How to Hack the Music Industry: Genesis

Lessons for creatives from the world’s fastest growing companies

When the winds of change are blowing, some people are building shelters and some are building windmills” ~Chinese Proverb

Our concepts of ownership are rapidly changing. The quiet revolution that’s now getting noisy is the sharing economy. We’ve gotten a taste with Airbnb and Uber, but it’s just getting started.

This new mentality already affects the way we consume music. We’re entering a world where “access trumps ownership.” What’s the value in owning a single album when you can have access to an unlimited library? So as iTunes sales decrease, streaming services take the reigns.

Most artists see this is a problem, and they’re right. But almost all of them miss the bigger picture. Government regulations, shady deals, and other factors create a system where artists aren’t fairly compensated from streaming plays. No doubt, this needs to be fixed.

But the reality is, the days of making a living from selling music are deteriorating. Higher compensation for streaming music is only a temporary solution to a much bigger paradigm shift. The economics of all industries are being fundamentally disrupted thanks to the “copy machine” we call the internet.

“When copies are super abundant, they become worthless. When copies are super abundant, stuff which can’t be copied becomes scarce and valuable. When copies are free, you need to sell things which can not be copied.” ~Kevin Kelly

There is nothing more abundant online than music (except cat videos). Artists need to reevaluate the value they create and how to best monetize it. In a world where music becomes commoditized (and free), what do they sell?

The disruptive technologies and innovations that devalued music in the first place are the same ones laying the blueprint for the new music industry. In short, artists have a lot to learn from startups. The parallels run deep.

Both create value in the world and attempt to monetize a portion of that value. Both look to build a critical mass of users (fans), moving from early adopters to the mainstream. Eventually they aim to monetize in some liquidity event (album release, tour, etc). Both operate on love and sweat equity.

Let’s dive into some specific lessons artists can takeaway from disruptive startups.

Lesson 1: Innovate The Business Model

“Once scarce things become abundant, markets treat them differently—exploiting the cheap commodity to create something of more value” ~Chris Anderson

Instead of trying to copy and paste what used to work into the online world, it’s time to generate new business models that reflect current realities. We need to embrace the internet as the native platform it is, with the unique advantages and disadvantages it offers to creatives. Let’s enter the world of “freemium.” A short list of billion dollar companies currently thriving under this model include Dropbox, Evernote, and Spotify (touchy subject).

If you’re not familiar, freemium means that 90–95 % of people will consume your content for free, and the other 5–10 % will support everyone elses consumption by paying for premium access. This is already happening, but most seem to be fighting it rather than leveraging it.

The parallels between successful SaaS companies using freemium and artists are multi-faceted. Haroon Mokhtarzada, CEO of Webs, Inc. explains the pillars of a good freemium business:

1) “The time it takes for the customer to experience a lot of value in the product is fast.”

Make your music as easy as possible to find, stream, download, and enjoy. Reduce friction as much as possible. Instead of asking people to make five clicks to get to your music, how can you get it to one click.

2) “The premium component of the offering gets more and more compelling as time goes on… The more you use the product, the more you need to upgrade.”

The more you listen to the music, the deeper the connection you feel with the artist. The deeper the connection, the more likely you will be to attend shows, buy merchandise and spend money on experiences.

3 & 4) “Freemium models work well when you can accumulate a LOT of subscribers over time… Entry level price points are relatively LOW. Think of the freemium component as a replacement for typical marketing expenses.

Giving away your music for free is a marketing strategy that a ton of artists are using successfully. You make music for the love, but times have changed. From a business perspective, think of your music as an arrow pointing fans upstream to monetize premium experiences. Your music is now the top of the sales funnel.

This is how you build a critical mass and leverage free. Google Executive Chairman Eric Schmidt uses a “max strategy,” that he thinks will come to define content markets.

“Take whatever you are doing and do it to the max in terms of distribution. The other way of saying this is that since the marginal costs of distribution is free, you might as well put things everywhere.”

In the entertainment industry, we’re going to see some interesting businesses models built on Freemium principles in the coming years. I plan on executing a couple myself. But that’s just one piece of the puzzle.

Lesson 2: Respect the Data

“Value comes from scarcity, and memorable experiences are the ultimate scarcity.” ~Chris Anderson

Knowledge is power, and data is knowledge. So by extension, power is data, if you know how to use it. Access to user data is the reason Facebook is valued at 2.2 Billion. Tumblr was acquired by Yahoo for $990 million with no revenue, because of its access to user data.

But of course, artists don’t have users, they have fans. Fan data can exist on a number of levels, from a simple email address, a purchase history, or a phone number. At the very least, it is a way to reach a fan directly and build a lasting relationship with them.

The current record conglomerates don’t have any data. Artists don’t know who bought their music on iTunes or their tickets from ticketmaster. Social media is deeply flawed as well. An artist is only able to see a small percentage of people who liked their Facebook page. Facebook owns that data, not the artist. This leads to wasted marketing dollars, something an artist or startup doesn’t have.

It was out of necessity that startups have adopted lean growth principles to acquire users in the millions with no traditional marketing spends. It’s cliche, but constraints drive innovation. How can artists adopt this mentality and leverage their fan data. They find their “whales.”

“It is better to have a handful of enthusiastic advocates than hordes of people who appreciate your work—better to be loved by a dozen than liked by the hundreds.” ~Nassim Taleb

The Freemium business model works on a power law, similar to Pareto’s 80/20 principle. This “Law of the Vital Few” states, simply, that about 20% of the inputs will produce about 80% of the outputs. In English, a small amount of fans will provide a disproportionate amount of your revenue.

We find the same thing already happening in successful crowdfunding campaigns. Crowdfunding expert Bryan Kim points out that successful campaigns follow the “backer power law” in which, “around 10 to 20% of your most generous backers account for 40 to 70% of your total revenues.”

The imperative is then clear. Focus intensely on that small percentage of people who care the most and are willing to support your art.

But the key to finding and building relationships with your “whales” all boils down to data. With no data, there is no knowledge. And with no knowledge, there is no power. Respect the data.

Lesson 3: Scale Personal Relationships

“New media rest on one thing: Personal Relationships.
The world now rests on these relationships.” ~Ryan Holiday

The days of mass marketing are disappearing in front of our eyes. By trying to reach everyone, you reach no one. By definition, if something is for everybody, it’s average. And in an attention economy, the surest path to irrelevance is being average.

This is the reason that most successful startups begin by dominating a small and often overlooked niche. Paypal got their break by targeting only eBay power-sellers. Today, they’re worth $40 billion. It’s repetitive, but there’s a reason Facebook started with only Harvard students.

When Paul Graham says, startups should “do things that don’t scale” he means they need to lay the foundation of their businesses by any means necessary. For artists and many startups, that means building a community of passionate supporters.

The first hire at Instagram wasn’t a developer, it was a community manager to provide support to users. Instagram’s community is their most valuable asset. Anybody can build filter apps, but not everybody can build a passionate community.

The days are rapidly approaching when artist will be hiring community managers instead of managers. A small team will be needed to help scale personal fan interaction from answering questions and providing access.

One of Airbnb’s core values is, “Creating real connections/friendships between like minded people.” Doesn’t this sound like something artists, whose work emotionally connects with people on a deep level, should be doing as well.

It’s a choice to ignore the mass market (at first) to focus intensely on your core fans. The “aficionado” market in music is estimated around seven billion dollars and there is a growing recognition of a huge latent demand in this category. This type of artist/fan interaction is not for everybody. It’s mostly for artists who want to thrive in the new world and retain creative control.

Finding and building relationships with your patrons. Embracing direct artist to fan interaction. New Media relies on these personal interactions, and now your career does to.

The Way Through

“People may one day regard ownership of stuff as a hack that was forced upon us because of limitations that no longer exist” ~Paul Graham

It’s time to get a little less sentimental about what the industry was and start looking at things clearly. This means not overlooking the fact that it’s the market, not the artist or the industry that decides what has value.

There isn’t a direct economic relationship between time spent in the studio and what an album is worth. There’s a reason NBA players have guaranteed contracts in the millions and still-life painters don’t. The market wants to watch basketball, not look at still-lifes.

Put a coat on, because the winds of change are blowing. The only question left is, “what are you building?”

If you enjoyed reading this, please click “Recommend” below. // // @DQuick215

Follow Danny Quick on Twitter @DQuick215
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