People have been talking about the demise of the traditional music
industry business model since the arrival of the Internet's first music
sharing sites 20 years ago. But the fact is what we are seeing today is
not the slow, creeping death of the music industry – it's simply a
reversion of it, one that is perhaps long overdue.
Nearly 100 years ago when music started to be sold as a product, the
biggest problem record player manufacturers faced was that their product
lacked a true complementary good. In other words, not enough records
existed to create demand for record players. They responded by creating
their own demand, making records out of whatever music they could get
their hands on – often without regard to quality – all the while paying
the artists who actually created the content next to nothing. With
records in hand, people bought record players. That's where the money
It was as if the music was secondary to the device on which it was
played. Sound familiar? It should, because we've basically come full
circle. While Apple undoubtedly would be profitable today and sell
millions of phones without complementary download and streaming services
– including the ones it owns – there's very little question the company
benefits enormously from cheap and widely available music.
As perverse as it sounds, given Apple's reach and the fact that artists
will continue to receive pennies on the dollar for content, even as
streaming services are fast moving toward a subscriber-only model, it
will become virtually impossible for the vast majority of artists to
make money from selling music.
Artists will to need generate revenue in other areas, including
concerts, merchandise, television show appearances, endorsements or even
product placements. This means building a unique and recognizable brand
is more important than ever before. The best way to do this is to give
away the music for free.
While it sounds counterintuitive, this approach has worked in the past
with startling results. The Grateful Dead, one of the most commercially
successful acts of all time, permitted concert goers to audio record its
shows free of charge. Actually, the band not only tolerated the
practice, it enabled it, setting up a 'tapers section' next to the sound
board at nearly every live performance.
This allowed the band's music to proliferate organically, and what was
once a niche following began to sprout and grow. And since nearly every
Grateful Dead concert was different (they rarely had set lists) each
piece of recorded content was unique and the band's community of
'tapers' expanded into a cottage industry, one in which thousands of
fans would trade and barter copies of various live performances as if
they were baseball cards.
No musical act before or since has built and nurtured an audience quite
like this, and because of it Grateful Dead shows eventually became
large, festival-like events, where the concert was almost incidental to
the overall experience. Summer after summer during the 1970's, 80's and
90's the band played to sold-out football stadiums and made multi-date
appearances at packed arenas across the country.
It should come as no surprise that its farewell shows slated for later
this summer in Chicago sold out in a matter of minutes, as did the two
Santa Clara, CA, performances that were later added due to the initial
high demand for tickets. This hysteria, of course, comes nearly 20 years
after the death of Jerry Garcia and 25 years since the release of its
last studio album.
In part, the success of the Grateful Dead, even today, puts the recently
concluded Coachella Valley Music and Arts Festival into proper
perspective. While attendance figures for this year have not been
released, in 2014 approximately 579,000 people attended, according to
event organizers. That sounds like a lot but nearly as many people will
see the Grateful Dead this summer over the course of five days. That's
one band. Coachella last year featured 182 bands, most of which played
for next to nothing because in today's environment it is perceived as
one of the best ways for small and mid-sized acts to gain exposure.
There's a better way to attract a following. Indeed, the future of the
music industry lies in what the Grateful Dead pioneered more than 40
years ago: Give the content away for free and as long as it's good, fans
and money will follow.
Today's artists have advantages the Grateful Dead could only dream
about. With social media platforms like Facebook, Twitter and Instagram,
along with other channels such as YouTube and SoundCloud, it's much
easier to gain exposure and attract a loyal following. In effect, these
companies are the contemporary 'tapers section,' and they benefit from
this shift in the music industry.
While the Grateful Dead would never promote outside consumer products or
accept payment for television appearances, most bands today do not have
similar principles, or should they. If it was considered 'selling out'
back then, it's merely part of the business model now.
Adam Levine and Pharrell might be passionate about mentoring young,
unproven performers, but that's hardly the reason they have become
fixtures on NBC's The Voice. Bands have few other avenues to make money
if they ignore such revenue generative activities. So they sold out for
some very large paychecks and exposure.
Companies that could be in trouble if this shift materializes include
Pandora, which continues to lose listeners, mostly because it takes a
radio approach to advertising and doesn't provide the same level of
freedom offered by other streaming services. When the subscription-only
model takes root – and it's only a matter of time until it does – Apple,
which sold nearly 75 million iPhones in the fourth quarter last year,
will be able leverage Beats Music and iTunes Radio to drive down
Pandora's market share even further. Not to mention the already troubled
Tidal music service launched by Jay-Z.
Content wise, the music industry is alive and thriving, with more
talented artists and innovative sounds now than perhaps ever before, but
most artists will struggle to make money because the model is stacked
against them. The name of the game is content, but free content. It's
about building an audience. No one knew that better than the Grateful
Dead and though their 'long, strange trip' is coming to end this summer,
bands and brands still have much to learn from them.
By Ross Gerber
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber
Kawasaki, an independent investment advisory and wealth management firm. Gerber
Kawasaki clients and employees may own positions in various companies
mentioned in the article.
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