[6 August 2009 draft – do not duplicate, distribute or cite] Business models for music Henry H. Perritt, Jr. Table of contents I. Introduction.................................................................................................................5 II. The problem................................................................................................................ 9 A. The old model ....................................................................................................... 11 1. Recorded music................................................................................................. 11 2. Live performances ............................................................................................ 20 3. Publishing ......................................................................................................... 21 B. Effects of technology’s latest revolution .............................................................. 22 1. Effects of the demise of the CD........................................................................ 23 2. Limited potential of downloadable digital files................................................ 23 3. Potential of live performances .......................................................................... 25 C. Law’s role............................................................................................................. 26 III. Who makes music now, why and how?................................................................ 29 A. Hedonic values...................................................................................................... 30 B. Making money ...................................................................................................... 35 1. Why money matters .......................................................................................... 35 2. Day jobs and opportunity cost .......................................................................... 38 C. Career paths.......................................................................................................... 41 Business models-63.doc 1 1. Life cycle of a band........................................................................................... 41 2. Two case studies of successful entrepreneurship: Vampire Weekend and Fall- Out Boy 42 a) Vampire Weekend........................................................................................ 42 b) Fall Out Boy................................................................................................. 47 c) Common patterns.......................................................................................... 52 3. Plateaus of popularity ....................................................................................... 54 a) Established celebrities................................................................................... 54 b) Striving entrepreneurs................................................................................... 56 c) Hobbyists ...................................................................................................... 56 d) Balancing the motivations............................................................................. 58 e) Artist exit...................................................................................................... 59 IV. Who consumes music and why?........................................................................... 60 A. Demographics ....................................................................................................... 61 B. Musical preference................................................................................................ 62 1. “Quality” of the music ...................................................................................... 63 2. Vicarious association with celebrity ................................................................. 69 3. Music is modelling............................................................................................ 69 4. Popularity of the music ..................................................................................... 72 C. Finding what you like ........................................................................................... 73 D. Formats ................................................................................................................. 74 V. Music market intermediaries..................................................................................... 75 A. Need for intermediaries......................................................................................... 75 B. New intermediaries............................................................................................... 77 Business models-63.doc 2 1. New distribution channels................................................................................. 78 2. New matching services..................................................................................... 78 3. New intermediation technologies ..................................................................... 81 a) Statistical classification................................................................................. 81 (1) Factor analysis.......................................................................................... 81 (2) Identification ............................................................................................ 81 b) Open source technologies ............................................................................. 87 4. New intermediary entrepreneurship.................................................................. 88 VI. Structure of the new marketplace ......................................................................... 88 A. Matchmaking ........................................................................................................ 89 B. Role of the bottom tier .......................................................................................... 89 C. Breaking through.................................................................................................. 90 D. Investment capital................................................................................................. 91 1. Capital sources.................................................................................................. 91 2. Sources of subsidy ............................................................................................ 91 a) Day job.......................................................................................................... 91 b) Subsidies ....................................................................................................... 93 VII. Business models: the money part.......................................................................... 94 A. Elements of a business plan .................................................................................. 96 1. For musicians.................................................................................................... 96 a) Costs.............................................................................................................. 96 (1) Recorded music........................................................................................ 96 (2) Live performances.................................................................................... 98 Business models-63.doc 3 b) Revenue......................................................................................................... 98 2. For intermediaries ........................................................................................... 100 a) Revenues: tapping new revenue streams .................................................... 102 (a) Live performances.............................................................................. 103 (b) Publishing........................................................................................... 103 (c) Merch.................................................................................................. 104 (d) Ring tones........................................................................................... 104 (e) Music tracks for movies ..................................................................... 105 (f) Advertising.......................................................................................... 105 (g) Access to celebrity ............................................................................. 107 (h) Revenue results.................................................................................. 108 b) Costs............................................................................................................ 110 (1) Total costs, including costs of tapping new revenue sources................. 110 (2) Bribes (“payola”)....................................................................................111 3. Capital requirements and ROI ........................................................................ 112 4. Uncertainty...................................................................................................... 113 B. Effect of declining efficacy of IP protection: making money from free music.. 115 VIII. Conclusion .......................................................................................................... 118 Business models-63.doc 4 I. Introduction The popular music industry is in the middle of a technology-driven revolution. It is