Although Wired magazine editor Chris Anderson was the Tuesday keynote speaker for the Interactive portion of South by Southwest, his concepts of the Long Tail and the freeconomics of his upcoming book, Free, have had perhaps more theoretical impact on the emerging digital music economy than any other writer today. His conversation with doubtful venture capitalist Guy Kawasaki was spirited, but left the question open of whether the model of Free, proven to have worked in a limited capacity already, will be able to generate money for the more general economy. Music, of course, is ground zero for many of these ideas.
Anderson’s declaration that “Free is the best way to maximize your reach” may be true, but the important aspect of that equation for artists and their business partners (be they labels, managers, or agents), is converting that attention and reputation to money.
“There is no one way,” he acknowledged, but in turning to the music industry specifically, exclaimed: “Everyone says the music industry is in collapse. It’s not. It’s fine except for one small portion of it.”
It’s true that labels are making the most noise about losing their egregious profit margins with the decline of CD sales, and Anderson suggests the problem with the music industry is a misalignment of interests – the labels on selling the product, and the rest of the industry concentrating on connecting with fans. The revenue of most artists has always largely relied on making those connections, encouraging fans to support them through their live shows or purchasing merchandise. Anderson noted that with the CD no longer a viable revenue stream, labels are “beginning to realign themselves with those ideals through 360 deals.” Yet he also asserted labels aren’t good managers, and that there is a large opening for a new kind of company to emerge in the vacuum.
Anderson’s conception of the freeconomy is based on the recognition that production costs in the digital environment drop to a mere shadow of their real world counterpart (though he contends Free is an equally viable model for brick and mortar establishments as well). Free in the 20th century economy was based on giving away a sample that required returns to cover production costs. As those production costs drop in the 21st century digital economy, the returns can also drop considerably and still make a profit.
The idea of Freemium models was the concept most promoted in the conversation, the idea of giving away 90 to 95 percent of the product to make a return on only the other five or 10 percent. That minimal return, Anderson contends, is enough to cover costs in the digital environment, and anything above is profit. So a company can give away a free version of their product with a premium upgrade, and even if only a small portion of their costumers pay for the upgrade, they can still make a decent profit.
This model has worked in the case of bands like Radiohead and Nine Inch Nails, but as many industry critics have noted, those bands are much more the exception than the rule. Whether the Free model will work for the music industry or not is largely a moot point for Anderson, because the industry has no choice and will have to adapt to some variation of it.
“If you don’t make your product free, piracy will do it for you,” Anderson asserted. So rather than be the victim of market Freeconomics, bands should get in front of piracy and take control to use Free as a marketing tool to create their celebrity, and subsequently turn celebrity into cash. It’s the last part of the equation that leaves many skeptical, however, and only forays into the idea over the next few years will show whether or not the Freeconomy can become a viable economy to support artists and the industry.
This article appears in March 13 • 2009.
