What is the future business model of the music industry?

Evan Asks:

Major labels are having issues, mainly because the business model they're operating on is obsolete. Obviously the Internet is proving itself to be a major part of the future of the music business, but the new model hasn't quite solidified yet. What will the role of record labels be, will "major" labels go extinct, and how will new artists emerge from the sea of Internet wannabes?

Rob’s Answer:

It's been prophesized [1] that there are 5 possible business models that the music industry could adopt or be forced into.

1) FREE

This is the easy choice for consumers. It's already very easy to obtain current music for free. A lot of money, time and effort goes into releasing albums for free.

However, this is a conceivable business model. Already, artists and labels know that diversified income results in the greatest profit. Sean Combs is well known for his empire of clothes, jewelry, accessories, let alone his popular music.

It's completely possible that music profits could be sustained by monopolizing on success in areas beyond music.

2) PAY WHAT YOU WANT

Radiohead made the biggest splash with this. However, it's been going on for years at local concerts all over North America. It's common place for a band to load up a table with CD's and ask $20 for them. The band may not necessarily get their asking price, but chances are they'll sell a good number of CD's if they're open to negotiation.

3) PAY BY POPULARITY

This idea is pretty self explanatory. However, if this was a viable option, why hasn't iTunes implemented it?

Apple makes very little per song [2]. Just like CD sales, iTunes is still responsible for splitting the revenue from each sale with a bunch of different people. It would make sense that they'd want to make more money and the best way to do this logically would be to charge based on popularity.

4) SUBSCRIPTION

The subscription model seems to be the most attractive in a compromise between consumer demand and publishers. Consumers would purchase a subscription just like NetFlix but rather than renting DVD's, they receive professionally encoded (high quality) digital audio.

The biggest problem with this scenario is that publishers are currently stuck on DRM (Digital Rights Management) issues. Consumers are currently demanding that content be available across the electronic devices they own. DRM is currently clunky, insecure and worst of all, horribly inadequate.

5) MUSIC TAX

As the name implies, the music tax is favored by governments (Canada especially) and Publishers alike. Quite simply, put a levy on each sale to offset the effect of piracy.

The huge problem with this is that the folks who are paying for music are penalized while people who download illegally aren't. That doesn't seem right at all.

CONCLUSION

The underlying issue to finding a business model is being overlooked by the Music Industry. They are so caught up in piracy and DRM technology that they are missing the fact that it's the product itself that's the problem.

I'm not saying that music is any better or any worse than it has been. I'm saying that the products that Producers are assembling and marketing do not reflect consumer demand.

Due to our recent history (Napster, Gnutella, Torrents, etc) consumers have devalued music and as a result, the music industry needs a complete overhaul. The industry needs to put quality and consistency in the forefront. They need to take a combined approach of these 5 methods to form products that can be (in part or in low quality) be given away for free, subscribed to, etc.

Above all else, at this moment advertising (online and offline) is going through a revolution. Advertising is in a state of disarray and everyone, including the music industry needs to redefine how they make money from ads. The comments given around this topic at the Grammys [3] are a direct example of this revolution.

The bottom line is that the music industry (as a whole) needs to carefully and completely reconsider itself.

Source(s):
[1] http://www.last100.com/2007/10/11/music-industry-five-alternative-business-models/

[2] http://communities.canada.com/ottawacitizen/blogs/bitsandbytes/archive/2008/10/02/how-apple-wrecked-the-music-industry-s-business-model-over-a-nickel.aspx

[3] http://ca.news.yahoo.com/s/reuters/090206/entertainment/centertainment_us_grammys

In addition to these sources, I have deeply and professionally considered music piracy on the Internet and specifically P2P networks.