Radiohead's rainbow could signal danger for record giants

Sunday October 7, 2007

The Observer

The group's decision to use the internet to release their new album is putting pressure on big music labels to adapt or die,
writes Richard Wachman

Is the bell tolling for the recorded music industry? Some commentators are saying as much following a decision by British
band Radiohead to release their next album from their website, cutting out the record labels. Even more revolutionary, the
group is asking fans to decide how much to pay for 'In Rainbows', available for download from Wednesday. A spokesman for
Radiohead says: 'As you might imagine, offers are ranging from nothing to more than you might pay for a CD in the shops.'
In part, Radiohead are asking: how much do you value us? But implicitly, they are also questioning how much people are
prepared to pay to download music over the net. It's a question that music companies have been grappling with ever since
the file-sharing site Napster was closed in 2001.

Once again, the economics of the music industry is being turned on its head as artists take matters into their own hands.
Haven't we already seen Prince sell 3m copies of his new album via a deal with the Mail on Sunday during the summer? Lily
Allen, Arctic Monkeys and countless others have launched themselves via email or social networking sites such as MySpace.
For its part, the public has been ripping the industry's conventional business model to shreds by illegally downloading music
for years. Internet piracy and the switch to digital sales are costing the music majors millions: profits from EMI's music division
plunged by £100m in the 12 months to March 2007. IFPI, the trade body that represents the music companies, has estimated
that the global traffic of illegal CDs is worth £2.45bn. Around 20 billion songs were illegally downloaded or swapped
worldwide in 2005/6. The organisation also reckons that more than one in three CDs is pirated.

But it's one thing to conclude that the music companies are in trouble, quite another to conclude that they will shortly be
consigned to the dustbin of history. Mark Mulligan of Jupiter Research points out that Prince is using BMG/Sony to distribute
his new album in Europe, but not in Britain, where the Mail was deemed to have done the job for him. Lily Allen and the Arctic
Monkeys, after their internet launches, have signed to EMI and Domino Records respectively. Mulligan says: 'Many artists
want a record deal. What the net has done is allow new people to be recognised, but once established they don't want the
hassle of marketing and distribution, which are the core strengths of the companies. At the other end of the spectrum,
established groups such as Radiohead, which have been around for years, have a loyal fan base and can exploit the internet
for their own advantage.'

But it's not a zero sum game. Radiohead's new album will still be launched conventionally in the new year. The group are
talking to a number of labels. Chris Hufford, Radiohead's manager, says the website launch is just 'another way of doing
things'. But Chris Parry, founder of Fiction records, says that the industry is undergoing a seismic shift. 'The music companies
used to have a monopoly when it came to finding new talent and distributing songs. Now artists such as Radiohead are
beginning to challenge the status quo. New technology has subverted the way the majors used to do business. The balance
of power has shifted from the companies to the fans and artists.' Ben Cardew of Music Week says: 'It's extreme to think that
music labels won't exist in 20 years time, although some people are talking about it. On the other hand, marketing,
production, studio management and distribution are time consuming and many artists don't want the hassle.'

Not everyone is comfortable with the power of the majors. A few years ago, Mick Hucknall of Simply Red said that internet
piracy was justifiably the record companies' problem, as major labels had ripped off artists for decades. Simply Red, once
signed to Warner Music, have started their own label: simplyred.com. Hucknall complains that artists have to pay record
companies for the costs of their recordings and their marketing, but the majors end up owning the master tapes. He says:
'Major record companies must reform. They have got too big for their boots. I think artists will break away from record
companies. I don't think artists will sign to major companies unless they own their masters.' Clearly, the internet offers the
opportunity for artists to sideline the companies, but to date this hasn't happened on a large scale, although Radiohead and
Simply Red have shown what can be done.

Paul Lewis, acting editor of Music Week, says: 'It's hard to visualise where it's going to end. But the business is going through
changes other than those brought about by the internet. Music is not as mass-audience as it once was - there are lots of
other things competing for people's time: computer games, social networking, mobile phones. That is why some companies
are dropping the word music altogether and calling themselves entertainment groups.' The rights to live concerts,
merchandising and broadcasting are increasingly a part of deals between companies and artists as the majors seek
alternative revenue streams to offset a steep decline in CD sales. A different sort of contract was established in 2002 when
Robbie Williams set up a joint venture with EMI that saw the music company take a 25 per cent stake and a share of profits
from DVD sales, touring and other commercial initiatives, as well as music sales.
Analysts say that a hybrid system of music distribution is emerging, one that is becoming increasingly innovative. A fortnight
ago, a scheme began in the US which allows iPod owners to download songs they hear over the speakers at Starbucks
coffee houses directly onto their device. The price? Just 99 cents.

The music companies know they have to adapt, like other industries, if they are to survive in the digital world, where the cost
of selling online is essentially zero. But how they do it, profitably, is by no means clear.

What price musonomics

For Radiohead fans, the arrival of the 'pay what you like' download may seem like a bargain, but for economists, it will provide
an intriguing experiment in human behaviour. Consumers can put a different value on exactly the same item in different
circumstances, even if it's a commodity such as a CD or a bottle of beer. Economist Richard Thaler found that thirsty
sunbathers on a beach would be willing to pay £1.30 for their favourite brand of beer if it was delivered from a smart hotel; but
only 75p if it came from the grotty shop nearby. They seemed to have some concept of the heftier expenses the hotel owners
would incur.

Even more weirdly, when Stanford University academic Itamar Simonson asked a group of women which they would rather
have, a £40 massage voucher, or £43 in cash, as many as a third of them said they would take the voucher - because they
didn't trust themselves not to spend the cash on something more mundane. People's willingness to pay up can also be
affected by what they think they can get away with. Steven Levitt, author of the wacky economics bible Freakonomics,
describes the findings of bagel seller and amateur number-cruncher 'Paul F,' who delivered hundreds of the savoury treats to
offices every day, and left an 'honesty box' for workers to pay for them.

He kept a meticulous record of how many bagels disappeared, and how much cash was left each day; and measured how
likely people were to short-change him. Workers in smaller offices, where they were more likely to be found out, were less
likely to cheat him out of a few cents. Unfortunately for Radiohead, it's unlikely anyone will be looking over their fans'
shoulders when they type in how much they are willing to pay.

Questions

1. What are the key marketing trends that emerge from this article?
2. What are the impacts likely to be on each of the major stakeholders involved in this market sector?
3. If you were a strategic marketing consultant to one of the major record companies, what recommendations
for future action would you make?
4. If you were advising an up-and-coming band what marketing tips would you give them?