Elemental Consulting on pay-per-download songs:

If Amazon has a hard time making money on music priced a little below iTunes standard pricing, how can downloads priced at a fraction of the cost be profitable for indie labels and musicians?

Applying the concept of loss leaders … it logically requires that the download is then just the gateway to other products that the musician will be selling for more money – concert tickets perhaps? Merchandise? These are probably the most common supplemental sales, but the fact of the matter is that the digital song is the most viable sale – possibly the cheapest and easiest to manufacture and distribute. The cost is unaffected by geography, unlike concert tickets where an artist has to physically be somewhere and must pay for his/her travel expenses and that of the band. So I’m not seeing how cheap downloads as a loss leader would really work for the individual artist or small label. I can see cutting the cost of a particular track or album in order to provide the gateway to buy other albums at a higher cost but I just don’t see how a viable business for indies can be made from cut-price downloads.

The use of music as a loss leader is about truly profitable products. Bands selling tracks on Amazon should seek to get a piece of anything the user buys, not just CDs. Taking this to the real world, a comparable deal would be to ask Best Buy for a percentage of the final sale.

So let’s say you’re Michael Jackson and Best Buy is doing a promotion where they give away a copy of “Thriller” to anybody who buys a Halloween costume. You’d ask for a piece of the costume, which has a decent markup, rather than a higher price on the CD.

You’re looking for stuff with a big markup that would move better if it were associated with cultural items like songs. The “Baby You Can Drive My Car” Beatles giveaway at the BMW dealership. Defense contracting. Pharmaceuticals. Software. Dating. Gourmet food. Liquor.

7 thoughts on “upsales

  1. @crosbie – because the discussion is about how everybody *except* the musician makes money along the way. Running Amazon costs money even if the incremental cost of posting a song is pennies.

  2. I presume it goes something like this then:

    MP3 copy @ 99¢
    Manufacturing/reproduction costs: 0¢
    Royalty: 66¢
    Customer Support: 22¢
    Hosting/download: 11¢
    Profit: 0¢

    Presumably the label is laughing all the way to the bank, the musician has been cut out of the deal, and the retailer is left holding the baby.

    How much better a deal it would therefore be if the musician disintermediated themselves from the unviable copy-selling industry and started selling their music instead?

    FLAC master @ 0¢
    Production: $100
    Manufacturing/reproduction costs: 0¢
    Hosting/download: $50
    Audience incentive: $990 (1,000 fanatic patrons @ 99¢)
    Profit: $840

    No royalty – files are copyleft.
    No support costs – files are freely copyable, the music is a priori without complaint.
    Cheap hosting – due to BitTorrent.

    Labels remain free to sell their promotion/discovery services to musician/audience, retailers are free to add value, musicians have money, audiences have music, and the public has its liberty.

  3. Can Amazon enable FREE downloads w/ artist affiliate tracking? Would/Will they?
    What about Live!?
    It seems in my view the artist would prefer to focus on building attention and loyalty – and it would be great if that simply were the economics of music.

  4. A pay-per-download engine will generate revenue in excess of its expense. A pay-per-download engine will not generate the per-album revenue that LPs did, or that CDs did. The reality of the new technology is that, as advertised, it can make things less expensive and more efficient, which can remove some of the excess profits in the system.

    Commercial tie-ins are a traditional way of licensing music. For some years now, for the artist, record deals are less about the artist making real money and more about promotion and rather unfavorable terms for borrowing of funds to promote touring. The economics of downloads is that artists will not suffer any more than they already have. The economics of advertising is that freed from record company hegemony, music will license directly from artist to commercial outlet, to the benefit of all.

    Even the artist who disdains commercial licensing probably wins, as that artist can now disdain as well record companies, and use the tunecore, the internet and touring to build the following that once only a major record label deal could help build. Such artists will inevitably arise–it’s just how and when and what innovations in marketing they use to make it.

  5. Eric, affiliate revenues on all upsales are a weird business model, but then again money is money. For musicians to get paid, they need to be earning on the real value of their work — to give cultural cachet to neutral products like toilet paper and spark plugs. People don’t care about detergent and they don’t need CDs, they care about CDs and need detergent. Put them together and you have a real winner.

    “New and improved Tide: now with Aerosmith!”

    gurdonark, this is really well said: “The reality of the new technology is that, as advertised, it can make things less expensive and more efficient, which can remove some of the excess profits in the system.”

  6. Sounds like endorsement to me – the manufacturer paying an artist to endorse their product. It’s just like websites selling their audiences to advertisers, but in this case it’s an artist selling the goodwill of their audience, and their own reputation.

    Either the artist really does endorse the product, and may not suffer significantly, or they can be recognised to have ‘sold out’ and their reputation diminishes.

    And what of unknown/lesser known artists? Is there the same attraction to a manufacturer in doing a deal with them?

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