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Music industry: five alternative business models

by Steve O'Hear, editor
October 11th, 2007 | Posted in Audio |  29 Comments

Music industry: five alternative business modelsThe record industry is in dire trouble and the major record companies know it. According to the IFPI’s most recent figures, “physical” music sales were down 11% to $17.5bn in 2006, and, blaming piracy — both CD copying and online file-sharing — the IFPI says that overall music sales have fallen for the seventh year running.

However, none of this was unpredicted, and in post-Napster 2003, Steve Jobs appeared to offer the recording industry a way into the future, through the iTunes Music Store. People didn’t want to steal music, argued Jobs, and if paid-for downloads could compete on price and convenience, then many of those illegal file traders would be converted back into paying customers. As a result, Jobs insisted on the unbundling of albums; instead all tracks would be offered for purchase individually, at the same price — 99c — whether they be a new release, top 40 hit, or an older and more obscure song. To which the majors reluctantly complied, and would later learn to regret.

Fast-forward again to 2007, and although paid-for downloads are on the increase, they aren’t rising nearly fast enough to make up for the loss in revenue from falling CD sales. By Jobs’ own admission, on average only three percent of music on an iPod originates from the iTunes Music Store. As if to rub salt in the wound, iPod sales accounted for nearly half of Apple’s total revenuefor 2006.

Instead of recognizing that the record industry’s aging business model, even with the intervention of Jobs, is a broken one and in desperate need of a fix, the response has largely been litigation coupled with the introduction of technology, in the form of DRM, designed to enforce copy protection, which, ultimately, just inconveniences paying customers.

If the iTunes model isn’t the answer, and business can’t go on as usual, then what is? Here are five alternative models for selling music, many of which are actually being tested by artists, entrepreneurs, and even the major record labels themselves.


If music is becoming ubiquitous, through illegal file-sharing, supported by mass storage MP3 players, then why not just give it away? The “free” model doesn’t mean not making money from music. Instead, the tracks themselves are treated as a loss leader, designed to promote the artist and drive sales of other associated products, such as concert tickets and merchandise.


JamendoJamendo is a web service that embraces the “free” model by helping artists to distribute their music for free, under a Creative Commons license, on peer-to-peer filesharing networks such as BitTorrent or eMule. Jamendo users can also discuss and rate tracks, as well as make a donation directly to the artists whose music they’re fans of. Additionally, Jamendo has an ad-revenue scheme for artists who set-up-shop on the site.


Prince gave his most recent album away for free, or more accurately, a British Sunday newspaper did. How much he got paid by the newspaper we don’t know, but Prince claimed the deal was primarily about getting his music into the hands of as many people as possible and to help promote his upcoming UK tour. It was later reported that all of Prince’s UK dates had sold out almost as soon as they went on sale. However, the move didn’t go down so well with the recording industry. The UK arm of Sony BMG withdrew from Prince’s global deal, refusing to distribute the album to UK stores. Retail store, HMV, was equally unimpressed, with chief executive Simon Fox describing the arrangement as “absolute madness.”


SpiralFrogLaunched last month, SpiralFrog lets users download music for free, in return for viewing advertising (see our full review). In addition to viewing ads while searching for and downloading music, the service requires users to log in to the site and view ads at least once every 30 days, or the downloaded music for the account becomes disabled. SpiralFrog is built on a revenue-sharing agreement with participating labels, and currently offers a catalog of 800,000 songs and 3,500 music videos.

Pay what you want


RadioheadSimilar to “free”, the “pay what you want” model came into the public eye most recently when Radiohead released their new album, In Rainbows, with a voluntary price tag. Fans can choose what to pay for the album, including nothing at all.

Jane Siberry

The artist, Jane Siberry, makes a similar offer to fans, with the difference that they can choose what they’d like to pay, after they’ve already downloaded and listened to the album first.


MagnatuneMagnatune is an online music service which has built much of its business around the “pay what you want” model. Albums carry a low minimum price, with fans able to decide how much more to pay after that. In an email, I asked Magnatune founder, John Buckman, how fans, artists and record labels have responded to the “pay what you want” model.

“New visitors to Magnatune see the “we are not evil” slogan and justifiably remain skeptical. The “how much do you want to pay?” question they get when they click the “buy” button is so shocking, so different than any traditional business, that it usually puts a smile on their face and makes them True Believers in the Magnatune Way.

Labels think it’s insane.

Artists often think it’s a bad idea *before* they’ve been signed to Magnatune but when they see that on average they will earn more money with this scheme than setting an $8 fixed price (on average, $8.21), and that fans will be able to express their strong positive feelings by optionally paying more (even, a lot more).”

Buckman also says that even when users choose only to pay $5, they tend to spend more overall, buying several albums at once.

Pay by popularity


AmieStreet logoAmieStreet, of which Amazon is a recent investor, is a social market place for artists to connect with fans and promote and sell their music. The site has pioneered a “pay by popularity” model, whereby transparent market forces dictate the price of music. All tracks on AmieStreet start off free, then the more the track gets downloaded, the more the price increases in increments, all the way up to the industry standard of 98c. This is in complete contrast to iTunes, whereby all tracks are priced the same, irrespective of how popular or obscure they are — something which the major labels are desperate to change.


Legendary music producer, Rick Rubin, recently told the New York Times that subscription services are the way forward.

“You’d pay, say, $19.95 a month, and the music will come anywhere you’d like. In this new world, there will be a virtual library that will be accessible from your car, from your cellphone, from your computer, from your television. Anywhere. The iPod will be obsolete, but there would be a Walkman-like device you could plug into speakers at home. You’ll say, ‘Today I want to listen to … Simon and Garfunkel,’ and there they are. The service can have demos, bootlegs, concerts, whatever context the artist wants to put out. And once that model is put into place, the industry will grow 10 times the size it is now.”

However, despite what Rubin says, services such as Rhapsody haven’t reached mass adoption, as it’s not clear that people are ready to “rent” their music. Another reason might be that we haven’t yet reached ubiquitous Internet access. When all of our music can “live in the clouds”, accessible at any time, owning it outright may no longer be that important.

A music tax

It’s an old idea and one that UMG was rumored to be pushing most recently: some sort of music tax, possibly collected via your Internet Service Provider. The idea is to charge the customers of ISPs and cellphone carriers a flat-rate fee as part of their data service plan, in exchange for the right to download and share the major record labels’ music over an ISP’s network. That way, filesharing is decriminalized and the recording industry is guaranteed revenue.

Other forms of music tax could include a tax on digital audio players, similar to how some countries tax blank CDs, or direct taxation through government.

All three variations would require the different parties — including all five major labels and government — to agree to work together, something which is very unlikely to happen. Additionally, if a file-sharing tax makes up the majority of the music industry’s revenue, it’s hard to see what incentive there would be for the major record labels, with their huge back-catalogs, to continue to invest in new artists.

Thanks E DOT BAY and WWW.Last100.com

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