we're wondering, can we improve the business model the pricing and revenue model in some way? What seems to be the problem here?

I think the first thing we'll look at now to kick off is, how the technology basically made the music industry? And, how has it been damaged in recent years? Like many industries, we've covered in the past from Blockbuster Video to others and even the Coca Cola model with vending machines. Recorded Music was actually a quite recent invention in the early 1900s, late-1890s. Of course, before that would have been live music, etc. We said the gramophone and recorded music on records. We could actually have recorded artists from the 1920s onwards when we had famous recording artists. It said the talking movies and all that sort of stuff. That probably peaked around the 60s and 70s. Think of the Beatles, The Rolling Stones, Motown and all that, Elvis Presley. Then with the 1980s, we had video pretty much started to kill the radio stars. We had MTV come on we're pop down recorded their videos. And then with digitalisation, the backlogs of all the money in the music industry became worthless or very diminished overnight night. Whereby people could share music for free. You could see the rise of Napster, Pirates Bay and these sorts of things. Then in recent years, we've seen I suppose the demonisation of Spotify. Whereby music can be consumed almost freely and it should be the world in your headphones.

What is the true value of the music recording industry? Let's think about that. Is it in owning the music itself? I think there's a fair bit of value in that. Yes, you can sing a song. But it's the person that sings and owns the song that has written the song that gets the money, the royalties. So royalties is a good revenue stream. Then the second value driver is in the distribution of music. If you own distribution, you own like channels to market, you own supply and you also can meet demand. So there's this huge value in that. That's why record labels own distributed very carefully for a number of years. Why does Spotify want to disrupt that very thing so we could freely distribute music without having to pay a huge markup for it? Yeah, I think you can remember that when people were paying something like $40 for a double CD. Not because it was potentially, depending on how much you wanted to listen to that music worth it. It's just the music industry that big labels really did own all rights. And could markup in distribution costs and production costs. But anyway, that's a whole different area. I suppose Spotify came in and completely disrupted that old model. Some people say it was an outdated outmoded model that was one-sided, I think so to some degree. But, has Spotify really fixed the problem? Yes, it fixed the distribution problem. But why are so many artists now complaining about it?

I think a lot of people look at Spotify and say,” Oh, we're only getting a couple of cents per song.” Or, the vast, the lion's share of the money collected from the subscriptions, etc. The vast majority of that money will go to the top 10 artists. I suppose that's the way any industry always has to be whether it's sports, movies, entertainment. The big stars take the big money. But people compare, they always compare the modern market with Spotify. Whereby they're getting a few cents per listen to the old market back in the 80s. Whereby people were buying the albums in the local record store. I think that's a false comparison. I think the reason is that the 80s is an awfully long time ago. We can't go to Spotify back to the 80s. We can't remove the digital revolution. I think we're either going to go from Spotify to again just a free for all file sharing on illegal downloads. Were in that regard, the music industry gets nothing. So I think the expectation is that we can ever go back to the way it was. That's never going to happen though because just technology has changed. We can not uninvent the digital revolution. So I think the reality of it is in that recorded music sector, this distribution method is what we have at the moment. But I think the question we want to ask is, is it the best distribution method that there is? And, how is the product that music actually sells? How's that significantly changed?

I think Spotify was set up on very idealistic principles that once the music is free distributed, people will listen to more and a greater variety of music through the platform. However, looking at what people actually listened to, that's not the case at all. It's the 80/20 percentage rule. Most people listen to the top 5, top 50 artists and that's it. When you look at the Spotify revenue model, basically all revenue from all artists go into one central part. And a percentage fee is given to the best selling songs. The best selling songs go to that top 5% of artists who we all know, the Taylor Swift of the world. Whereas everybody else gets very little. In fact, they get paid much less than one cent every time their music is streamed. So, in effect, if we know that very few people are listening to most artists and they're only getting paid less than one cent. It would take the 1000s of the streaming listens to get something like $10 to $15. It doesn't make much financial sense for most artists to go through the platform. This is why there's been so much bad press about Spotify as a model in the artists' community and also customers. People that listen to artists think that this is unfair. I don't know. Maybe there's an opportunity to revise the model. Because even when you look at the profitability of Spotify, it's still largely unprofitable. So it's not really working for them either.

I think with recorded music, we have to ask the question, what are people actually buying? In the old days, people would go into a record store that was experienced. They enjoyed the day out, would go with friends. They might get some advice from the person who owned the record store. They browse down the aisle, attracted by the cover art on the record, on the vinyl. You People might even have conspiracy theories about some of the classic records like some of the Beatles albums. Where entire conspiracies grew up around what the symbolism meant on that album cover. Owning the product bringing it home. It was like a piece of art. So you're buying the sounds but you're also buying the paraphernalia that goes with it. The membership of the club, people apparently carried the Beatles record with them when they were first released in the 60s. That really gave that sense of ownership, the solid feeling of the music. That has all been wiped away and really has gone with digitalisation. People would sit down with the vinyl and albums were written to be listened to from start to end like a work of art. Now with Spotify, that's not the system. I would say very few listeners really sit listen through an entire album. They've been on their own and listened to it, in the car or walking. The relationship with the music has very much changed. And, are we buying a product? I don't think we are. We're not buying products anymore. We're not buying something that could go on your album or your shelf and you could show your friends. You’re buying content, you're buying some form of content that could be consumed in a different way.

I suppose in the early 2000s, it was CD sales that peaked. Before that was cassettes, vinyl sales pretty much have stayed constant over time. It just appears now that vinyl sales are peaking, but really in demand, but they're not really it's still a very niche segment. Bought by a few people who still do value music in the way Aidan was describing before, that music is art. And vinyl is more than just music, it's a sort of living memory. They're also a status symbol for musicians who go, “look I have vinyl I'm serious about music”. Now there are only a few people that really are willing to pay the $100 price tag for listening to the music so much. However, it is a very profitable segment and also sales are growing. But, what's the profile of a segment like that? It's probably something like a middle-aged sort of man or woman who likes very niche music. And potentially there's not a mass-market need for that type of vinyl sale anymore. Young people are quite happy and automatically go to Spotify. To get the free dose of music, and they're pretty undiscerning. They'll just listen to the basic 10 songs at the time that they potentially hear off the radio.

I think we can look at a lot the pricing concept. We all talk about pricing that, if something is for free, it will be consumed many times more than if it was charged at one cent. People consume pop music or anything of music through Spotify or YouTube or any other system. And they don't really care about it. It probably decreases the attention of the care because you're not upfront paying. My understanding, still with Spotify for example very few people actually subscribed. Still, the vast majority of people consume the free version with advertisements. So I say that the relationship with the music then perhaps it feeds back on itself. A negative feedback loop whereby the less value that it becomes, the less value people put into it. The other thing I say is until the COVID a situation hit last year. You could almost argue that recorded music was a loss leader in many regards. It was being put out on the market really to advertise the concert experience. The large concert, the tours that were probably bigger than ever for new artists such as Taylor Swift and some of the more established stars. People, like I don't know if calling them historical, will make them happy but people like Madonna, Rolling Stones etc. Whereby they were packing world stadiums, football stadiums worldwide. That was really becoming the financial model behind the industry. Obviously, at the moment, we don't know when that's going to return and I'm quite confident be sooner than later. But with that gone, we're actually left with real revenue raising abilities in the music industry. And then it brings the whole Spotify issue to a crisis. Can we go back to the scenario where it's somewhere the bands, the writers, the music companies can add some additional value to the product that isn't just the same?

I think because of COVID I really started thinking about the impact of COVID on musicians and the industry. I think one of the positive things to come out with COVID for musicians, was that people actually found themselves becoming more willing to pay for the premium version of Spotify than they did even a year before. As Aidan was saying before most people even young people were didn't even think twice about getting a premium paid plan. They'll just go, “yeah, that's fine, I'm quite willing to listen to the ads”. However, when you're stuck in a confined space for weeks on end. What was found was that people would pay for not listening to adverts. So what we see now is an increase in people switching to premium plans since COVID. Because they've come fasciae they want to just listen to music. The types of music they listen to, however, are the same. They just don't want to listen to the ads. I think potentially another area that musicians can think of new artists to get more revenue would be looking at something like YouTube. Because they pay much better rates than Spotify and music platforms. A lot of artists are going there now. I think influencers have really led the way there. How we've seen their success stories, rags to riches of social influencers. Getting rich quickly by showcasing their lives for us on YouTube. I think now musicians will follow suit. Another revenue stream would also be royalties, off-radio. But as a result of COVID, unfortunately, restaurants cafes are closed and people are just not playing the music so royalties have gone down. So now a lot of artists are going to crowdfunding platforms to literally get finance to help with marketing. To help with promotion in general. Some are even going back to the old agency model to get promoted and sponsored for events. I think what's happening quite clearly is that musicians and the music industry are diversifying. The money is now in different areas and you've got to be much quicker and nimble to find it.

I think we could see a lot of overlap between what's happening in the music industry versus the cinema movie industry. Whereby we've seen conglomeration through one portal, where the Spotify and Netflix stuff like that. But I also think and we argued this on our last podcast about movies that studios will go direct. You'll just go directly to their company and they will do it. And I think the music industry is very much like that. You could even go from down to the artist's level. Let's take the example of a Taylor Swift, why would Taylor Swift who's got a dedicated market, all that brand awareness? Why would she not just do it directly to her own portal her own system whereby people subscribe to the music that pays her? She could with that provide additional benefits such as that could be artwork provided. They could send record sleeves to the post if they buy into the website. You could have a subscription model to that music. You could get access to the latest music early. This could be done in any niche audience because obviously with the internet niches can be local but can also be global. We joke about that, the middle-aged guy with a Rolex sweater who's into smooth jazz and sits at home listening to these variables. That may be one in a city but, “the riches in the niches” is a known saying marketing. If you can target that audience and sell products to them, something can be of extreme value to certain people who really value that product. The one who would value live streamings or, question and answer sessions. That's where I think the growth area will become as we move towards more digitalisation. We probably go back to more of the human element, the human contact that I think we're in the initial stages now of digitalisation, which is the mass market. I predict will go more towards a mass market, but niche audience.

I think to some degree, artists and musicians have really thought it's enough just to be an artist and musician to play a good song to sing it really well. A lot of them play covers, very few actually write and produce and perform the songs. But that's where the money is if you think purely in terms of producing content. A lot of artists, however, really failed to say the business aspect side of things. It's the IP moment and the marketing and the distribution that goes hand in hand. To get heard now, you need to have an eye and manage all of those things as an artist. It's not enough just to be a good artist, because now we're surrounded by choice. We're surrounded by platforms, bombarding us with lots of information, different adverts, lots of options, and very little curation. So, what does that mean? Is that we've got to make sure the artists are visible and seen. But they've got to ensure that they know about the business and they do some type of marketing activity to back themselves. So you know, I think only then can we start seeing more selection and a bit more competition in the market.

Obviously, I think this is a tricky one because clearly music in a better form is an art form, this is probably the purest art form. But having said that, obviously a lot of disposable pop music is borderline whether it is art. A lot of it is a plastic pop produced by the committee by picking members of a band to fit demographics, and really have to tick the box to be moneymaking. So, we're discussing the broad stroke. But obviously, there are more artists and then there's less. We're not suggesting that a band should start with a business model or business plan, go through a business model canvas. But I'll be honest, that's probably what people or bands created from TV shows like Power and that's probably where they do start out from, and they hit those demographics. Obviously, if you're in the music industry, for the art aspect, you might want to be listened to by as many people as possible. You might value film, you may value the love of the music more than money. And so in that context, Spotify is probably the best thing for you. But if you're searching for money, I would doubt that ever the best option is to give it away for free. If you're giving everything away for free, why would anybody logically pay more than they have to pay? So if you're in for money, if you are that classic pop and you want more than money, maybe you have to make it harder to access. Take it off these platforms. Don't give access and the free stuff. Stop recording music videos, unless they're on your own personal website. So it's a freemium model. When we talk with freemium models, generally what we want to do is up the price at a certain point in the future when you've got market acceptance. The problem with pop music or any sort of music is it's almost impossible to do that. So you're doing a lifetime freemium that will only lead you to be I think public streams.

If you think of even Taylor Swift she uses or she's advised to use some of her music as a loss leader to gain sponsorship. In Nike for instance to get exposure in films, the movie industry. In everything, there's a value exchange. As an artist, you've got to think very carefully about, what the exchange of value? Who your real customers are? Then work towards that to get money. Because often, the money is not in the end consumer necessarily. It could be in the person who's going to help you distribute it. It could be in the royalties. It could be in if you're looking for funding, the person that's going to give you funding or the crowd or the group that's going to offer that. But you've got to think what's the value exchange because nothing in this world is free. But there's has to be a fair exchange. And to date, because musicians think in that sort of one dimensional way. It's about the content, the art. There hasn't been a fair exchange and a little bit of exploitation. But that doesn't have to always be the way there are other options. And I have seen a fair few artists taking it upon themselves and being more proactive to really own that marketing and channel. A lot of building websites or subscription pages and downloads. They are trying to collect and engage with their audiences. They're trying to partner with other like artists to create even bigger, like audiences to then create a virtual network effect. And all of these things are essential. If you can do it yourself and you can work with others that can do that. You're more likely to get heard by people that can give you extra funding or advice where you need it. Because anybody will jump at the chance of signing somebody up if they know that they're getting a crowd listening to them. That's essential. There are people with money who want to know that their money and their investment is going to be well spent. I suppose, to do that it's easy now with Google Analytics. You can show people numbers, you can show people your audience size. So it's much easier than you actually think.

I think we've covered a lot here but at the end of the day, we weren't really skimmed the surface. Music is a huge industry, it’s a huge art form and let's hope it stays that way. It stays an art form. At the end of the day, we've listened to music from the beginning of time, so hopefully, we always will. We've touched on a lot of subjects. Obviously, there's music from the highest art form to the lowest music in the supermarket aisles. So obviously we can't cover every aspect. But hopefully, we've given you some ideas, some concepts maybe or some methods of thinking whether we're right or wrong.