Release day economics

the same way most founders of new companies get paid. Dayjobs.

So having access to 5 billion web pages for a few dollars a month makes them seem equally worthless?

Not sure this is any different to being able to listen to any radio station in the country for free. I don't think that devalues music.

I am not sure how I feel about the first. On the second, it's very different. You don't get to pick what you want to hear, when you want to hear it. So, you discover something new on the radio, if you want it, you go buy it. You don't just sit and wait for it to come on again. With Spotify, you hear something you like, you have no reason at all to support the artist with a purchase, and you'd have to listen a ton of times for them to make any money.

I like these posts as well, as its a window on the economics of their information content (in this case music).

They didn't mention how long it took them to come with this album, but since the web site says they added a drummer at the end of 2010 and this album was done in April of '11 we will call it 4 months work of three gentlemen best case, and if they really only finished it here at the end of August it would be 9 months. If we use the outside estimate of 9 months, and these guys had 'regular' jobs, lets say they would have earned $60K/year each with benefits, so call it $67.5K/year each for 9 months at an annualized pay of $90K. Note the numbers here are just guesses, I know they are in Europe and may have access to other healthcare options.

So had they worked at this mythical job they would have earned $67.5K * 3 or $203K. They opted instead to spend that time making an album so now, 9 months later instead of $203K in value they have this album with 9 songs on which they own the copyright for the next 75 years. Its an interesting exercise to compare that 'foregone' revenue for the possible future value of the album.

They can make as many copies of this album as they want and sell it for what ever they can get. Now they state that Spotify pays them .003 euros/play, Deezer .006 euros/play. Lets say it averages out to .0045 e/play. To keep everything in dollars, 1 euro => 1.43$ according to google, so .0045 E => 6.4 cents.

The question one can ask is this "Would they have been better off working for 9 months? Or making this album?" We can assume that as soon as they release the album they gave up music forever and went back to a 9-5 job at $60K/yr. (or not but that would be one way to look at it). In financial terms, when does this album they created give them 203K $ of value back?

A 6.4 cents/play That is 3.2M plays. Over the life of the Copyright of 75 years, that is 42K plays per year on average or 115 plays per day. So if they had 115 Spotify/Deezer fans who played one of those nine songs every day, they would earn back exactly as much money as they had 'not made' by not working 9-5. Conversely they would have to sell 29,000 albums on Amazon or 22,500 albums on iTunes to earn back the same amount of money they would have made.

So a couple of things that are also important. First, they don't have to do anything to manufacture copies of the album. And secondly, their time is available to add another album to this 'stream'. (if the financial analysis of making the this one pans out).

What this illustrates is that music is about the long tail, not the up front. If you make back all your investment in making an album in the first year, then your 10 year rate of return will be better than any other investment you could possibly make. What is more you can keep feeding albums into the system at what is your marginal cost of living (eating, thinking, composing, recording). This multiplies your revenue stream going forward.

The record companies used to play an interesting game with musicians, it worked like this:

Give us the 75 year rights to this music and we'll pay you a big chunk of change right now.

Now the criminality was that the record companies created accounting systems which obfuscated additional revenue to the point of not paying the artist anything. However in this world its quite different. If these guys turn into a 'huge success' and sell a million copies of their album on Amazon their are going to make nearly $5M on a $270K investment. In the past they might get $50K in 'upfront royalties' and then never see any of that $5M.

One thing they might do is sell the 'rights' to this album for $203,000. They are revenue neutral at that point and if the album does poorly they are protected from 'losing' money but if it does well they don't stand to gain from that. Risk arbitrage, its what VCs do, it is what music companies do, its what you and I do when we fill up our gas tank at half full rather than wait until the car is empty.

Being a musician is hard work. And early on when you are finding your voice and your fans, its not very profitable (in fact if you don't love doing it you shouldn't because if you die early all you will have to show for it will be memories of creating that music.) However on the flip side, down the road, it can be hugely profitable with little if any additional investment. You develop a following and your numbers get better, no need to go out can cut down additional vinyl trees :-) or schedule another "pressing" of your album.

It is this sea change that musicians need to understand, if you don't 'sign' with a label you are keeping control of your profits and managing the risk yourself. If you do sign with a label you can probably get more money up front but you don't benefit from the upside. Distributors make money on leveraging things like PR where it costs the same to promote 5 different albums at radio stations as it does to promote one. They work to amp the distribution so that they make more money. As a musician/owner you can do that but its not as efficient. The better news for musician is that the long tail money ends up in their pockets if they keep the rights, people underestimate that but it can get to be serious cash.

It will be interesting to follow these guys as they develop to see how it works out.

I don't have any numbers, but I strongly suspect music sales tend to drop off pretty quickly: a big splash (if you're lucky) that will quickly slow down to a trickle. So IF you make back all your investment in the first year (obviously not guaranteed), the rest may still be fairly small. If you don't make it back in the first year, you might never make it back.