The long term picture is grim. Digital sales from the likes of iTunes do not compensate for lost hard copy sales. (Unless people are buying less music, this means that piracy continues to grow.) For many younger consumers, piracy is the way you get music.
The industry is mobilizing to respond. According to Victoria Shannon reporting from Midem in Cannes,
…at least one of the four major record companies could move toward the sale of unrestricted digital files in the MP3 format within months.
But this raises a problem: how to capture value. The industry hopes that MP3 format will woo the consumer back to purchase, but the pirates might actually see it as the white flag of surrender, an invitation to board the industry and strip it clean.
Here’s a thought. What if the music industry came up with a new pricing scheme? What if the music industry started charging fewer people more?
I remember as a kid being impressed with how little I had to pay for my favorite "album." I remember sitting there staring at the cover and thinking, "wow, I can actually own this!"
Now that I have taught at a business school, I know what this is. This is the failure of an industry fully to capture the value it is creating. In point of fact, I would have happily paid the industry 4 times what I did for that album.
The notion here is that every artist has a deeply passionate core constituency. For this constituency, the artist creates value like crazy. The fan is not only willing to pay the full sticker price but to pay more than the full sticker price. And this passionate engagement makes up for all those unpaid MP3 in circulation, which may now be regarded as loss leaders. Some of them will end up in the hands of a would-be fan who will, it is hoped, convert to core constituency status. Think of it as a "user pay" model. Lots of people benefit, but only the real users pay.
The fact that I taught at business school doesn’t mean that I can run the numbers. But I think the calculation would look something like this. My generation listened to lots of artists, followed some subset of artists, and committed to a mere handful, 6 or 7, say. This model of music consumption looks a lot like a peak. The pricing model proposed here supposed that I will pay more for those 6 or 7. Whether this throws off enough funds to sustain the industry, to pay, in other words, for all the other artists and the rest of the landscape, is an open question.
Younger generations of consumers exhibit a different pattern, less a peak, more a mesa. Kids, that is to say, tend to consume more music, listening to more genre sand more artists, following more artists, and committing, finally, to more than 6 or 7. Or so I think. I may be that 6 or 7 is the core loyalty number. But if this distribution is "flatter," with more artists but less loyalty, my pricing model has a problem.
What I am assuming here is that the motive for and the nature of purchase would change. The consumer will pay more, but he or she wants to know that proportionally more is going to the artist. Consumers have still not forgiven the industry the digital transition. CDs cost less to make but the industry didn’t charge the consumer less or pay the artist more. It kept the difference. (A penny of this difference could have funded a beautiful or at least effective jewel case. Instead, we got a piece of crap that breaks almost immediately.) I think it’s probably true that some part of the piracy problem can be put at the door of industry bad behavior.
The purchase decision becomes in effect a reward system. I am not paying money to buy a copy of A Night in San Francisco from Van Morrison, say. This is available online for free. I pay for this music in order to thank and support the artist. I am a little bit more like a patron, and a lot less like a consumer. We are all Medici now. Actually, the Medici model works twice. My "purchase" supports Van Morrison’s work and makes his music available free to a larger public. This is the public art model, I think. Every "core fan" plays benefactor to every non-core listener.
We know that the fixed price is a historical invention that installed itself relatively late in the Western markets. But certainly we have seen the reemergence of variable pricing. This has not always gone well. The CEO of the Coca-Cola Company proposed variable pricing for Coke vending machines (the machines were to charge more on hot days) and he was made to pay for this act of temerity with his career. But it is surely contrary to the vaunted rationality of the marketplace that we should cling to pricing conventions merely because they are habitual.
Every business school appears to believe in a Platonic cave concept of capitalism. There is a perfect original of industry and organization there in the cave, and all the real world industries and organizations are so many shadows. These real world industries and organizations differ from one another only because of the accidents of history and the irrationalities of the world outside the cave. Actually, all industry and each organization is formally the same. (This is why b-schools insist on one-size fits all instruction, treating industry-specific courses as so many trade schools.)
The music industry has followed suit. It has never made much of its difference from other industry. By and large, it sells music the way the Gap sells clothes the way Detroit sells cars. But it is now an industry in crisis and perhaps this is inducement enough to rethink the business model and reach out to its consumers as patrons. If we don’t treat them as patrons, they can be relied upon to act as pirates.
Shannon, Victoria. 2007. Record Labels Contemplate Unrestricted Digital Music. New York Times. January 23, 2007. here.
LaRacuente, Nicholas. 2007. Free Culture Labs. Free Culture Blog: voices fo the student movement for free culture. here.