The 'Free' Debate
April 06, 2009 - Digital and Mobile
By Glenn Peoples, Nashville
Ad-supported music sites, file-sharing services and a wealth of music posted online are adding to the topic of "free" become a more common talking point. As companies search for new ways to monetize recorded music, expect free music to be a common theme.
Chris Anderson, author of "The Long Tail," has a book on the topic coming out in July and frequently posts about the concept of free at his blog. "Free: The Future of a Radical Price"may ignite interest - like Anderson's "The Long Tail" - as well as fear in the music industry as people ponder how to earn money if music is supposed to be free.
Last February, Anderson's article on free for Wired, "Free! Why $0.00 Is The Future Of Business," set the stage for much of today’s discourse. "Once a marketing gimmick, free has emerged as a full-fledged economy," he wrote. "Offering free music proved successful for Radiohead, Trent Reznor of Nine Inch Nails, and a swarm of other bands on MySpace that grasped the audience-building merits of zero."
But just as he did in "The Long Tail," Anderson did not draw enough distinction between marginal cost – which in the case of digital distribution is zero – and average cost. When Anderson writes that "the marginal cost of digital information comes closer to nothing," what he means is the marginal cost of distributing that digital information. There are significant costs in recording music. The cost of creating a brand and inducing awareness, other considerations Anderson understates, are both unavoidable and considerable. An insignificant cost of creating and distributing one more digital file does not reflect the amount of investment to be recouped.
In theory, a company should set price equal to marginal cost. Digital goods on the Internet, though, are not akin to razorblades. In reality, not all digital music can be priced at zero. The information comes with real costs. Even if it feels free (Nokia’s Comes With Music) it’s not free.
But some digital music can be priced at zero. Streams at MySpace are free to consumers. Their value is promotional, not whatever scant revenue share makes its way to the owner. Widgets that stream an album can generate awareness and, more importantly, harvest listeners' email addresses.
Even some downloads can be free. Artists may give away some downloads to raise awareness and generate sales of the full release. Radiohead's "In Rainbows" was given away for tips, but its true value was the awareness it raised; the album got an official digital and CD release just a few months later. iTunes and Amazon.com regularly give away free tracks and entire label samplers.
Music industry blog Hypebot recently ran a number of posts about how to use free music to induce sales and build an artist. One post on the subject was by Jim Mahoney of the American Association of Independent Music. Mahoney acknowledged the history of using free music for promotional purposes, and he encouraged artists and labels to use the strategy wisely.
"Know why you’re offering your music for free, get something tangible in return in terms of special, unique, and focused attention (from a select and limited group of partners who reach your fans), and know your exit strategy (i.e. how giving away your music is going to turn into real profits) because the old model that says 'promotion will result in sales' is now a fairy tale."
A post by The Orchard CEO Greg Scholl touched upon the shortcomings of some free models.
"The goal of the ad-supported services, which make up the preponderance of new entrants getting a lot of press lately, is to fill a demonstrated market demand by giving consumers a flexible, easy to use product that offers good value. But, these services will only survive if they find a way to do this while creating new revenue streams that are accretive for rights holders – just being something consumers love is important, but not enough."
David Zaslav, CEO of Discovery Communications, understands consumers want free content but is trying to figure out if his company will distribute either short-form or long-form programming online. Suffice to say, Zaslav is not just going to give it away. Quoted from a post at paidContent:
"We don’t want to lose marketshare, but at the same time, we don’t want to encourage free content. Free didn’t work for newspapers. Free didn’t work for the magazines. And it doesn’t work for the broadcast companies. We have to see how it develops. But ultimately, we all have to follow the behavior of the consumer."
Before Anderson's "Free!" book comes out in July, there is a conference in May called "The Free! Summit." Anderson and TechDirt's Mike Masnick are scheduled to speak.