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Business Impact

The Tipping Jar

Does Radiohead’s Internet release of its latest album tell us anything about the future of the music business?

In October 2007, the English rock band Radiohead enhanced its already enviable avant-garde credibility by releasing its seventh album, In Rainbows, online. Fans willing to offer up their names and e-mail addresses–or at least, fake names and fake e-mail address–could pay what they chose for the album, even downloading it for free. The band, and the “tip jar” business model it had adopted, were the talk of the music press and the blogosphere for weeks.

Just days after the release, ­the site Gigwise.com, citing an unnamed source “close to the band,” claimed that 1.2 million copies of the album had already been downloaded. At about the same time, a survey by a British company called Record of the Day pegged the average price paid at about $8. But Billboard, the U.S. music industry’s leading trade magazine, estimated the number of downloads at closer to 400,000, although it accepted the $8 average. And ComScore, a consumer research company based in Reston, VA, that collects data on the online behavior of a representative two million people worldwide, calculated that in the first 29 days of October, about 1.2 million people visited the Radiohead site. Although a “significant percentage” of them downloaded the album, ComScore said, the average payment was $2.26.

This story is part of our January/February 2008 Issue
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As of this writing, the band has declined to release any figures. Radiohead’s manager dismissed the Gigwise report as “exaggerated.” But band representatives also called ComScore’s data “wholly inaccurate,” and Ken Kovash of Mozilla, the organization that designed the Firefox Web browser, revealed that ComScore had underestimated the number of people who visited the Mozilla site in September by about 60 percent.

Billboard surmised that a conventional CD release of In Rainbows would have brought Radiohead between two and three million dollars. If anything like the higher sales estimates obtain, then relying on the public’s largesse rather than the efficiency of record-label marketing campaigns increased the band’s take. But even if ComScore’s less impressive figures are right, and a “significant percentage” means no more than half, then Radiohead grossed $1.36 million in the last three weeks of October. That’s still a big enough number to turn some heads.

Radiohead's Internet Release Of In Rainbows

Money: It’s a Gas
The digitally compressed music file presents a conundrum that may be unprecedented in the history of commerce: soon the music industry’s chief good will be one that its customers can easily acquire at no cost.

The industry’s response to the threat of piracy has been threefold: to use digital rights management (DRM) software to limit illicit copying and distribution; to discourage file sharing through lawsuits; and to attempt to exploit the new technology in ways that preserve high profit margins.

By most accounts, the first two strategies are doomed and will eventually be abandoned. But the third has been much more successful. Last summer, iTunes sold its three billionth audio file, which means that it has generated around $2 billion in revenue for the record companies partnered with it. And while iTunes, which charges 99 cents per download, is by far the largest online retailer of compressed music files, it’s still only one of many.

As the market for music comes to be dominated by generations weaned on file-sharing software, however, piracy is likely to take a bigger bite out of online sales. So one of the questions the music industry will need to answer is how much it can afford to charge customers who consider payment entirely optional.

Data that address that question are hard to come by, but the online music store eMusic may, through a quirk of its business model, provide some guidance. The ­second-­largest online retailer of compressed audio files, eMusic still lags far behind the leader: according to its CEO, David ­Pakman, it has only a hundredth as many customers as iTunes. Those customers pay monthly subscription fees that entitle them to fixed numbers of downloads: $10 buys 30 downloads, $15 buys 50, and $20 buys 75. Subscribers who regularly download their full monthly quota thus pay from 27 to 33 cents per MP3.

But few eMusic subscribers meet that description. Since the quotas don’t roll over from one month to the next, a given subscriber’s average payment per download can fluctuate widely: 30 downloads last month may have meant an average of 33 cents per MP3, but 10 this month means an average of a dollar. “Across all of our customers and all of our usage, the effective price that consumers are paying is less than 99 cents, so we don’t believe that 99 cents is the right price point,” says Pakman. “For non-hit music, it’s probably somewhere between 60 and 75 cents a song. And that’s based on data. That’s not my gut. That’s based on what we see people willing to pay in the market.”

Pakman doesn’t believe that eMusic’s low prices are seducing anyone away from piracy, though. “Our customers are really not the piracy-prone customers,” he says. “I think that generally, piracy is the domain of youth, and we just don’t focus on the youth customer. So we don’t see piracy as eating into our ability to sell music.”

But what happens when today’s piratical youths, unintimidated by file-sharing technology and accustomed to free music, become adults?

In 1998, Bruce Schneier, a celebrated cryptographer and chief technical officer of the network security firm BT ­Counterpane, proposed an answer, a mechanism he called the street performer protocol. A band would announce the completion of a new album, and the band’s fans would begin paying arbitrary amounts of money into an escrow account. Once the total in the account crossed some threshold, the band would collect the money and release the new work into the public domain. Schneier showed that data encryption can ensure that the artist doesn’t swipe the money without delivering the goods, and that if the payment threshold is never crossed, the contributors can all get their money back (plus interest).

But Schneier himself now believes that such measures will prove unnecessary. “In real life, you’re more likely just to use trust,” he says. “Radiohead just said, ‘We’ll do it.’ They’re just relying on the good will of their fans, and their fans’ trust in them, and so on. And that just seems more plausible in our world.”

Radiohead’s reliance on the good will of its fans probably netted it more than a million dollars in the month of October, and possibly much more. But Radiohead is also the beneficiary of years of major-label publicity. In a world of unrestricted, open-­format downloads, where record companies have no way to recoup the costs of huge marketing campaigns, bands will have a harder time achieving Radiohead’s level of celebrity in the first place.

Nonetheless, smaller experiments with new methods of distribution and promotion also indicate that people are willing to pay more than they have to for music they care about. The Canadian folksinger Jane Siberry, who last year changed her name to Issa, began using the tip-jar model to sell her recordings a good two years before Radiohead did, although her website recommends that customers pay the industry standard 99 cents a song. According to statistics posted on the site, about 20 percent of downloaders pay nothing. But the average payment per song is still $1.20. Magnatune, a website that sells 569 albums by 258 artists, lets its customers choose how much to pay but sets a lower bound of $5 an album. Its 50 top albums, however, sell for an average of $8 to $10. In a slightly different vein, Team Love Records posts all of its artists’ recordings to its website as free, high-­quality MP3s. But its most popular acts still sell thousands of CDs, which is pretty good for a small independent label.

It may be that in the brave new world of Internet music distribution, rock bands will no longer generate so much revenue that they can afford to throw TVs out of hotel windows or insist that all the brown M&Ms be removed from the candy bowls in the greenroom. But Radiohead’s online release of In Rainbows contributes to the mounting evidence that musicians who build an audience will still be able to make a living doing what they love.

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