Study the diagram attached to this post.  This diagram is the future.  When I say that substitution is going to be a far bigger challenge for record labels and artists than replication/file sharing - this is what I am talking about.  File sharing should be a dead issue.  Use your energy to conquer the future.

Sudden Substitution Impact
Attached to every play, forward, reverse and shuffle button will be a digital aggregator, a recommendation engine and ten million songs.  Every link on this chain is or may become a commodity.  

Devices - Commodity
Apple has a device manufactured like the one shown in the diagram for less than $50 USD.  It doesn’t matter if the thing is bolted into a cell phone or implanted in your head, the hardware to play music will be a commodity business.  Any record label or group of artists will be able to buy/sell/give-away these things by the truckload.  MP3 players will multiply like the one billion used cell phones rotting in your junk drawers.

Digital Aggregators - Commodity
Paid downloads, ad-supported music, personalized streaming, etc. - any company will be able to wrap songs into a business model that uses inexpensive point-of-sale and/or ad-coupling services; supplied by the companies that will compete to supply this low-margin, high-volume service.  It won’t be much different than seeking a company to process credit cards - it’s will be an obtainable, competitively priced commodity.

Recommendation Engines - Commodity?
It’s early days for recommendation engines.  I’m still undecided if one service will outperform another service to the extent whereby they all don’t end up competing on price?  Nevertheless, any company will have the ability to plug and unplug recommendation engines into their consumer offering.

The Song Pool - Commodity
Record labels don’t like hearing this, but the combination of device + digital aggregator + recommendation engine + ANY large pool of songs makes every pool of songs a commodity.  So what if Universal is missing from the pool - take this device (Brand Z) - it’s free.  Press the play button, press the play button again, press it again, press it again, press it again… Sounds pretty good huh?  Brand Z doesn’t need 100% of consumer mindshare to make money - no, they just need an hour or two a week of their target market’s disposable time.

It’s a Great Time To Be an Artist
Artists please take note that I did not say your song will be a commodity - it’s the pool of songs that will be the commodity.  While the eventual reality of this scenario is a problem for some, for artists that make great songs - this is the future that will cause the companies with cash to bid for your songs and services.  Every company that can offer a branded music solution will seek to differentiate itself from every other company offering a competing product.  While I stressed “commodity”, it won’t be a commodity like bananas are, it will be more like cars or television channels; switching will occur within the category less frequently than it does in the produce isle.

Strategies For Artists
Stop worrying about file sharing, forget everything you know about promotion and do nothing but make great songs.  Everything else will sort itself out.   But seriously, read about P-SPINS on my previous post and think about how to improve the odds of enabling your songs to be found within a large pool of songs connected to a recommendation engine.   Translation = great songs placed everywhere and anywhere, paid and unpaid - will increase your odds for success.
 
Strategies For Labels
Stop worrying about file sharing, clone the red square, put it under the blue container and stock your pool with the best songs.  Cut overhead, hire the Google guy and prepare to bid on the best songs and artists.  Start building/looking for products that will generate higher margins and offer a deeper level of engagement for consumers.  Pray that Live Nation isn't doing all this.  
   

What would it take for an independent artist that is not on the radio to generate $100,000 a year in net income from digital music revenue?  The answer is 5,000,000 P-SPINS.  

SPINS ON THE RADIO
A spin on FM, satellite or Internet radio occurs when a radio station plays a song. Every spin generates a number of impressions.  For example, if 50,000 listeners on average are tuned in to a radio station when an artist’s song is “spun”, the artist receives 50,000 impressions from that one spin.  On that same radio station 20 spins would yield 1,000,000 overlapping and/or unique impressions.  

CONVERTING LISTENERS TO FANS
People are listeners first; they become fans through repeated exposure, filtering and imprinting.  The conversion from listener to fan is a complex process.  100% of the people that are repeatedly exposed to a song do not become fans and buyers of a particular song. 

• The number of exposures during a given time period is called Frequency.  
• The rate that listeners convert to fans is called the Conversion Rate.
• Listeners * Frequency * Conversion Rate = Fans.
• 500,000 Listeners * 10 (spins within a time period) * 2% Conversion Rate = 100,000 Fans

SPINS OFF THE RADIO ARE P-SPINS
Getting on mass-market radio isn’t easy. Most artists have to rely on Personal Play Spins or P-SPINS for exposure.  A P-SPIN can occur anywhere there’s a PLAY button tethered to one of your songs.  A P-SPIN can occur on MySpace, FaceBook, ReverbNation, Last.FM, iLike, your website, or within any widget carrying your music. The easiest place for a P-SPIN to occur FREQUENTLY is on a listener’s laptop or iPod.  

P-SPINS ARE MORE VALUABLE THAN RADIO IMPRESSIONS
Presumably, a listener is already motivated to press the PLAY button that causes a P-SPIN to occur.  The listener has found or obtained your song, and/or some level of filtering and/or imprinting has already occurred.  In addition, the effort required to purchase your song is minimal, as the ability to convert from a listener to a fan/purchaser is just a click away. 

UN-TETHERED P-SPINS DRIVE FREQUENCY
Remember this equation: Listeners * Frequency * Conversion Rate = Fans.  It’s always nice to see your P-SPIN numbers going up on a site where you don’t have to give your music away.  However, to convert many listeners to fans you need the FREQUENCY that only comes from un-tethered P-SPINS.  Un-tethered P-SPINS are the spins that occur on laptops or iPods that can be disconnected from the Internet.  When it comes to racking up P-SPINS nothing beats being in “heavy rotation” (most frequently played) on devices that can be used anytime/anyplace.

DIGITAL MUSIC CONSUMERS BUY DIGITAL MUSIC
I have not seen survey or statistical data that demonstrates what percentage of FANS actually purchase digital music instead of test-driving it.  There’s lots of information that shows that consumers have lots of stolen (for the purpose of trying) music, but what about those consumers that become fans?  At what rate do FANS convert to purchasers of music?  For the analysis I did here, I used 50% as the percentage of FANS that will eventually buy your music.  

AVERAGE FAN SPENDING PER ARTIST PER YEAR ON DIGITAL MUSIC
For this analysis I am carrying $3.00 per artist, per year.  Given that most digital music consumers are spending less than $250 per year on all artists, I believe that it’s safe to assume that $3.00 per year is an appropriate average for all artists combined.

THE MATH
Click here to download the spreadsheet.  Try your own assumptions.

THINGS YOU HAVE CONTROL OVER
Listeners * Frequency * Conversion Rate = Fans

• Listeners - one of the simplest strategies you can pursue to increase listeners is to be everywhere and anywhere on the Internet.  
• Frequency - set your songs free.  You need frequency/spins to convert listeners into fans.  The best way to increase frequency is to be in as many un-tethered devices (MP3 players for example) as possible.
• Conversion Rate - the percentage rate in which listeners convert to fans - you can improve this rate by improving your songs.  I have always maintained that a great producer is invaluable to improving the quality of your music.
• % Paid to a digital aggregator - try to push your fans to the store that charges you a flat annual fee instead of stores that extract percentages from your sales (coming soon).

THE SUBSTITUTION PROBLEM
I have been talking about how substitution is a far greater challenge to the music industry than replication.  As the use of digital music grows you will have less and less control over reaching Listeners and/or boosting Frequency (from the equation above).  The number of Listener will grow, but so will the number of songs attached to the shuffle, reverse and forward buttons.  Since we are talking about multiplication, you could argue that the equation will balance out.  However, the number of places digital music consumers hang out already challenges your ability to REACH listeners; this challenge is also part of the solution (hint).

DISCLAIMER
I am not an expert on radio promotion (not even close).  The purpose of my writing is to test my assumptions.  If you have any contradictory facts, figures or thoughts - blast away.  I intentionally left off all other revenue sources.  However, you should expect the potential for other revenue sources to be substantial when you have reached 5,000,000 P-SPINS.  Create your own projections by counting your P-SPINS to date and comparing that number to the digital music revenue you generated over the same time period.

 

 

This post is a follow up to my last post titled The Wrong Trousers where I described substitution as a far greater challenge to the music industry than sharing/replication. 

The Substitution Dilemma 
The iPod giveth, and the iPod taketh away. The digital music technology that enables your music to be effortlessly substituted for music created by someone else is the same technology that enables someone else’s music to be effortlessly substituted for yours.

Searching For Another Emotive Spike
I’ve had this quote (below) from Karla Starr’s excellent article titled 22,000 Songs And Nothing To Listen To rolling around in my head for months.

“My iPod is like a remote control or a slot machine, flicking through 500 songs, searching for another emotive spike.  I now find myself getting bored, even in the middle of songs, because I can. The paradox of spending so much time changing songs, trying to find one that you like—without giving it time, meanwhile thinking about what else you could be listening to—is that you wind up attached to none of them.”

I can’t find any hard research on behavioral patterns of digital music consumers.  However, when someone gets around to it, I bet you’ll find “emotive spike hunting” right up there with “playlisting” and “shuffling”.  

New Technology - New Behavior Patterns
Within a couple of years one billion people will have tens of thousands of songs at their fingertips; accessible through mobile phones and iPodish devices.  Think about the new behavior patterns:

• Emotive Spike Hunting - just explained.
• Playlisting - building playlists for personal consumption and sharing.
• Shuffling - random generation from an endless list(s) of songs you have control over.
• Button Pushing - Endless fast-forwarding and reversing - because you can.
• Recommending - Machine to human and human-to-human.
• Sharing - effortlessly sharing because it’s finally acceptable.

It’s all Substitution
All these new (easier to do now than ever) behavior patterns add up to what I am going to call the Substitution Challenge.  There are so many great songs in the world, and it’s going to be so easy to skim, skip and linearly or randomly churn through thousands of songs.  It makes me wonder how much of this activity, over any given interval of spare time, will displace what was once spent on passive listening?

Substitution and Economics  
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.  MP3 players (and the Internet) are the new radio (my favorite line) and every artist wants to be on the radio.  Where record labels pay to place songs on the radio today, it makes sense that artists will certainly continue to offer songs for free in exchange for placement in the new “radio” tomorrow.  Unfortunately, those that are selling songs have to compete with those that are trying so hard to get on the “radio”.  And, as the first line in this paragraph says - where products can be easily substituted (see behavior patterns above), prices get pushed down to marginal cost; thus practically eliminating the ability to generate a profit.

The Substitution Solution
If you have some time watch this video by Barry Schwartz titled The Paradox of Choice - Why More Is Less.  My solution will be forthcoming.  There are two challenges that have to be dealt with simultaneously; the first challenge is the Lack-of-Margin-Challenge (in a .99 cent sale) and the second challenge is the Substitution Challenge described here.  The solution(s) to these challenges are intertwined.

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.