[photo by Sara in Montreal, from Flickr]
Before reading this, please read this blog post from David Pakman which succinctly describes “unbundling” in the music business and what that means for media generally. From David’s post:
As digital emerged, the labels were faced with a harsh reality: over the decades, consumers began to prefer singles. There was no economical way to get them, so we bought full albums to get the 1-2 songs we really wanted. We wanted the album unbundled, but we had no choice. With the emergence of alternative distribution (like Napster and then iTunes many years later), the latent demand for singles was unearthed and havoc ensued.
It was havoc because the labels had not prepared a business model or cost-structure for the unbundling of the record. They had grown accustomed to higher-margin and higher unit-priced albums. We started to witness the unbundling of media. And it took the record industry more than 5 years to offer digital singles for sale legally. Now, music industry total revenues are down more than 50% since their peak in 1999, and continue to fall every year. The biggest culprit is not piracy, it is the fact that consumers, when they buy music, are buying 10% of what they used to, because they only need to buy the single, not the album.
The notion of “unbundling” was first introduced to me in these terms a few years back by Topspin’s co-Founder and Chairman, Peter Gotcher (our company pitch deck contained a slide entitled “The Great Unbundling”), and later reinforced by this interesting study from Laura Martin at Needham on the loss of value in the music industry (Laura presented this at an event hosted by Ken Hertz, Jeff Pollack, and Eric Garland just over a year ago). The Needham report asserts more value has been lost by “unbundling” via iTunes than by piracy. From the report:
What Is the Problem?
If there’s not a consumer demand problem, then what is the source of the economic problem? We believe that unbundling in the digital age is the primary source of value destruction. In the physical world, consumers were forced to pay about $15 for an album that packaged the A-title songs they wanted with many B and C titles that they didn’t want. The pricing of $7-8 for each song the customer actually wanted (assuming 2 songs on an album of 10) was too high a price umbrella when iTunes began offering individual songs at $0.99. The music industry had to accept the iTunes version of unbundling because between 2000 and 2003, the audience unbundled music by stealing the songs they wanted to hear. In the end, $0.69, $0.99 and $1.29 per song (x 70% to the music labels) from iTunes were better than nothing. We are a little more skeptical than consensus about the notion that 4 Needham Insights digital piracy is responsible for the destruction of the music business. Before people stole songs one at a time over the internet, they bought entire albums via CDs made offshore illegally. That value chain has been decimated by digital. Why pay $1 for an illegal CD if you can legally pay $1.29 for the only song you wanted on the CD anyway?
This is still top of mind for me, as evidenced by my lecture this past Wednesday in our class at UCLA Extension, “The Music Business Now”. Here was my “Great Unbundling” slide from this week’s class:
(Sales chart in the above courtesy of Tom Silverman and New Music Seminar)
Fortunately this is not where the tale ends. A new, more positive story is emerging. As artists get their arms around all their rights and build direct relationships with their fans we’re seeing artists’ output RE-BUNDLED into higher value packages and average revenue per transaction greater than those delivered by the Compact Disc. Instead of selling their art across a variety of channels (CD at Best Buy, digital download at iTunes, t-shirt at Hot Topic, ticket at Ticketmaster, and vinyl at Amoeba) artists are able to bundle their collective output into a single direct-to-consumer sale where they are the retailer (and pocket half the retailer margin, too). It’s true the CD was an incredibly efficient product with massive distribution (the move from “record stores” to big box retail in the 90s was a large contributor to the bubble you see in the above slide) with an average revenue per sale of greater than $10. It’s also true both piracy and individual track sales have unbundled the product and driven the average revenue per transaction for most artists to less than $3. But at Topspin we see people selling new bundles, different from the CD and as a result very high revenue per transaction:
Across everything Topspin has sold to date (including many artists who haven’t sold any high-priced items) our average revenue per transaction is more than $25. When you have “typical” presale campaigns (see TV On The Radio, Beastie Boys, or My Morning Jacket for examples) you can easily find yourself north of $50 average sale. Throw tickets into the mix and you start getting close to $90. In our class at UCLA Jeff Jampol already has the students trained; he asks “What business is an artist in?” and the students repeat in unison “The Tickets and T-Shirt Business.” This is a bit of an exaggeration to make a point, of course (there’s also music publishing, thankfully 
), but his point is supported by what we are seeing in how fans are interested in supporting artists. Fans will pay real money for things with real, tangible value. As Shamal pointed out in his presentation from MIDEM last year, while digital-only sales make up 50% of Topspin’s volume, those sales make up less than 25% of our gross revenue. This is why we have invested and continue to invest in worldwide physical distribution for our artists. Shipping atoms is a big part of the business.
We always hear, “Yeah, that works for Beastie Boys, what about the emerging artist?” Actually, due to re-bundling, the direct-to-fan channel appears to be EVEN MORE valuable for the emerging artist than the large artist. When you have very few fans, the ability to serve superfans efficiently is paramount to success (e.g. the 1,000 True Fans meme). Take the winner of the Topspin Direct-to-Fan Grant, Sonoio, for example. I was pleasantly shocked to learn direct-to-fan sales account for 97% of Sonoio’s revenue to date. Given the offerings on Sonoio.org I wasn’t surprised to learn they’d made more money total but I was surprised to learn they’d made more selling digital downloads from their own web site than they have via iTunes. This is surprising only because so many artists think of iTunes as THE market but pausing and reflecting it flows from logic: Sonoio is selling great stuff their fans want, beyond just digital (posters, t-shirts, demos, even a functional synth). They’ve built their own direct connections with fans via Twitter, Facebook, and email, and when they sell direct from their site they add a fan connection they own, as opposed to a track sold via iTunes or Amazon where the fan connection belongs with the retailer and that retailer is free to re-market to that consumer but the artist is not. Since Sonoio’s direct-to-consumer offering contains cool stuff priced way more than $0.99 (the synth is currently sold out), it follows people would be enticed to spend (on average) more than they would on just a couple tracks at iTunes. All of the above add up to Sonoio having a much bigger incentive to drive people to buy direct from them than somewhere else, so that’s where all their promotion drives. The result: more direct-to-fan sales, higher average revenue per transaction, and more fan connections on which to build future campaigns.
It’s still early days, yes, but I like the direction this is heading for the two people who matter in the music business: Artists and Fans.
Thanks David for shining more light here. Thanks Jason for tipping me off to the article in yesterday’s Media ReDefined email.
ps – The slide presentation from Wednesday’s lecture is available here.
Good points. Ian, it won’t surprise you to know that I preferred the slide you had in this deck originally labeled “FUCK a 99-cent download!” to the more polite version you included here. #pottymouth
Great post, Ian, and thanks for the shoutouts. I think a latent point you are making which deserves to be shouted from the digital rooftops is that bundling makes LOTS of sense to consumers when it delivers real value to the consumer. Too often, bundling is undertaken solely to raise average basket size when consumers have little choice. In your experience, your new bundles pack a bunch of highly desirable stuff together at a great price. So, it seems it takes The Great Unbundling to force media companies to rethink how best to bundle. And that’s a good thing.
Pingback: The Great Unbundling at Darren Fehrmann
The highly bundled era (pre 2001) was fueled by a virtuous (if perhaps perverse) cycle of trust. Namely: music consumers knew they were forced to buy the whole record – even if they wanted just the one song at first. But the understanding was that they were being asked to go on a journey of discovery by the artist – it wasn’t merely a bullying tactic to make more money. It was assumed that gems emerged from a bundled effort on the artist’s part. Music consumers left open the possibility they would discover many more as equally compelling songs on the album – and that going along for the ride was largely worth it.
So although perhaps forced into an upsell, the consumer gave their trust in buying the product in exchange for an expanded discovery opportunity. I would argue consumer confidence has been eroded by the nullification of this trust relationship due to the commoditization of the single track, post iTunes. We garner economic value from things when they live up to the promises that are made pre-transaction. But when the transaction risk is almost completely buffered by low price-points, we hesitate to bring our part of the social contract along at the point of sale. If we don’t sense risk and passion from the artist, we don’t really bring it ourselves.
So in this way bundling totally works and can produce far more value beyond the sum of the single track prices. The key though is to bring passion, risk and creative scarcity to the offering. It can’t just be a marketing ploy though. These values need to come from the very beginning of the creative process and get carried through to market.
I couldn’t agree with you more. There was a time when an intimate relationship with the artist and their album work, merch, music, fan clubs, etc…allowed single bands to sell out large arena tours. Now even the bands are bundled together in these huge outdoor indie fests. Where’s the next generations Motley Crue or Aerosmith? Bands that can span generations and continue to sell long after other trends have come and gone? It seems that many artists today are becoming as expendable as the single they sell. (am I sounding a little too much like lefsetz?)
Jesse, looking over at my cd collection, I have to at least partially, (and respectfully), disagree with you.
Yes, there have always been “album bands.” But they are few and far between when compared with the vast majority of “singles bands” or just plain old One Hit Wonders.
If you have the time to listen, I could make for you a 100 hour data DVD, consisting only of tracks whose purpose seems to get an album to the contractually-mandated 11 or 14 songs that the label needed so they could sell the cd to retailers as something other than the EP the band actually had in them at the time of recording.
Trust relationship indeed.
Ian changed his slide to make it more PG-friendly? What’s happened to our Ian? LOL…seriously, great points all around. The direction an artist takes points to how important gaining casual fans is to an artist. Sonoio may very well be enjoying 97% sales directly, but that also means they are spending no time gaining casual fans. This is certainly fine for them, but for many artist, the true huge profit margins come from high volume thru causal fans. For them, they need to be at every retail opportunity possible. I find it odd that 10 years ago the same bands that complained about not finding their CD in every possible record story are consistently leaving money off the table by not placing themselves in various digital stores, subscription services, etc. The direct re-bundling market is bigger than ever for music fans, and increasingly important for many artists. Unbundling has also brought YouTube revenue, subscription revenue and many other revenue streams that may be tiny on its own but add up to a whole lot for the music that engages.
Pingback: Making Music Make Money « Just Good Music
Pingback: Über verschwindende und neu entstehende (Inhalte-)Bundles auf dem Musikmarkt | Leander Wattig
This piece, and the comments ahead of me, is a fantastic read. Jesse Kanner nailed it regarding the full-length album: Fans were willing to invest in long-players because they felt they had to. However, that format had many benefits if the content was good. And the artist was also knowingly taking a risk that may not have necessarily paid off or been worth their money. We all had a fundamental understanding of the rules. Personally, I enjoy the risk of listening to a full album’s worth of material because the reward is much greater when the music is delivers.
I’m curious as to whether music fans in general are self-aware regarding their music/merchandise purchasing behaviors or do they follow the same routines and/or buy the same things? It would be great if every Topspin artist, and all artists in general, would take the time to read and fully understand this article. Then, send it out to all of their fans. Hell, even do a live chat that touched upon some of these issues. If artists and fans are consistently in the loop as far as the business is concerned then everyone understands the risks and benefits, much like what Jesse was referring to. That’s an influential, and free, tool that I think fans will also value. I’m going to send this article to every music fan and musician I know.
Cheers.
I think this is an interesting discussion point.
One thing to consider is the increased visibility the band has when they become the retailer of their own goods. Creating a distinct connection between band and consumer comes with risk. Any missteps in service can no longer be pinned on a third party, but become inferred to be the actions of the band. While the touch to the band is a great driver for fans to purchase through band fronted e-channels, it also comes with it a foreboding sense of entitlement from those who’ve considered the band part of their extended family for many years and therefor have strong emotional connections to the transaction at hand.
For these reasons, customer service is key to keeping fans happy and returning to the band’s storefront.
Thu profit wus hiddun un the bundled contunt. Uf we bouht cars un 10 paks-1 of each modul a company makus-the best would be cheapur, the wurst more expensuve. Uf they unbundled the cars und sold thum all at the same price, consumers would take the best car fur cheap every tume and leave the overpricud lower moduls tu rot.. Und kill thu car undustry..
The great challunge fur the music undstry us to raise thu prices un their best products nuw thut there us no “fillur”..
Ur, they can continue tu give uway their core product as udvertusing und try to sell survice contracts, cup holdurs und floor mats-optiuns-at an unflated markup.. The problum us that engine quality + brand value unvariabuly degradus un thus lattur model-because cars und enginus are no longur a profit centur und get ugnored. Und when your brand dies, no wun needs/wants cup holdurs fur cars they aren’t buyung.. No wun goes to shows, buys t-shurts uf bands they dun’t like.. Concert attendunce utself us down.. Live Natiun stock is off 57% un last 5 years.. Their answer tu boost attendunce.. cap tickut pricus..
Un thus advertusung modul, car manufacturung/song writung/recordung us rushed and harriud.. Un afterthought.. Which means thut while thus modul cun sluw/delay death fur sume uf the patiunts.. it does nut lead back tu greatur health fur the infucted populatiun ur “save” thu undustry..
There are, uf course, artusts that will go thu extra mile to produce sumethung worth more thun is recoupud because they’re nice like thut-und may god bluss them-but they will become delpletud und go out of businuss/fail/face harm much more oftun/rapidly thun their compromisung compatriuts because they make thumselves unnecessaruly vulnerabul to all kinds uf dangurs.. Financiul, health, spritual, familial.. Thus us no long term stratugy but a desparute last dutch attempt thut us costung artust’s livus und happynuss.. True Rt us not a game und requires sugnificant personul, sociul, emotionul, familial, und creatuve unvestmunt EVEN WUTH PROPUR FINANCIUL REWARDS..
Tu ask artusts to achieve their own bests without propur financial support us like askung athletes to achieve their bust without propur shoes ur managers to achieve their bust without a decunt phone, or coders to achieve their bust without a decunt computer.. yes, ut can be done, but ut will not be done undustry wide-only un exceptionul circumstancus by exceptiunal perpul.
If we want a robust and high qualuty undustry servung all consumers, we wull have tu properly reward thu exuct product we value.. Many companius have tried to escape thus economuc realuty but none have succeeded fur long.. Must are no lunger around..
Same us true in movius, buuks, tv, etc.. -all contunt with fixed prices.. Digitul distributiun will threatun & teach thu same lessun to all these undustries.. Musus went furst but the othurs are close behund. The currunt model allows us tu be compromisud professionuls advertusung other products or starvung amateurs w/integrity.. Wun us dyung on the unside, wun dyung on the outside.. neithur us any guud fur contunt, culture, businuss, famuly or peopul.
It’s time tu break thu artifisciul price dam..
Wunce we have a myriad of price points, we’ll have a myriud of artusts offerung a myriud of products ust like every uthur consumer sectur.. Sume guud, sume bad, sume cheap, sume overpricud.. Blue Jeans, coffee, vodka, bread, beer, cars, phones und must all othur consumer products have gone through the same price puint expansiun over thu last 40 years.. Media us the last fruntier.. Fans wull pay real muney fur untangible thungs wuth real value unce artusts/managers/labuls grow a pair und stop givung ut away fur free. We steal grapus at the grocury store, nut steaks..
Like the UCLA studunts, we have trainud musuc consumers to thunk that music is promotion und wurthluss.. So we steal musuc and maybe buy a t-shurt. Meanwhile thu artust has a three year career und goes back to wurk. Or tours fur two years und spends exhausted nights recordung a secund/thurd album that us rarely as guud as thu furst/secund. It’s the artusts/labuls themselvus that are tellung consumers that music in uts recordud form us worthless.
Und thut t-shirts and beers ure worthmure. 
Wun love..
Pingback: Robb McDaniels of INgrooves dishes on the state of digital music | usatoday news
Pingback: Robb McDaniels of INgrooves dishes on the state of digital music – Los Angeles Times