Topspin™

I was fortunate to attend the Digital Music Forum West conference this week and help set the table for 2-days of discussion with Eric Garland from Big Champagne and Russ Crupnick from The NPD Group.  In only my second speaking gig with Topspin, I wasn’t sure what to expect.  Frankly, the industry has an appropriate fascination with what we are up to, but an unrealistic view on how quickly our vision will be achieved.  I have always believed the line between confidence and arrogance was a thin one easily confused.  I made a conscious decision to disclose more about our progress than ever before and send a message to this industry that we are confident of our mission and ability to succeed in it, but appropriately humble about the work and partnerships required to get there.

Russ led off with a well-researched discourse of the state of recorded music consumers.  I have chosen those words carefully.  It was about music as a product and those who do (or don’t) consume it.  Unfortunately there is less consumption according to $$ spent.  His most important point, and one I agree with completely, casual fans are being underserved.  (I will take it one step further.  Pretty much all music fans are being underserved.)  Russ is the consummate professional and his research was totally accurate.

Eric was next up and gave the industry an update on the stark reality.  U2’s latest record was ripped ~ 2 million times for free (500,000 before street).   CD unit sales at $16.99 are declining and being replaced by $.99 cent downloads.  Ouch.  Again, Eric’s data speaks volumes about the state of physical and digital music.  It’s the absolute truth – dismal as it may be.

Enter my 10-minute discussion.  So what about fans and artists?  We analyze this industry top down with the incumbent industry as audience and focal point.  I decided to speak about the relationship between artist and fan using the language of data as support.  Wherever we end up, the terms will be dictated by fans and artists.  I felt it appropriate to lend their voice to the conversation.

My main points are as follows:

Artists are brands with many products to sell, only one of which is music. We love to analyze the music industry independent of all other products (e.g. music, merch, tickets, advertising), yet the artists and fans do not relate to each other on music alone.  Fans will spend (and spend a lot) for a combination of both physical and digital goods that span the artist’s “product line”.  The data support:

1. 70% of all transactions include a physical good leaving only 30% as digital.  Note this does not include tickets or sponsorship dollars.
2. The resulting revenue per transaction is over $18 vs. $3 in digital channels.

The implication is obvious.  360° deals make sense for the artist and the fan.  The industry needs to stop trying to save the topline of the music product specifically and start treating the artist as a brand with many products.

Music is the greatest promotional asset ever. Fans in today’s digital world understand that paying $16 for a record they have never heard is just plain stupid.  The solution is a simple concept borrowed from other industries – trial.  Give away some of your music in exchange for a permissioned relationship to gather a fanbase.  The alternative is to keep trying to sell a $16 piece of plastic.  Personally, I think it makes more sense to promote trial in exchange for a relationship with the fan.   Professionally, I will defer to the data.  Specifically, the conversion rate* of artists who give away some music is about 4x that of artists who only stream.

*  Conversion is defined as purchasers over web site visitors.

We need more focus on cost reduction.  Both Eric and Russ had reams of data showing the decline in topline revenue for music.  This is fact.  That being the case, we should take a look at the underlying cost structure.  Two major cost centers include marketing and the A&R function.  The data between artist and fan offer some important insights.

1. Not one paid marketing test conducted in 2009 yielded positive ROI.
2. Other the search, there is no digital channel contributing more than 10% of sales volume for the artist directly.  Further, there are hundreds of channels contributing less than 1%.
3. On average, Topspin widgets dispersed to 90 locations at virtually no cost.

The data suggest we need to focus on methods to efficiently harness the value of viral marketing and the direct marketing that results from ownership of the fan relationship.  These tools can drastically reduce the cost of marketing and eliminate entirely the need for remarketing every album cycle.  To paraphrase Ian Rogers, people buy music from trusted sources.  Period.  These sources are less and less likely to include bus stops, magazines, and TV ads and more and more likely to come from the rich social fabric of the Internet that allows fans all over the globe to recommend music to each to other.  Let’s make it personal.  Who are you more likely to believe?  Wal-mart or your high school music geek buddy who still loves music and lives 3,000 miles away?

We can scale the A&R function with help from data.  This point was hotly debated at the conference.  Either folks disagreed, or they didn’t full understand the point during my :30 seconds on the topic.  Allow me to clarify.  If you want to be a multi-million dollar music company, you will need to find a way to profitably manage hundreds if not thousands of artists.  According to the data we are seeing, there is a way to accomplish just that.  He is the formula:

1. Read the social media footprint of artists and look for unsigned artists who are spiking.  (Next Big Sound is a great 3^rd party source FYI).
2. Train them to run their business in a sound manner and give them basic technology tools to do so.
3. Measure their performance based on artist-to-fan engagement metrics and a general observation of their work ethic via said tools.
4. Take the top performers and invest time, money, and expertise in their careers.
5. This along with a healthy dose of gold old human A&R is a highly efficient and scalable way to find financially viable artists.

I will debate this method of A&R will yield a far higher ROI on a per artist basis than current methods with anybody in the industry anytime.  It’s simple math that has been used in other industries for 60 years.  The banking and marketing companies that perform this function most efficiently and quickly will have a seat at the table in 5 to 10 years.  The rest of them will simply cease to exist.

The direct-to-fan artist as retailer model is not the savior of this industry, you are. This is one of the most important points made in my :10 minutes in Hollywood.  Putting up a website with some buy buttons will do little to further your cause.  We are still in the learning and investment stage with evidence of great promise, but execution and hard work are requisite elements.

1. Currently the direct-to-fan channel is about 2% to 3% of topline revenue and 5% of margin for artists that execute well.  Have realistic expectations about where this all begins.
2. The right measure of success today is fan acquisitions.  For example, we have seen several artists ramp from a few thousand fans early in year to 20x that number today. These fans offer a direct channel with no cost of remarketing per my earlier points.

The difference between artists who execute in the channel with core business principles in mind vs. the artist who does not is radical.  If artists or their agents want to keep more $$ in their pocket, they will need to do more work in the process.  Some folks will simply never make that adjustment and they will not be here for much longer.

You can find the full presentation here at http://www.flickr.com/photos/36166805@N06/sets/72157622423041571/show/.  I look forward to the continued debate and thank you for your time.  Now go listen to some great music!

Peace,

James Lamberti