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August 15, 2007

Business approaches for indies

This post arose out of a discussion on the [MusicThoughts] e-mail list. We were pulling apart the benefits and weaknesses of using Tunecore or CDBaby as your service of choice to digitally distribute your music - at least that's roughly how it started. I thought I'd better spell out my reasoning in a little more detail here because e-mail posts are very hard to follow on an issue like this.

First, a primer. Tunecore and CDBaby are NOT the only companies that provide this service, but they are two of the best and biggest, and their pricing structure exemplifies the point I want to make. These observations apply much more widely than just these two, even though I will refer only to them.

As far as their appropriateness to Indie music releases goes, the difference is both simple and complex. The simple part is the way you pay them. CDBaby asks for a once-off up-front fee to process your hard-copy CD and then takes a 9% cut of whatever proceeds you get from digital sales (the amount depends on the retailer). Tunecore asks for a smaller up-front fee, allows you to upload single digital tracks (so you don't need to wait until you have a full album - you can release one song at a time) and gives you all of the proceeds of your sales. BUT, they charge you an annual fee for ongoing service and storage of your account.

So, the appeal of the Tunecore approach is twofold: they allow you distribute your recording immediately, and they take no cut of your sales - you get to keep all of your sales ... UNLESS your sales amount to less than the annual fee ... in which case you go backwards. For the sake of simplicity, let's call the Tunecore fee $20 (it's actually slightly less, but I like round numbers).

Here's where it gets more complex. Tunecore make is possible to release one track at a time - but charge you the same fees for that as for an album - in other words, you have to get more value from your single release than from any single release in a package. So you have to earn $20 a year from your single just to cover costs. BUT the Tunecore package also works on time-limited contract, so you have to make $20 in the first year, the second year and the final year. If that song doesn't end up being some sort of hit, you go backwards on it. And when you realise that the song isn't pulling its weight and cancel your unprofitable Tunecore account, it is also removed from iTunes and all the other outlets that were selling your few copies, so it earns you nothing unless you get another service to distribute it for you ...

Now CDBaby. They charge $35 to process your album and $20 for a UPC barcode (if you don't already have one, but this is the cheapest place I've found for getting one). So you incur an up-front fee of US$55 (+postage) to distribute your tunes digitally and open up a CD-selling account. For that you get both digital and hard-copy sales, but my experience is that digital sales dwarf hard-copy. But here's thing - you get income as soon as your stuff sells, so once your costs are met (it's never taken me more than 6 months, and I've released 4 CDs like this) you're gong forward with every sale or listen.

Now, if you have a hit, and your digital sales are more than $20/0.09=$223 a year, you would be better off paying $20 a year to Tunecore rather than 9% to CDBaby - until your sales decline again. But if you've released two CDs, one earns more and one earns less, the combined total is not quite enough to cover both ... well, with CDBaby you're still ahead, with Tunecore you're going backwards. Personally, if I were to have a release that earns some serious money, I'm quite happy to pay CDBaby their 9% - partly out of loyalty to their efforts when i earned nothing and partly because I think this kind of thinking is more appropriate in a networked environment where we have to sink or swim together. That that's an ethical decision for me, not a business decision.

Economically speaking, the Long Tail environment implies that the best approach is to charge people a percentage of income for services rendered, and provide a lot of low-cost services forever. For small Indies, it is always going to work better to go with percentage-fee, perpetual contracts than fixed-fee, fixed-term contracts. Early growth of your business requires that you move ahead as much as possible, so avoid the fixed-fees. Of course, once you've built up a market presence and generated some serious digital sales income, you need to re-think, but if Gerd Leonhard is correct (and I don't think he is, quite), recordings sales revenue is going to be shrinking for the foreseeable future.

Incidentally, this is yet another demonstration of why the Album is NOT dead. It may not be the sales force it once was, but the economics of production and distribution still very much favour a collection of songs rather than single releases.

For the record, by approach is to give away the beta-releases of singles and offer the finished product as an album, from which people can take whatever singles they like ...

Posted by Hughie at August 15, 2007 10:45 AM

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