New Business Models for Music

Chicago-Kent College of Law Scholarly Commons @ IIT Chicago-Kent College of Law All Faculty Scholarship Faculty Scholarship January 2011 New Business Models for Music Henry H. Perritt Jr. IIT Chicago-Kent College of Law, [email protected] Follow this and additional works at: https://scholarship.kentlaw.iit.edu/fac_schol Part of the Entertainment, Arts, and Sports Law Commons, and the Intellectual Property Law Commons Recommended Citation Henry H. Perritt Jr., New Business Models for Music, 18 Vill. Sports & Ent. L.J. 63 (2011). Available at: https://scholarship.kentlaw.iit.edu/fac_schol/480 This Article is brought to you for free and open access by the Faculty Scholarship at Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in All Faculty Scholarship by an authorized administrator of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact [email protected], [email protected]. \\jciprod01\productn\V\VLS\18-1dr\vls102.txt unknown Seq: 1 7-MAR-11 11:02 NEW BUSINESS MODELS FOR MUSIC HENRY H. PERRITT, JR.* I. INTRODUCTION ....................................... 65 R II. THE PROBLEM ........................................ 70 R A. The Old Model .................................. 72 R 1. Recorded Music ............................. 72 R 2. Live Performances ........................... 84 R 3. Publishing ................................... 86 R B. Effects of Technology’s Latest Revolution ........ 87 R 1. Effects of the Demise of the CD ............. 88 R 2. Limited Potential of Downloadable Digital Files ......................................... 89 R 3. Potential of Live Performances .............. 91 R C. Law’s Role....................................... 93 R III. WHO MAKES MUSIC NOW? WHY AND HOW?........... 96 R A. Hedonic Values.................................. 97 R B. Making Money .................................. 103 R 1. Why Money Matters ......................... 103 R 2. Day Jobs and Opportunity Cost .............. 107 R C. Career Paths..................................... 111 R 1. Life Cycle of a Band ......................... 111 R 2. Two Case Studies of Successful Entrepreneurship: Vampire Weekend and Fall-Out Boy ................................. 112 R a) Vampire Weekend ....................... 113 R b) Fall Out Boy ............................. 118 R c) Common patterns ....................... 125 R 3. Plateaus of Popularity........................ 128 R * B.S. in engineering from MIT (1966); Master’s degree in management from MIT’s Sloan School in (1970); J.D. from Georgetown University Law Center (1975). Henry H. Perritt, Jr. is a professor of law at Chicago-Kent College of Law. He served as Chicago-Kent’s dean from 1997 to 2002 and was the Democratic can- didate for the U.S. House of Representatives in the Tenth District of Illinois in 2002. He served on the Transition Team for President Clinton and on the White House staff and as deputy under secretary of labor for President Ford. He is a member of the bars of Virginia, Pennsylvania, the District of Columbia, Maryland, Illinois and the United States Supreme Court. Also, Professor Perritt is a member of the Council on Foreign Relations and of the Economic Club, is on the board of directors of the Chicago Council on Foreign Relations, and has served as secretary of the Section on Labor and Employment Law of the American Bar Association. Professor Perritt has authored more than 70 law review articles and 15 books on international relations and law, technology and law, and employment law. (63) \\jciprod01\productn\V\VLS\18-1dr\vls102.txt unknown Seq: 2 7-MAR-11 11:02 64 VILLANOVA SPORTS &ENT.LAW JOURNAL [Vol. 18: p. 63 a) Established celebrities ................... 128 R b) Striving Entrepreneurs ................... 129 R c) Hobbyists ................................ 131 R d) Balancing the motivations ............... 132 R e) Artist exit ................................ 135 R IV. WHO CONSUMES MUSIC AND WHY?.................... 136 R A. Demographics ................................... 137 R B. Musical Preference .............................. 138 R 1. “Quality” of the Music ....................... 139 R 2. Vicarious Association with Celebrity .......... 147 R 3. Music is Modeling ........................... 148 R 4. Popularity of the Music ...................... 151 R C. Finding What You Like .......................... 151 R D. Formats ......................................... 153 R V. MUSIC MARKET INTERMEDIARIES ....................... 154 R A. Need for Intermediaries ......................... 155 R B. New Intermediaries .............................. 158 R 1. New Distribution Channels .................. 158 R 2. New Matching Services ...................... 159 R 3. New intermediation technologies ............ 162 R a) Statistical Classification .................. 162 R (1) Factor analysis ....................... 162 R (2) Identification ........................ 163 R b) Open Source Technologies .............. 171 R 4. New Intermediary Entrepreneurship ......... 172 R VI. STRUCTURE OF THE NEW MARKETPLACE ............... 173 R A. Matchmaking .................................... 173 R B. Role of the Bottom Tier ......................... 174 R C. Breaking Through ............................... 174 R D. Investment Capital............................... 176 R 1. Capital Sources .............................. 176 R 2. Sources of Subsidy ........................... 177 R a) Cross subsidy From Day Jobs ............. 177 R b) Direct Subsidies ......................... 180 R VII. BUSINESS MODELS: THE MONEY PART ................. 181 R A. Elements of a Business Plan ..................... 182 R 1. For Musicians................................ 183 R a) Costs .................................... 183 R (1) Recorded Music ..................... 183 R (2) Live Performances ................... 185 R b) Revenue ................................. 186 R 2. For Intermediaries ........................... 188 R \\jciprod01\productn\V\VLS\18-1dr\vls102.txt unknown Seq: 3 7-MAR-11 11:02 2011] NEW BUSINESS MODELS FOR MUSIC 65 a) Revenues: Tapping New Revenue Streams .................................. 191 R (1) Live Performances ................... 192 R (2) Publishing ........................... 193 R (3) “Merch” ............................. 194 R (4) Ring Tones .......................... 195 R (5) Music Tracks for Movies ............. 195 R (6) Advertising .......................... 196 R (7) Access to Celebrity ................... 198 R (8) Revenue Results ..................... 200 R b) Costs .................................... 201 R (1) Total Costs, Including Costs of Tapping New Revenue Sources ...... 201 R (2) Bribes (“payola”) .................... 202 R 3. Capital Requirements and Return-on- Investment .................................. 204 R 4. Uncertainty .................................. 205 R B. Effect of Declining Efficacy of IP Protection: Making Money from Free Music ................. 208 R VIII. CONCLUSION ......................................... 211 R I. INTRODUCTION The popular music industry is in the middle of a technology- driven revolution. It is clear that the old order has been swept away, but it is not yet clear what form the “new order” will take. The major labels are on life support and will not survive in anything like their previous form. Compact Discs are dead as a distribution medium. Copyright is unenforceable and hence essentially irrele- vant except at the margins of the “new order.” Barriers to entry have been reduced dramatically as the costs of producing top-quality recordings have declined by a couple of orders of magnitude. Portable music players such as the iPod permit consumers to listen to music all the time and this enormously increases the potential demand for music. The amount of new music generated by indie musicians will increase as the demand for music increases because of its portabil- ity for consumers. Copyright protection, in the form of digital rights management (“DRM”), will become even less effective for recorded music and technological protections and will be abandoned altogether. The result will be continued downward pressure on prices for recorded music and soft demand for paid record sales. \\jciprod01\productn\V\VLS\18-1dr\vls102.txt unknown Seq: 4 7-MAR-11 11:02 66 VILLANOVA SPORTS &ENT.LAW JOURNAL [Vol. 18: p. 63 Increased supply and demand mean increased search costs— how are musicians and their potential fans to find each other? As in the past, intermediaries must match consumers with the music they like, but this will happen in new ways. As music MySpace pages and independent websites proliferate, the burden of finding new music only increases. Someone has to perform the matchmaking function formerly performed by the major labels and the radio-sta- tion chains. Who will do it? Innovation and experimentation will increase as new kinds of intermediaries try to find the best way to connect musicians with their potential fans. A handful of these will become the dominant gatekeepers. The increased competition and the demise of traditional gatekeepers signal a sharp reduction in prices—approaching zero—for recorded music. This means a reduced revenue stream to support anyone in the industry unless demand increases so heroically as to outpace the downward pressure on prices. This is unlikely. What business model will support the post-revolutionary space? In this climate of increasing competition, musicians and their sponsors will try

Load more