Start Here - Practically Indisputable Economics:
In a competitive market, where products can be easily COPIED, prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit; therefore the solution is to create products or features that can't be simply REPLICATED.

And Then The Music Industry Said:
In a competitive market, where products can be easily COPIED, prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit; therefore the solution is to stop people from REPLICATING our products.

But, Someone Put The Wrong Statement In The Play Book.  It Should Have Read:
In a competitive market, where products can be easily SUBSTITUTED, prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit; therefore the solution is... (a post covering this is in the works).

Common Sense Says - Rule Out This Option:
In a competitive market, where products can be easily SUBSTITUTED, prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit; therefore the solution is to stop people from SUBSTITUTING our products.

Substitution Is a Bigger Problem Than Replication
At this point in time, given the adoption of MP3 players (including cell phones), broadband Internet, Internet everywhere, video game consoles and the pending media recommendation tsunami - substitution of one song instead of another is a far bigger challenge than replication; that is, if you don't have the right strategy... 

Continue to the follow up post on substitution. 

 

 

I am taking the advice I give to Brand Together.  You will be able to find new articles I post on Music Think Tank.  I am flattered to be part of such a great group of people.   

 

How many ways can you slice the digital music revenue pie?  Most of the companies operating in the digital music ecosystem seem to think the answer is: as many ways as you could slice the old-music-revenue-pie.  That’s the wrong answer.

Artists need every cent of a $.99 cent sale to survive.  Business models that call for extracting percentages from artists are no longer appropriate; slicing the pie is the wrong metaphor, and there is a better way.

The Old Pie Paradigm
Prior to the digital revolution, music revenue was a pie that could be sliced; $15.00 could be carved up using a formula that was negotiated upon percentages, and just about everyone made money if revenues met expectations.  Deals structured around percentages worked when the average unit sale was $15.00; percentages don’t work when the average sale is $.99 cents.  Models that extract percentages are killing the music industry.

New Metaphor = Batteries
The music industry needs a new financial metaphor.  Throw out the pie mentality and think of digital music revenue as batteries.  What happens when a machine calls for 12 volts and you give it 8.4 volts?  It doesn’t work.  You can’t run a machine with 30% less power than it needs. When you run any machine using a deficient power source - it slowly dies from overwork under inadequate power.

What happens when you ship a battery that’s worth $100?  Does UPS charge you a percentage of sales?  No, UPS charges you a shipping fee that has nothing to do with the selling price.  When you sell a battery on the Internet, should you pay a percentage of your sales to your ISP, to Dell or to Microsoft?  No, you pay a flat fee for your Internet service, for your computer and for your software - no matter how many batteries you sell.  

If the companies operating in the digital music space don’t substitute the battery metaphor for the pie metaphor, the machine is going to break down and cease up.

Charge Flat Fees - Make More Money
Size the total potential market.  There are four million artists in the English-speaking world, and that number is growing rapidly.  If artists were charged annual service fees instead of sales percentages, every nimble service provider in the digital music ecosystem would thrive.  Four million artists paying $250 a year, spread out over multiple companies, is a billion-dollar annual business for service providers.  With up-selling and tiered pricing, add another five hundred million to the total potential market.  Add the rest of the world and we are talking about a three to five billion dollar business for providing fee-based services to artists.

Flat fees or no fees are the only things that make sense in the digital music world of extremely low margins.

The Other Argument
Please don’t comment that more music sold = more bandwidth consumed.  The companies operating in the digital music space have generated billions in profits from selling digital music hardware, from selling recommended merchandise, and from selling digital music.  Every one of these companies could justify selling digital music at a loss.  It’s not a matter of redistributing wealth, it’s a matter of common sense.  Slicing the pie is killing the goose that lays the gold records.  Service providers should think about this, fans should think about this, and artists should choose services that charge flat fees instead of those that extract percentages.

 

 

In Previous Posts
Previously, I wrote about the demise of traditional record deals.  I also stated that investors would find great songs and offer Single-Song-Investment-Deals to artists.  I also told you that record labels need to consider a new model where data is more important than marketing, and that marketing and promotion as you understand it today will cease to be entirely useful.  What I did not demonstrate is a clear example of how this will happen.

In This Post
I will show you one of the methods that will be used to find hit songs, and the example will demonstrate why promotion will take a back seat to data.  This post will also describe a $100,000,000 business that will unfold over the next 24 to 36 months.  I will also offer advice to artists as they prepare for this future.

Advertisement & Disclaimer
I will work with any artist-friendly company on refining and applying this vision.  My goal is to never have a great song go unheard again.  Also, I have no connection to Hit Song Science.   Although I have tried their technology, my analysis of their business model is based upon speculation.

How Songs Will Be Found
With millions of songs in existence and with hundreds of thousands of songs created each year, it’s hard to envision how Song Investors will find the needles in the giant haystack.  Imagine putting all of the songs in the world into a huge funnel.  The first step is to funnel out the 80% that are potentially unpopular; thus leaving the decent songs to be further funneled and analyzed by computers and humans (hopefully).

Hit Song Science   
Companies like Hit Song Science (read article) already have the tools that could be used to funnel out the first 80%.  A song can be loaded into Hit Song Science’s computers and they can measure within acceptable accuracy limits if a song could be a hit.  Click here to learn how Hit Song Science does this.  

I tried out Hit Song Science and I am satisfied that this tool could be used as I describe below.  To save you the trouble of loading up a bunch of songs, all of Jediah’s Hit Song Science reports are at the bottom of this post.  You can download or listen to Jediah’s songs and read the reports to see if you think they are accurate.

Hit Song Science just raised $7,000,000.  Don’t judge the company by their old website.  

The $100,000,000 Business
“Let me see your Hit Song Science Reports.”  Imagine if every label, club, talent buyer, booking agent, ad agency, filmmaker, television show, manager, promotion company, music supervisor, publishing firm and fans wanted to see your Hit Song Science Reports prior to moving an inch!  $10 times 10,000,000 songs is a $100,000,000 business.  Within three years, the phrase “Let me see your Hit Song Science Reports” will be as common as “How many friends and plays do you have on MySpace?”.  

Acceptable Accuracy Limits
I mentioned the concept of “acceptable accuracy limits”.  It will not matter to many of the report readers listed above if technology like Hit Song Science is less than 100% accurate; here’s why: in every segment of the music industry margins are slim; any tool that can reduce overhead and increase odds will be rapidly embraced.  100% accurate or not, (numerous) tools like Hit Song Science are going to be part of the future.

The Problems I Envision
This is not an obstacle that can’t be overcome.  The biggest problem with systems like this is: when it comes to music, the past or even the near past, is not the best predictor of the future.  Systems like Hit Song Science use previous hits to predict the future.  The problem with using previous hits as a baseline is that they were funneled using the smallest funnel on earth.  Small committees or a single person within a record label picked the potential hits.  If all of the hits in the comparative database had been organically crowd-sourced over the past fifty years then this would not be an issue (for me at least).  However, since the prior hits were picked by experts and not by the masses, I am pretty sure they will have to adjust for trends and tastes that were missed and (over or under) exploited.

If you want to dig deeply into music recommendation and discovery subscribe to Paul Lamere's blog titled Duke Listens  I would also go to this post on Paul's blog, scroll to the bottom and download his excellent PowerPoint presentation.  I have come to beleive that Paul generally knows as much or more about this stuff as anyone working in the field; if only I could get him to invite me up to Sun Microsystems for a visit.

Other Systems & Companies
Hit Song Science seems like an interesting spin on what you already know as music recommendation systems.  Companies like Pandora, MyStrands, iLike, Last FM, Music IP, and others should be able to offer differentiated services that perhaps predict entirely different outcomes, as each of these companies is approaching the prediction and discovery business differently.  The bottom line is: you will not be able to hide from the data your songs generate.

Science Wins - Marketing Changes
Surely you can see how this type of system changes marketing and promotion.  Artists will hold up their scores like a restaurant boasts about a five star rating or a great review.  Moreover, there will be companies that feature, promote and pay for highly rated songs.  On the other hand, marketing will cease to be effective for artists that can’t score a hit report.  

Preparing For Hit Song Science
The best way for an artist to prepare for a world that runs on these types of systems is to ignore them.  Well, sort of.  If I had the option to spend time and money right now on promotion versus creating, I would pick creating.  Making great songs will pay bigger dividends than adding fans to your fan base.  Don’t get me wrong, fans are great, but you could spend the next 24 months building a fan base, or you could just pop out on a report and get picked up by a national radio group.  One effort may get you 10,000 fans, but the other effort will get you 1,000,000 fans.  
        
Final Note
When iTunes was born everyone thought it was great that the music distribution barrier had been broken.  Then everyone found out that there is this HUGE HUGE HUGE promotion barrier.  When companies like Hit Song Science go live with their new tools (hopefully I have accurately predicted what their product will be), 80% of the promotion barrier will be gone.  With a good report card you will be able to jump to the head of the line.

Jediah’s Songs 
I will say that some of Jediah’s lowest rated songs are some of my favorites (such as Come Around and The Fears) and the fan-favorite (Butterfly) scored below eight other songs on their recent album; this was a big surprise.  However, I do see the validity of the analysis in the reports.  In addition, we could have used this data to alter the mix on several songs to improve our scores, and I may have used the data to push Don't Die or Flight instead of Butterfly.

To review Jediah's reports on a page with a song player click here (best option). 

Invidual Reports Below.  
Jediah’s songs are sorted from highest to lowest (as rated by Hit Song Science).  
Song Page     Hit Song Science Report     DON'T DIE
Song Page     Hit Song Science Report     FLIGHT
Song Page     Hit Song Science Report     EVERYONE IS FINE (REMIX)
Song Page     Hit Song Science Report     NIGHT'S A PUPPY
Song Page     Hit Song Science Report     EVERY SONG
Song Page     Hit Song Science Report     ALTER EGO
Song Page     Hit Song Science Report     EVERYONE IS FINE
Song Page     Hit Song Science Report     CRY DON'T CRY
Song Page     Hit Song Science Report     BUTTERFLY
Song Page     Hit Song Science Report     UNFAITHFUL YOU
Song Page     Hit Song Science Report     THE FEARS
Song Page     Hit Song Science Report     AS WE WERE
Song Page     Hit Song Science Report     COME AROUND

You can also quickly download all of Jediah's songs at Jamendo. 

If you are going to try Hit Song Science make sure your MP3s are encoded at the proper rate.  I believe Jediah would have scored higher if I had encoded the MP3s properly.

 

MODERN AUTO RECYCLING - A NEW MODEL FOR RECORD LABELS
This is not a funny joke.  I have experience working in both industries and the problem solving skills needed to succeed in one industry are remarkably similar to the problem solving skills needed to thrive in the other.

In this post, I am going to tell you why modern auto recycling is a great model for the record labels of the future.

This post will help artists develop strategies they can use to improve their odds as the music industry evolves to become as sophisticated as the global auto recycling industry.

The Auto Recycling Industry
Consider that every single car on the road will ultimately be recycled; that the automotive recycling industry generates over $30,000,000,000 (billion) in revenue annually; and that auto recycling is one of the most complex, competitive, data intensive and demanding industries on earth, and this is where the music industry is headed.   

Roughly Speaking, The Auto Recycling And The Music Industry Are Numerically Identical...

• There are as many record labels as there are auto recyclers (modern junk yards).
• There are several dominant auto recycling groups, but the "indie" recyclers also thrive.
• There are as many automobiles wrecked each year as there are artists performing or recording each year.
• There are as many songs per artist as there are salable parts per wrecked car.
• There are as many automotive manufactures as there are major genres of music.

To begin to absorb the analogy (for the future) hold this in your head: (recycler = label) (vehicle/car = artist) (song = part).

The Complexity of Auto Recycling
Auto recyclers acquire whole wrecked cars for their constituent parts at highly competitive auctions.  The cars come from insurance companies that have inherited the cars from consumers after a car is appraised as unfixable (after an accident for example).

When an auto recycler buys a vehicle at auction, the recycler has to rapidly process a complex matrix of information, as every car has numerous parts, and EACH AND EVERY PART has numerous questions that have to be answered before a bid price can be tendered:

• Damage question - Is the part damaged or not?
• Interchange question - Will this part fit on other similar cars?
• Mileage question - How old or used is this part?
• Supply question - Is this same part already in stock and how many do we have?
• Supply question - How many miles are on the same parts we currently have?
• Competitive question - How many of the same part do my competitors stock?
• Competitive question - What are my competitor's prices on the same part?
• Demand question - How often do calls come in for this same part?
• Demand question - How many days did it take to sell the last one of this same part?
• Pricing question - How many times have I lost a sale trying to sell this same part?
• Pricing question - What is the average selling price of this same part?
• Handling question - How expensive is it to handle this same part?
• Capital question - How long does it take to recover my investment in this same part?
• Capital question - How much is capital costing me right now?

Remember This Paragraph
Using sophisticated (and FULLY AUTOMATED) salvage buying programs, the answers to these questions are numerically tallied and scored against every other vehicle that the recycler could possibly buy at the auction, as an investment in one vehicle usually means forgoing an investment in an alternative vehicle that carries a different matrix of answers to the questions above.

A typical large auto recycler has to make this type of inventory investment analysis decision hundreds of thousands of times per year.  Large auto recyclers carry tens of millions of dollars worth of inventory and the inventory investment decisions are absolutely critical to the success of a recycler.

Remember This Paragraph
Auto recycling is a data driven business.  The acquisition of cars for their parts is driven by data.  No amount of promotion or marketing by the entity disposing of the car will change the data driven decision that the recycler must make to be profitable.



The Music Industry Will Become a Data Driven Business
The current music industry is a business driven by marketing and promotion.  Going forward, any company that puts "record label" on their business card will have to be a business that is skilled at RAPIDLY acquiring, managing, analyzing, presenting and intelligently acting upon - DATA.

Why Data Trumps Marketing?
You can no longer put lipstick on a pig, and it's becoming impossible to sugarcoat shit.  There you go; it's becoming more and more difficult to promote anything that can't positively populate the data matrix that equates to great music; as collectively determined by a niche of humans coupled to the Internet.  Moreover, the margins are going to remain so thin, AND THE COMPETITION FOR THE GOOD STUFF WILL BECOME SO RAPID AND INTENSE, that there will be no room to make mistakes when acquiring "inventory" to nurture, invest in and to SMARTLY promote.

The Complexity of The Music Industry - The Data Matrix
The cool-looking, pointy ball in the diagram above is a Matchkey from a Boston-based company called Matchmine.  A Matchkey is a mathematical representation (shown graphically here) of your personal interests, tastes and preferences in movies, music, video and blogs.  In reality, everyone has one of these things conceptually growing and evolving in their head.  

I am not sure how Matchmine represents or calculates music, but here's how Hit Song Science does it:

"Our analysis application is able to "listen" to any CD and isolate patterns in many musical events, some of which are melody, harmony, tempo, pitch, octave, beat, rhythm, fullness of sound, noise, brilliance, and chord progression. This is a process called Spectral Deconvolution. Each song is then mapped onto a grid we call the music universe and is positioned according to its mathematical characteristics. Each song is represented by a dot on the universe and the songs on one end of the universe are vastly different from songs on the other end of the universe. Songs with mathematical similarities are positioned very close to one another."

Like Hit Song Science's application, your subconscious brain also does the Spectral Deconvolution thing to form a Music Matchkey in your brain.  Every time you interact with music using your mental Matchkey - a data event occurs:

• You listen to a song and a computer ups the play-count by one.
• You buy a song and a computer ups the buy-count by one.
• You share a song and a computer ups the share-count by one.
• You stream a song and a computer ups the stream-count by one.
• You comment on a song and a computer ups the comment-count by one.
• You rate a song and a computer records your rating.

Here are a few "negative" data events that are not captured by systems - but should be:

• You listen to a song, but you don't buy it.
• You skip a song repeatedly because you are tired of it.
• You repeatedly hit the next or seek button because you can't find more of what you like.
• You negatively commented on a song

A Song is a Keyhole
Think about a song as a keyhole.  If the pointy ball above (remember, everyone has one) fits into your keyhole then a data event will occur, and if it does not fit into your keyhole, a negative data event will occur.  Someone's matchkey fits when melody, harmony, tempo, pitch, octave, beat, rhythm, fullness of sound, noise, brilliance, lyrics and chord progression match your keyhole.  (Please - no keyhole jokes on the comments.)

This Is What I Told You So Far:

• Auto recyclers purchase vehicles at auction for their constituent parts.
• Every part has a data matrix that must be analyzed prior to bidding.
• The amount of data that a recycler processes and analyzes is huge.
• If a recycler's analysis is not driven by his data - he's fucked.
• In music - it's becoming impossible to put lipstick on a pig.
• Margins in the music industry are thin and getting thinner.
• Competition for the best artists/songs is going to heat up.
• Every human has a mental Matchkey.
• Using your Matchkey generates data events.
• Every song is like a keyhole.

Labels Need To Operate Like Auto Recyclers
I estimate that there are four million artists in the English-speaking world creating ten million new songs per year; which are being vetted and adopted by 500,000,000 music fans.  That's a lot of parts (songs) sitting on a lot of vehicles (artists) that need to be analyzed by numerous recyclers (labels) that have customers (fans) that are looking for those exact parts (songs).

This is what the record labels of the future will have to do to thrive:

• Obtain the bulk data that is generated by the matchkey-driven events described above.
• Use the data to generate new "master" matchkeys that represent large pools of humans.
• Insert these "master" matchkeys into as many keyholes (songs) as possible.
• Sign artists (or do song deals) with artists that have the highest frequency of matching master matchkeys to keyholes.
• Laser promote the matching keyholes to the humans from the pool that have the exact or similar matchkeys.
• Do this repeatedly, rapidly and with as little friction as possible.
• Start learning how to do it now because your competitors will.
• Get ready for scenarios where competition to sign the best (songs and/or artists) comes down to an auction.
• When this day comes - re-review the strategies auto recyclers use.

Final Note To Artists

Remember, the music industry is going to be driven by data.  Your data is not going to pop out on someone's screen unless it's exceptional.  If you take anything at all away from this post it should be this final paragraph:

If your songs do not cause data events to occur (described above) your career will die from obscurity.  You need to make sure data events are happening to your songs.  This is the primary reason I advise unsprung artists to make their MP3s available for free and paid download everywhere.  You may miss out on a few thousand dollars worth of MP3 sales, but you should consider the forgone sales as an investment in your data and your ability to:

• To be found by record labels.
• To be found by programming directors.
• To be found by fans worldwide.
• To mushroom above and out of your geographic area.

SellaBand profits from the sum of all their deals combined.  It does not matter if you loose money (and you are investing a ton of time) and it does not matter if your believers ever recover their "investment".  The only "partner" in a SellaBand deal that truly profits is SellaBand.  Proceed with caution.   

SellaBand is a new spin on an old model.  Instead of being a record label that looses money, this is a record label that has smartly learned to shift the cost of risk capital onto “believers”.  The fact is – the average dollar invested generates a substantial negative return. 

This is a follow up to my previous post on this subject.
Read this post titled "You Can't Slice The Digital Music Revenue Pie" for more related information. 

SellaBand has a great business model.  This spreadsheet (click the thumbnail below to enlarge - right click to download) is a simplified, make-believe revenue model; probably not far from what SellaBand would show to investors.

FICTIONAL REVENUE MODEL
Total Net Revenue = CD sales + digital music + advertising
The model assumes 100 artists signed.
The model assumes 18 months to achieve revenue targets.
The model assumes worst to best is incremental – except the top 1%.
The worst artist (Artist Named 1) generates $50,000 in net revenue.
The top artist (Artist Named 100) generates $1,000,000 in net revenue.
The average artist net share is $27,972.
The average believer nets (-$4.41)
SellaBand’s TOTAL COMBINED TAKE is $2,797,200 in net revenue (nice!).

SELLABAND PROPOSITION
Convince 100 artists to work to get 500,000 believers.
Convince 500,000 believers they are “going into business with the artist”.
Convince 500,000 believers (gamblers) there is potential “investor” upside.
Convince 100 artists to spend the high-energy period after their album release to work to generate another $8.4 million in revenue.
Convince artists to fork over a chunk of their publishing.
Use the money from believers to fund SellaBand overhead.

What a business (seriously)!  Click here to download the Excel spreadsheet.  You can make your own assumptions.  Nothing will change the fact that SellaBand is by FAR, the largest winner in this model.

PROMOTION
Yes, yes, the promotion is great.  That’s how we got to a GENEROUS revenue range that went from $50,000 to $1,000,000.  And, what about more promotion?  The catalog will grow and the tail will lengthen, but don’t expect a higher percentage of artists to reach $27,972 in average net return (it’s actually a $22,028 negative return if you factor in the first $50,000).  The reality is, more promotion will pull in more artists; take SellaBand’s $2,797,200 and double or triple it.  Like I said, it’s a great business; how can I invest?

SELLABAND POSITIVES
Seems like fun – picking artists and doing a bit of “gambling”.
Great music discovery tool – there are some great artists on SellaBand.
Collector edition CD – could have upside on eBay?

NEGATIVES - WHY BASH SELLABAND?
This is a new spin on an old model.  Instead of being a record label that looses money, this is a record label that has smartly learned to shift the cost of risk capital onto “believers”.  The fact is – the average dollar invested generates a substantial negative return.  

There are three illusions here:
1) The illusion that artists are benefiting.  Your songs are your body of work that represents countless hours of labor.  To invest all of this labor + the labor to find believers + the labor to record new songs + the labor to push your music after it’s created – just to generate $27,972 in average net revenue – is asking more than a lot.  

2) The illusion that “believers” are “going into a business with the artist”.  A good business or even a good gamble will enable the average investor/gambler to just about break-even.  In this model, that is never going to happen.  Yes, believers are getting a CD, but this is a contradiction to a world that is seriously trending toward digital music.  I suspect that being the “record label” and that doing a bit of “gambling” is the attraction here; unfortunately, the odds are poor and the potential for upside should be disclosed.  

3) The illusion that this is the new way…that SellaBand is game-changing.  It’s not.  The average artist will still be generating a minimum wage, the average dollar invested generates a negative return, and SellaBand will hugely profit from this model as it grows.  As someone said in an email on this subject: “meet the new boss, same as the old boss”.

WHAT ARE THE ALTERNATIVES?
Unfortunately, digital music is currently a poverty machine for artists.  There are some great music discovery tools/sites like iLike, Pandora, Last.FM, myStrands and Imeem that will help generate sales for artists, but at the end of the day, selling MP3s is not going to propel the industry forward.

FINAL NOTE
I am expecting more from digital music and music 2.0 in general.  Companies like Amazon have the brains, the customers, the complimentary product lines, and seemingly the motivation to offer digital music to customers for free, whilst still compensating artist for their art.  To pretend that cutting Apple’s already low price and then splitting the revenue four ways is helping the people that make music is bullshit.  Smarter and fairer alternatives are on the horizon; for now, just be aware of who is truly profiting from your art.