The global music industry has been experiencing a revolutionary churning in the past few years. It has been hammered by huge revenue losses from piracy and the sharing of music files on line. Despite energetic efforts at cracking down, including numerous high-profile law-suits, the losses continue to unabated. So much so that many music labels are even re-thinking their business models by focussing on alternative revenue streams like live concerts and world tours, merchandise sales etc.
The biggest source of worry has been the dramatic spread of internet technologies, which has opened up numerous avenues for music sharing and duplication, thereby causing revenue loss to music labels. The leading record labels have long been using a Digital Rights Management (DRM) software for encrypting all music sold online, and thereby preventing it from being replicated. This acts as a virtual envelope, preventing the music from being emailed or uploaded into a file-sharing network. The power of internet technologies have also opened up vistas for new and enterprising artists to bypass the major record companies and promote and sell music directly.
Iconoclastic music group Radiohead, set the cat amongst the pigeons, when on 10th October, 2007, it bypassed record labels and made their new album available online and let fans set the price for it. This "pay what you like" release of their latest album, In Rainbows, has sent shock waves across the industry. They are also simultaneously selling a premium, box-set version of the album online for 40 pounds.
Opinion is divided on whether such "pay what you like" strategies will hurt the revenue margins or not. Some fear that this could be the death knell for revenues from record/album sales. But others argue that on the contrary, it could end up as a masterstroke in radically expanding the target audience.
The potential customer base for an album or a song, can be divided into three parts - die hard fans, general music lovers, and occasional listeners. The first category would purchase the particular artists' song for any price, while the third would be put off by anything, except a very low price. The purchase decision of the second category would be influenced by both the price and the opinions of peers and others.
By selling their music on a "pay what you want" format, Radiohead will not suffer any loss in revenues from the first group and the third. In fact, by lowering the entry bar, it is inviting a much wider audience. It will be able to give listeners from the third category an opportunity to listen and hopefully get hooked into Radiohead. Any revenue loss would have to come from the second group, who may end up paying less than what they would have paid with the conventional pricing strategy. But here too, by being bale to reach out to all its potential target audience, it stands a better chance of getting more people to start liking its music. In the final analysis, a music group will make money only if its music is attractive to its listeners. Deceptively attractive packaging and high profile promotion, minus the beef, can at best get through the first round of sales and then flop.
For the major music groups and artists, there is already a well established fan following, who are eagerly looking out for the next release. Under the present sales arrangements, both online downloads and through music shops, all these fans pay the same price. In fact, both the die hard fans and the first time listener pay the same amount. This, as Eco 101 would teach us, is clearly missing an opportunity. Radiohead's music impart different utilities for different categories of fans and music buyers. The diehard and strong fans of the group would be willing to pay much more to lay their hands on the latest release, as the marginal utility gained by them is much more than the market price. The value they attach to listening to the new song, will invariably be many times more than its market price.
First releases of new artists are an unknown commodity and are invariably a case of testing the waters. In this context, it would make great sense to explore all the options of disseminating the song/album to as wide an audience as possible. This will provide the opportunity to capture all potential fans for the new artist. If the song is good and strikes a chord with the listeners, the artist can build his or her future from this base, without relying on the expensive record labels.
So here is a business model - both the big and the new artists and groups can consider downloading the music for a basic minimum price, of say 25 cents, (or even free). The buyers can be given the option of paying what they are willing to pay for the song. Simultaneously, as Radiohead are doing, a premium edition can be rolled out by bundling some other memorabilia.
"Pay what you want" sales strategy would be an excellent way of converging/reconciling the differential utility of music listeners with their respective willingness to pay. It is economically efficient in so far as it reduces the deadweight loss and increases the total surplus. By employing the principle of price discrimination, this strategy is able to capture the differential willingness to pay of the customers of such music. Further, by providing an opportunity to spread out the net as wide as possible, this strategy provides an opportunity for capturing all the potential followers of the group/artist. This is important for the success of other potential revenue streams like live programs and tours.
Therefore, the "pay what you like" strategy could be an interesting option for major groups with well established fan following, and for new artists releasing their first album. For the former, it can even be a way to increase their revenues, while for the latter it can be an excellent promtional strategy. In fact, this strategy could be adopted for the first couple of weeks of release of the new album, and then could be dispensed with for the conventional sales strategies.
As is the case with all theoretical models, its success will depend upon whether in the real world, the increased revenues from capturing the differing utilities of consumers offsets the fall in revenues due to doing away with conventional pricing.
Update:
Tim Harford describes the Radiohead model as an "electronic tip jar". He writes, "According to one internet consulting firm, almost two-thirds of those who downloaded the album paid nothing, and those who did pay didn’t pay much – less than £3 on average. "
Update 2
Freakonomics mentions about Amie's Street, an online muisc sales site, in which songs start at 0 cents and rise in price the more they are purchased, up to 98 cents. Further, if you find a music first on Amie Street, you get it free!
Update 3
Freakonomics blogs about SongSlide, a music-downloading site co-founded by Devin Brewer, a folkish singer-songwriter from Seattle, that lets musicians post their music for sale and lets buyers pay what they wish for the songs, with a $.59 minimum. The higher the amount, the larger a percentage goes to the musician.
Update 4 (21/7/2010)
Freakonomics has this list of "pay-as-you-wish" articles.
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