In Chapter 2: Here In The Real World we begin laying the groundwork for the meat and potatoes of a plan that will take shape in a few more chapters. Chapter 2 highlights a few well known business models including the idea of public goods which we normally associate with governments. Ultimately, it asks, “Which one is best for the music industry?” Does the model which worked perfectly during the analog world of physical product still work perfectly in the digital age? My guess is you can guess my answer is???? Well, actually you might be surprised, but read for yourself and leave your comments below—now or at anytime as during the ongoing chapters…
Sometimes the toughest part of explaining a big idea is picking the perfect place to begin. In this case however, the choice is easy, we will start with the powerful concept, Pay On The Way Into The Store.
Walmart, Target and your favorite upscale department store have many things in common. They set up cash registers near the exits, put electronic tags on the merchandise and charge people for purchases as they leave the store. At night, the owners can lock the doors and be reasonably assured that the store and its merchandise will remain safe and untouched until the next morning when they will again open for business. This classic scenario describes the typical bricks & mortar store. Digital strategists sometimes nickname physical vendors “analog,” thereby separating the world of objects we can touch from the virtual online world which is created from 1s and 0s.
But what about going to a movie or football game? Paying as you leave the theater or stadium would be clumsy at best and perhaps almost impossible as throngs of people crowd out the doors. And would you charge everyone the same? How would you know where they sat? Should they pay more if their team won? Less if they lost? If they really enjoyed the experience should they pay more, or pay nothing if they found it dull?
Smart business people quickly realized that paying on the way out was not a smart way to run certain businesses. In fact, it makes so much sense to charge people on the way into a football game, for example, that we don’t even think about it. It allows us to reserve the seat we want at a cost we are willing to pay and completely eliminates collection problems for the business owner. Even a young child understands it—you don’t get in without a ticket and you don’t get a ticket without paying.
An entrepreneur simply has to decide upon the best way to operate his or her particular enterprise. In the above examples the answer was obvious. But as we’ve seen in the music industry—picking the wrong method can be disastrous.
Once you accept that both business models—pay on the way in or the way out—make perfect sense (when properly employed) you can then bend the ideas to fit specific situations. Have you ever been to an All You Can Eat buffet restaurant? One flat price is charged, sometimes on the way in and sometimes on the way out, depending upon the price and ambience of the venue. Want two desserts, fine. Seconds on roast beef? No problem.
How do they make money when extra large appetite customers get into line? It’s a numbers game based upon averages. They figure out the average cost per person and then price everyone accordingly. What makes the business work is customer volume. The owners expect to lose money on some customers and make more on others. They accept a strategy based upon averages because customers would be insulted if they were priced according to how fat or skinny they look. So as long as the entrepreneur properly adjusts the average price to include a sustainable profit margin the business can operate successfully.
And finally, governments and insurance companies illustrate a third model by pooling payments and spreading risk across large groups of people. To support public goods, like roads and schools, governments require all citizens to pay a small fee. With lots of people each paying a little, the end result is a large fund. Today’s streaming distributors like Spotify, Beats or Pandora unfortunately face a different reality—they have a relative few people paying subscription fees. For example, after several years Spotify has attracted only 3 million paid subscribers in the U.S. (May 2014) which has a population of 320 million. In an effort to boost numbers Spotify and other companies are lowering prices for college students and offering bundled deals for families.
We just explored a few basic ways to charge for goods and services—pay on the way in or on the way out; pay for exactly what you purchase; or pay for an average consumption with “all-you-can-eat” privileges and finally pay to support a public good usually defined as roads, a bridge, or supporting the military. Could music also be a public good in the digital era where distribution is virtually impossible to control? (More about that later.)
How do these basic economic models relate to the tragic entertainment industry disaster we are witnessing? Why are publishers, songwriters, artists, labels and many others suffering the effects of downsizing and losing jobs? Could the problem be because music industry leaders simply haven’t found the best way to charge for their product?
As this book heads to press there is a great deal of activity among legislators regarding Consent Decrees and the Songwriter Equity Act (SEA), but it is unclear exactly how the Justice Department and Congress will resolve these issues. Looked at simply the struggle is about allowing songwriters and publishers to negotiate using free marketplace rates and not the pricing set by laws, almost a century old, that do not allow fair compensation in the digital era. If publishers are allowed to negotiate based upon free marketplace rates it will result in more money being paid to creators. But the bigger question is, will those adjustments be enough to support an industry currently shrinking faster than a cheap shirt in a hot dryer? Spotify is hundreds of millions of dollars in debt and desperately cutting rates to attract subscribers. Pandora’s latest reports say they lost over $11 million in just the last quarter (Q2 2014). The music industry is also under duress. Will negotiating better fees based upon this small group of subscribers solve the problem, or merely be a temporary band-aid? Are leaders mistakenly just rearranging chairs on the deck of the Titanic? Is there a realistic and attainable break even point for the streaming services, especially if they have to increase royalty payments?
To continue developing The Digital Solution let’s briefly return to the time when Napster exploded and review what happened vs. what might have happened.
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