Wednesday, March 27, 2013

Meet the new middlemen...Part 1


As you can probably tell (if you've dropped by the blog before) I enjoy thinking about how new production and distribution models are taking shape in these ever-changing, highly digital times.  Let's briefly take stock: we've got free platforms with hundreds of millions of users, the ability to make high quality podcasts, songs, videos, and websites relatively quickly, cheaply, and easily. Global distribution happens with the upload of an audio, video, image, or text file.

Barriers to entry are now almost non-existent, so individual/independent writers, musicians, artists, and filmmakers, now have access to an international audience.  Unfathomable just a few short years ago. As the technologies and platforms become more user-friendly and plentiful, the floodgates open up, and everyone from the hopeful hobbyist to the professional has the same access. But now we have a logjam at the entry point to the market, because there are no content police standing there at the roadblock saying "excuse me ma'am/sir, can you pull over here so we can see your qualifications?" The price of entry is the doing. Period. And because this is the case, mere market entry brings with it less certainty than ever before.

What was once scarce, i.e. the ability to produce and the ability to distribute and/or publish those creations, is now abundant.

The digital era has changed a lot, indeed.  But...the idea that everything is now do-it-yourself, bypass the gatekeepers, go direct to fan, is somewhat overstated and oversimplified.  Yes, you can create and upload and share and use networks for large-scale, inexpensive distribution, and it's a fantastic and liberating thing which I'm all for.  But the likelihood of reaching a mass audience using solely these channels is slim. It can happen, but so can winning the lottery. The general rule, if there is one to be extracted from these musings, is that do-it-yourself and digital models are particularly valuable for niche products artists.  Using digital and social techniques and tools niche artists can find their audiences in a way, and on a scale, that previously did not exist. This means that niche no longer has to mean hobby, limited appeal, or money loser. In fact you could say there's never been a better time for niche. To this point note that the label with the biggest single slice of the music pie right now is not in fact a single label, but all the indies rolled up into one.  (Also note that Universal has since acquired EMI, and even with the sum of those two entities, the indies when considered as a single slice, are still larger. On the other side of this argument is that the 32% slice that the indies enjoy also counts indies that have major label ownership, either in whole or in part, but I won't be that much of a stickler for now. However you can be if you'd like to.)


Source: http://a2im.org/2013/01/07/indie-label-u-s-sales-market-share-grows-to-32-6-indies-remain-1-sales-sector/

What made many of the above points possible is the decentralization of power made possible by the Internet when it became a mainstream, consumer technology in the mid to late 1990s.  But for every force there is usually a prevailing counterforce and what we're seeing now are new intermediaries providing bridges that link, in the case of my area of interest, artists to audiences. This is not inherently a bad or good thing, but rather a way of understanding how marketplaces reshape as technologies change.

Time to meet some of the new middlemen. We'll start with the area of music and in later posts look at film and video. In music the biggest middleman is, of course, Apple, whose iTunes store launched ten years ago in April 2003, and which went on to account for close to 2/3 of all digital music sales. (The other third is split between vendors such as Amazon, Google Play, and CD Baby). What started out (arguably) with the objective of being a marketing platform for its iPod line of hardware has become a retailing juggernaut for not just music but books, games, apps, TV shows, and movies.  A full breakdown of the iTunes economy can be found here, but the condensed version of the story is large volume of sales, they take a cut of approximately 30%, and their profits have been estimated to be in the range of $2 billion for 2012. Whether they're better or worse than the labels is debatable. And I'm told that iTunes does not generally deal with independent artists. They require a middleman of some sort -- either a label (indie, major, it doesn't matter) or a distribution company...even though the product is digital. For rough comparison purposes the chart below, sourced here, compares the revenue splits for music on a variety of digital and physical platforms.



Software services that cater to the direct-to-fan, or D2F, market are many, and I'll use the rest of this post to introduce you to some of the more interesting and popular ones.  And note that I'm not endorsing any of them, but merely reporting on them. If you have an interest in using some of the services listed here I would recommend doing the usual due diligence by talking to others who use them or have used them, search around online for reviews, etc.  The basic point I'm trying to make is that many of the functions that were formerly the domain of agents, managers, and labels can now be accomplished with software.  And that direct to fan isn't exactly direct, but certainly is direct-er.

In the area of online marketing, merchandising, & fan communication some of the best known platforms are: TopspinTunecoreNimbit, and Fanbridge. Generally speaking these platforms make it possible for artists to handle a sizable chunk of the activities that had previously been the sole domain of managers, agents, and labels.  Email and newsletter blasts, social media dashboards, eCommerce for websites for the sale of band merchandise and concert tickets, and of course digital and physical sales of music.

If you want to book shows in people's living rooms there are sites for doing that. If you want to remove promoters from the picture there are sites like (the very cleverly named) Detour that let fans put their money where their concert wish is, thus reducing the risk to the promoter, and when enough dollars are in the kitty, the band comes to play in your town. If the show doesn't happen, you don't get charged. There are also companies that enable artists to work around the centralized ticketing systems of titans like Ticketmaster and LiveNation. For example there's GigSwiz, which bills itself as the "effortless ticket promotion tool for artists" and there are also services such as Tunezy and HugeFan that act as brokers between fans and artists, particularly in the area of enabling special fan experiences like dinner at home with your favorite indie band, or how about a custom song composition from them, or maybe a bowling party?  Those using the Bandpage platform will know that $2500 gets you a personal 30-minute guitar lesson, over Skype, with Ozzy's axe-man Zakk Wylde, or some of the more affordable indulgences below.

To me the overarching point is that rather than the industry being one giant monolith, a parallel system emerges, one made of many little pieces. Artists can cherry pick the pieces they want to use, and usually with little or no up front cost, and pay via revenue sharing as sales occur. This specifically digital business model is an attractive option for independent and/or niche artists as the incremental cost of doing business online -- compared to the world of physical objects for sale, warehouses, sales teams, print marketing, etc. -- is close to nil and like they say in those big box ads, the savings can be passed on to you.




Part 2: Meet the new middlemen in the world of filmmaking and independent and/or digital distribution here.


Related posts:

The economy of 'big enough'
Reintermediation Watch: The Tale of the YouTube Multi-channel Networks
Podcasting: Art, craft, or reaching the niches
...So you want to self-publish
The Creative Economy: Is the (3rd) Party Over?


Sunday, March 24, 2013

Let's do some simple addition: aka How much did Macklemore make?



Note: Apologies if there are font jumps later in this post; am experiencing some formatting problems and will try to resolve asap.

Today we're going to look at traditional music industry economics vs new music industry economics, using Macklemore, the subject of the last string of posts, as our case study.  I won't commit to a hard and fast definition of new music industry economics just yet, because I'm not only referring to the world of digital vs physical music, or the world of independent vs major label artists, or the world in which artists can go direct-to-fan and fans can communicate directly with the artist, as well as with each other.

Things are not that black and white, as we began to see in the previous post about Seattle rapper Macklemore. An unsigned artist, Macklemore rose to #1 on the charts around the world, sold millions on iTunes, generated close to 200 million YouTube views (as of late March 2013) for a single song, and/but did so with a combination of independent and industry resourcesAs we'll see, there are still intermediaries, just different ones, and under different deal terms. Will the post-industrial music business look that different from the industrial music business?  Come along for the ride and let's decide together.

But first, a few bases for our discussion. Major labels have long been vilified. Their processes have been said to lack transparency (there's that word again), their economics are said to resemble those of sweatshops, their royalty statements have been referred to as "works of fiction". Yet, the fact of the matter is that the major labels have been operating as investors in products that fail about 97% of the time. The money for recording, manufacturing, distribution, promotion, marketing, and sometimes touring is put out up front by the label, in the hopes that there will be a hit down the road. Preferably quite soon down the road. The labels work with a model of advances, i.e. the funds are doled out by the label to cover the costs listed above and then if/when the earn back happens, it is deducted from the advance.  Most major label artists only get a few albums with which to prove themselves, and most don't recoup, or pay back the advance or the charge backs to them. While it's easy to condemn this business model, it's one in which the odds are stacked against everyone. It's the ultimate high rollers game. The only reason it works/has worked, even with ridiculously low hit to non-hit ratio, is because the 3% that do become hits have become such colossal hits that they are able to carry the other 97% of the roster. Such are the economics of hit-driven businesses; movie studios and network television work with similar ratios. Just last week I heard a former president of one of the major studios speak and during his talk he shared his opinion of the industry's wildly unpredictable economics: "The movie business is a terrible business. It shouldn't even exist."

Despite all the disintermediation, or removal of middlemen, brought about in these days networked, digital systems, there are a few things that are the same in the old and the new. I'll do a quick review of them here, before doing some guesstimates of how the actual numbers look in Macklemore's case, just because it's been the object of study for the last several blog posts. Feel free to grab a pencil and paper as we go through the basic accounting and categories.




Royalty rates: These can vary from fractions of pennies for digital streaming to tens to hundreds of thousands and up to millions for use in advertising campaigns. Back in the good old days artists were able to command  multiple millions for the use of their song in a TV ad, as was the case when Microsoft wanted to use the Rolling Stones' Start Me Up in the Windows '95 ads. But back to digital royalties, the source of much consternation among artists today. It's another one of those 'it's the good news and it's the bad news stories'. The good news is that the radio programmer gatekeepers and the MTV-type programmers have been removed from the process. As an artist you can upload your music, you can make it available to streaming and on-demand sites. As a user you can click on songs and stations and playlists with Spotify, Pandora, Slacker, Rdio, Rhapsody, and others whenever you like. You can help yourself to all the streaming music you want, and if you don't mind listening to a few ads, you can do so for free. The bad news is that this adds to audience fragmentation and demassification. Where the mass media delivered mass audiences, digital media is able to deliver niche audiences. Consequently, the royalty rates are tiny. It has been reported that 70,000 plays on Spotify net approximately $300 to the artist. And what's more, none of these services has achieved profitability. Not yet, anyway.  In fact, it has been estimated that if traditional terrestrial radio had to pay the same royalty rate as services like Pandora they (radio) they would incur an additional 2 billion dollars in annual costs, which would most likely make their business model unfeasible. Because the numbers for digital royalties of this kind are so small, we won't even include them as a line item on the revenue side for the calculations below. They'll just be thrown in when numbers are rounded up.

On to revenues from the sale of recorded music. In the traditional music business model, in which the label signed the artist, and in which the artist failed to break even about 97% of the time, the pie was generally divided as follows:

Source: http://www.theroot.com/views/how-much-do-you-musicians-really-make?GT1=38002


Note that not all deals have the label taking 63%, sometimes it's closer to 50%, and a lot depends on the bargaining power of the artist (new artists have less, established artists have more). But as the above pies illustrate there's a whole lot of slicing that has to go on. So what if we removed the entity taking the biggest slice, i.e. the label, from the plate? Now, pencils in hand, let's make some sort of kind of educated guesses as to how this might look in the case of an unsigned artist like Macklemore, now with a huge international hit on his hands. I've tried to make none of these figures wild guesses, and have run numbers that I'm guesstimating past some folks in the industry.  So no guarantees that the numbers are accurate, just that they're not completely ludicrous.

iTunes: The Thrift Shop single has now sold approximately 5 million copies. Not only on iTunes, but also on Google Play and Amazon and probably via other smaller vendors too. But the vast majority of sales would have happened on iTunes. In the label world, if the download was priced at $1.29 the monies would be split this way:

Source: http://www.rollingstone.com/music/news/the-new-economics-of-the-music-industry-20111025

With no label in Macklemore's scenario the $0.60 is not taken off the top. But, as we learned in the previous post there is a distribution company involved, ADA, as well as some label services via ADA's parent company, Warner Music. According to manager Zach Quillen these services are paid for out of pocket, as opposed to with an advance, but we don't know if there's a percentage take involved as well. Just to be safe, let's say 20% to ADA and Warner. So, from that $1.29, let's say 40 cents to Apple, 20 cents to ADA/Warner, and the rest to recording artist and songwriter. In a way Apple (or whoever the digital vendor is) becomes the label in this scenario, taking 30% off the top; but in this scenario with no investment or risk in the artist. And while selling a digital product, with no incremental cost per unit, no manufacturing, shipping, or warehousing required. Meet the new boss, worse than the old boss?  (See this post for estimates of Apple's margins on iTunes and software sales.) Nonetheless, Macklemore & Ryan Lewis keep about 69 cents of every $1.29 sale. 5 million paid downloads @ $0.69 each = $3.45 million.

On to the album, The Heist, which has sold close to 500,000 copies in the U.S. and Canada as of late March 2013. I haven't been able to find a number for global sales, but let's throw in another 200,000 for a total of 700,000. The math here gets a bit conjectural as the digital album The Heist comes in two packages -- a deluxe version for $11.99 and the regular version for $9.99. Note the role of Amazon's discounting of the album to $1.99, which resulted in swift early sales figures. (This is a strategy Amazon has experimented with before, most notably with Lady Gaga's album in 2011. Demand was so high that their servers ended up freezing). To expedite the math let's just say $10 for the digital album, with a similar breakdown as for the digital single. Of the $10 we'll assume $3 goes to the digital retailer (iTunes, Google Play, Amazon, etc), and another $2 goes to the distributor ADA, which leaves $5. Therefore if we are assuming the sale of 700,000 copies worldwide = $3.5 million. So we're up to around $7 million, net to the artists, from the sale of physical and digital albums and singles.

Next up, YouTube, where the Thrift Shop video has 185 million+ views of today, and the Macklemore & Ryan Lewis channel has approximately 260 million views in total.



In other words Thrift Shop accounts for about 70% of the views on the channel. But, not all videos on the channel have been monetized. In fact Macklemore didn't start doing so for the big hit single until Thrift Shop hit 90 million views. So that brings the total of 260 million views down to 170 million views. And not all of the videos on the channel are monetized and not all views are as valuable as others. So let's take 100 million of those views as monetized and use a CPM (cost per thousand) of $5 (which seems fair, compared to the $8 CPM received by Gangnam Style). Continuing to pencil this out, we add another $500,000 of revenue from Macklemore's YouTube channel, bringing our running total up to about $7.5 million. 

Our next line item is touring. In Macklemore's case it looks like he and his crew have been doing several shows per week, often headlining at venues with a capacity of 4-5,000 as well as appearing on multiple band bills at festivals.

If we take an upcoming show at Sioux Falls, South Dakota's Elmen Center as an example, we have a venue with a capacity of 4,000, which seems to be in line with the size of venue he generally plays at, and let's assume a ticket price of $28-32. So, since the release of the album The Heist, approximately 6 months ago, let's say there have been 100 shows, with audiences that started out in the hundreds and increased to the thousands, with ticket prices starting at $12 - $15 and going up from there accordingly. 100 shows, with an average price of let's say $20, playing to an average of 1500- 2,000 people = gross revenues of $3 - 4 million for the past year. And out of this come the cuts taken by promoter, booking agent, and ticket agency, along withhotel rooms for band members and crew, flights and/or buses, meals, roadies, and per diems while on tour. Because it's difficult to estimate the below the line, or operating costs, I'm just going to assume an average to the band of $10 net per ticket x 1500 people x 100 shows, for a total of $1.5 million for touring for the past year after expenses have been paid.

One part of the Macklemore operation that is particularly profitable is the merchandise arm. This is the sale of t-shirts, hoodies, and assorted trinkets bearing the band name, that takes place at shows on the tour as well as on the macklemore.com website. The margins are generally high, meaning if a fan buys a CD and a t-shirt at a show, for a total of, say, $35, it's reasonable to assume that about $20 of that is profit. So while touring at this level may be modestly profitable, it's the sale of merchandise that helps offset the laundry list of costs detailed above. As a guideline, those in the merchandise industry suggest that 1-3% of concertgoers at the large arena venues purchase band merchandise, and at smaller venues not more than 7%. So let's take a conservative 3% of the average of 1500 people we assume have attended a Macklemore concert over the past year, and let's say that on average they spent $35 on merchandise. 3% of 1500 - 45 people. 45 people spending $35 each = $1350 per night. $1350 x 100 shows = $135,000 of which we'll assume close to half, or $70,000, is profit.



There are other revenues coming in, from activities such as songs licensed to ads, such as the one below, for a Miller Genuine Draft commercial in 2012, another for Microsoft's Outlook.com, and  a promotional ad for the NBA's All-Star Week in February 2013. Let's pencil these in at $50,000 each, for a total of $150,000 of revenue.


But remember, in the absence of a label the artists are financing everything themselves. Recording, manufacturing, design and production, distribution, marketing, promotion, producing and maintaining their website, producing and selling the merchandise, and don't forget there are also professional services required by the likes of accountants and lawyers.

After all these partially informed calculations I'm going to say that Team Macklemore -- the core group of Macklemore, Ryan Lewis, Manager Zach Quillen and Tricia Davis, has probably netted between $8 and $10 million in the past 6 or so months.  Although the numbers taken into account in this post add up to around $8 million I'm factoring in some margin for error, and to account for any overlooked revenue streams. Because we don't know exactly how they split the cash among the core team, I'm going to say that Macklemore himself has netted around $4 million since Thrift Shop has taken off.  For want of a better reality check we can use this estimate as one data point for testing our math. The author assumes $2 million net worth for Macklemore himself. This is when Thrift Shop was at 66 million views (it is now at 3x that level) and album sales were at 272,000 (it's now at 1.5x that level). Twice that level now seems reasonable.

Had Macklemore been on a major label the math would have looked something like the following:

Label advance of $500,000 to $1 million

First 50-60% of revenues go to label

Next 25% of revenues go to distributor

Charge backs for video production, marketing materials, promotional services, and miscellaneous fees such as breakage, container fee, etc.

If the deal was a 360 deal, in which the artist and label share revenues not just from the sales of physical and digital product, but also touring, merchandising, licensing, etc., the percentages would continue to be split. Much depends on the terms of the particular deals, and as this cautionary tale lays out, situations do exist where the artist sells a million albums, and still owes the label half a million dollars. This doesn't always happen, but it can happen.

So -- if we can draw some reasonable conclusions here, under a regular label contract, approximately 50%, or $4-5 million, would have gone to the label.

Under a 360 deal, which some labels now require artists to sign, the percentages would have extended to the revenues from concert ticket sales, merchandise sales, and song licensing from ads, so let's say a 50% cut of the $135,000 from merchandise, the $100,000 from licensing, and presumably a cut of the $3 million gross from touring, all of which adds up to an additional $1-1.5 million on top of the $4-5 million.

And still, some questions loom: Had Macklemore been signed to a major label from the outset would the sales have been higher? Would today's 5 million paid downloads of the single be 10 or 20 million? Rather than take four months to get to the top of the charts could Thrift Shop have hit the jackpot earlier, and enjoyed the higher chart position and higher sales for a longer period?

I guess we'll never know, but can think of it this way: the label would have needed to double the sales level for Macklemore to have benefitted at the same monetary level he has. Inversely, had Macklemore sold half as many singles, t-shirts, and concert tickets on his own, he may have fared better under a major label deal, in that the label would have put in more than he brought in, but that would probably ultimately have led to getting dropped by the label, which is how the major label model works, and I think has to work when the odds of success are so crushingly low.

As an indie (or more accurately 'indie plus', in which the artist is not signed to a label but instead buys, a la carte, major label services as s/he desires) the cash flow is as estimated above. Bear in mind, however, that the Macklemore scenario was only possible because of the leverage he possessed after close to ten years of building audience, building fan relationships, paying out of pocket for goods and services the label otherwise would have subsidized, and, of course, the wearing of many, many hats.  Is this a new model for the music industry? Perhaps.  In this pretty much ideal scenario we have the much desired win-win. A win for the artist, still able to call his own shots and guide his own career path, and a win for the label, who didn't have to risk capital up front on an unproven act.

Doing things the Team Macklemore way is a new way of operating both within and without the music industry, and requires rolls of the dice and sets of skills that not all artists currently possess, but may have to as the industry unravels, and then in time re-ravels.

Your thoughts and comments are welcome below; as are polite indictments of the assumptions or math in this post.

The next post in this series, on the new faces of the middlemen in the music industry, can be found here.

Monday, March 18, 2013

The business of indie - Part 2: When indie explodes




Macklemore tweets with incredulity in Oct. 2012,
one week after the release of his album The Heist
For the last few posts I have been talking about eventually getting to estimating the dollar side of the Macklemore story, as we have the unusual case of an unsigned, independent/indie artist with a #1 hit in over a dozen countries around the world, a sold out tour, his own merchandising operation, and millions of YouTube views per day.

Without a label one might think all the money is his, or all the money minus the 30% to iTunes or the revenue split with YouTube, or whoever the other platform providers are. Well, not exactly. Keep reading, and you'll see why.

Further investigation has uncovered additional information, shedding new light on the different ways success can now be built in the first place, and then built upon. I love thinking about these new processes, but a discussion I don't particularly enjoy having is what does and doesn't constitute 'indie', as in independent, as in religiously averse to the involvement of corporate entities, middlemen, and anything but the most grassroots, DIY (do-it-yourself) approaches.  Don't get me wrong, these are valid ways of doing things, and I respect many who take that path, but the argument can quickly become saddled with holier than thou, indier than thou details...and this has come up with regard to my current interest in the case of Macklemore.



What interested me about his story in the first place was how someone without the power of the infrastructure usually needed to create a hit on that scale was able to create a hit on that scale. In my first post on the Macklemore phenomenon I laid out the basics of the case and included lots of numbers re his initial level of success, followed by growth that could only be described as explosive.

Could it really be that the sheer force of a solid fan base, built over 10 years or so in Macklemore's case, combined with a catchy song and video, and the power of a well-cultivated social networking presence could take an artist from regional stardom to millions of iTunes downloads and over 100 million YouTube views. Could what I have referred to in a previous post as the heavy industry of the entertainment industry really be circumvented to that extent?

Further digging was required, and in the immediate last post I started mapping out how Macklemore started building out from his extremely indie base of himself and his DJ/producer collaborator Ryan Lewis to include a manager and a booking agent. “We run a very small team", said Macklemore, "...it’s me and Ryan and Zach [manager], my fiancĂ©e Tricia and it’s the four of us as this tight knit nuclear family,  and we have a bigger family too but in terms of running our business we’re the four people that are making the decisions at the helm of this business and we act as a record label, the four of us."

"We do everything in-house", continues Macklemore.  "The marketing team is me and Ryan, my girlfriend, and my manager Ryan is doing graphics, cutting the videos, we’re both directing the videos, we’re both figuring out what our merch is going to look like. It’s been DIY ever since I first started at like 15-16 years old in graphic arts class, trying to figure out how to design an album cover at 17-18."

In fall 2012, upon the release of the album The Heist, Team Macklemore was, clockwise from Macklemore's head: Macklemore, Manager Zach Quillen, DJ/Producer Ryan Lewis, and Tricia Davis, Macklemore's girlfriend of 7 years, and soon to be wife.


The team had also been working with booking agent Peter Schwartz of The Agency Group, for a year or so. Peter was now tasked with booking the act into halls and clubs all over North America for their 2012-2013 tour. This week's show at the Jack Breslin Student Events Center in East Lansing, Michigan, next week's show at the Elliott Hall of Music in West Lafayette, Indiana, the following week's show in Anchorage at the William A. Egan Civic and Convention Center....those are all arranged by Peter and The Agency Group.  Without a booking agent with the right skills, experience, and contacts getting the shows, having them run smoothly, and of course getting paid, would probably not be possible at the scale at which Macklemore & co. are currently operating.


There has also been a distribution deal, as of mid October 2012, with ADA, the Alternative Distribution Alliance. ADA's website describes the company as "independent music, film, merchandise, and synch licensing since 1993. Among its clients are labels such as Beggar's, SubPop, Merge, Alligator, and Smithsonian Folkways.  These are all labels. Macklemore and his crew were able to secure a distribution deal with ADA, without being or having a label, based on their unexpected and impressive first week of album sales figures, which were 78,000. That they did all on their own. The result of close to ten years of work.


And yes, ADA is owned by Warner Music Group. which to some makes Macklemore ineligible to call himself 'indie', but I tend to side with Hypebot's Clyde Smith, who calls into question the usefulness, or more aptly, virtual uselessness, of the term 'indie' at a time when so many ways models and processes are in flux.  After all, Macklemore owns his own copyrights and masters, is not beholden to a label, and the way I see it ADA works for him. They're a subcontractor just as any distributor would be. Team Macklemore chose ADA over other suppliers because they decided that ADA was the best company for the job, and so far it looks like they're right.  One of the most salient quotes from Clyde Smith's blog post is: "If you thought Macklemore and Lewis were a couple of hipsters posting up on Tumblr and slinging CD-R's out of their backpacks in front of Goodwill in between tour stops reached via public transit, then you're living in a fantasy world."

Despite the power and reach of digital tools there's still only so far you can go as an indie, as a full-on do everything yourself indie. Even distribution, now largely digital, can require an intermediary. I asked a friend, himself the owner of an indie label that's been around for over 20 years, why that is, in these days of iTunes and Amazon and streaming music services, and he wrote:

"There are middlemen involved for a few reasons:

1. When you ask them to take on something (physical distribution) they don't want, and they insist therefore on getting something they do want (digital)
2. When you don't know what you're doing, as a fledgling band you do it once with the middleman, learn how to do it, then, later, should you choose, you can do it yourself."

And there's also radio airplay, which many tend to think of as irrelevant because, perhaps, you or I or the people we generally talk to may not turn to radio for music very often, but to break through to the mainstream, radio is still important. For how much longer is another story, but for now apparently it still is.

Again, by the time the promo forces came into full effect for Macklemore he had already sold over 100,000 copies of the album, racked up 4 million YouTube views in the first month, and was charting on Billboard on the strength of the Soundscan (sales) numbers.  So while there are those who may wish to view Macklemore's success as the product of the force of industry, I prefer to view it as an ingenious "indie plus" model, in which the artist is able to attain an unprecedented level of success independently, and then, with the selective addition of industry partners, can see if/what the effect is of adding the extra layers of marketing and promotion.

This January 2013 article from Billboard references the promotional 'muscle' that Macklemore received via his deal with ADA, and it turn Warner Music.

"After the clip clocked more than 4 million YouTube views in less than a month and the album's impressive Billboard 200 debut, ­Macklemore agreed to a one-off deal with ADA for at least three months to service the song in the alternative market. ADA sent the song to key tastemakers, and the response was so overwhelming that it expanded its servicing across stations within the format-an unusual approach for the company, according to ADA president David Orleans...."Our business is set up exactly how it was when we released the album, but we have access to a great radio department at a major label that we essentially pay for out of our own pocket," says [Macklemore manager] Quillen."

Note the new direction of the work....not from the label to its promo people to radio, but, instead from the artist, first to the distributor (ADA), and then to its parent company (Warner Music Group) and then the artist pays to have the single and/or album promoted to various radio formats (pop, alternative, hip hop, etc), out of their own pocket. This way the label isn't risking its capital, as the artist has proven his ability to draw a substantial audience, the artist remains in control, and the music is able to reach as wide an audience as possible, which is how we end up with videos like this one, of buskers in a shopping mall in New Zealand, performing Macklemore's hit song for passersby.





And as I sign off on March 18th, 2013, the video for Thrift Shop clocks in at 175 million YouTube views. Nicely done, Team Mackelmore.

As for where the money goes, I'm working on that puzzle. We now have a sense of the variety of players involved and my next challenge is to compare and contrast the economics of the traditional major label music business model with models such as the one being carved out by Macklemore and his crew.

See next post here.

Tuesday, March 12, 2013

The business of indie - Part 1


I promised you a post on the business side of the Macklemore phenomenon, that breaks out the revenue numbers and paints at least a rough picture of what it means to be an indie artist at this level of success...from the standpoint of earnings, and also from the standpoint of all the new responsibilities that come without, in this particular case, the framework of a music label and its various apparatuses. Because there is a considerable amount of ground to cover I will do this in two parts: first the organizational aspects of being an independent artist, and then a look at revenue sources, the conventional ones and the new ones, as best as I can estimate them, in future posts.

Part 1:

Essentially this is the story, or at least one story, of what happens when we move from an industry structure that looks like this, in which there were great distances between artist and fan --





...to one that looks more like the drawing below, in which artists are able to take their wares more directly to fans, and in which fans can communicate directly with the artist, and each other. While theoretically this was possible before the advent of digital media -- usually taking the form of musicians doing small scale tours, driving themselves to shows, sending out newsletters, selling cassettes and CDs out of the back of their car -- widely distributed, inexpensive or free (or should I say "free") digital tools, services, and platforms have created a drastically different marketplace, for both producers and consumers.  This is overly simplified (as we'll start to see below, and will see even more clearly in subsequent posts), but for now, you can think of it this way:






So, what's not to like? Industry? Who needs the industry, you say. We can now do it all ourselves.

Not so fast. First off, the good news and the bad news are kind of one and the same. The good news is in the second model you don't have to deal with labels and managers and lawyers and publicity departments. The bad news is you don't have labels and managers and lawyers and publicity departments to handle the business end of the work for you. You have you, and you have whoever else you can afford to subcontract or talk into doing you some favors. The artist is not just the artist but also the agent, the band manager, the tour manager, the promoter, the roadie, the creative team, the marketing team, the merchandising team....and, don't forget, the bank. In order to fund the activities within this loop, dollars must be taken from one revenue source and applied to another, all the while keeping an eye on maintaining positive cash flow so that each link in the chain can function. This indie, self-funding model contrasts with the model of advances from the label, whether for recording, touring, or video production, followed by recoupment.

But before we go into any further discussions of business structures, I do feel the need to reiterate that the story of Macklemore is the story of the extreme end of the indie spectrum. His success is the exception, rather than the rule, but is of interest as it's an example of just how far it is possible to go while operating outside many of the conventional structures of the entertainment industry.






As a point of comparison you may want to look at the results of a study released last week by the Canadian Independent Music Association that evaluated the economic impact of the Canadian music industry on the country's GDP. There are some findings that could be interpreted as encouraging but there's also this:

"Individual artists earned an average of $7,228 per year from music-related activities in 2011, though they only spent 29 hours per week pursuing such activities."

(Note that pro-rated to 40 hours per week this still only comes out to $9000 and change per year, approximately half of what a full-time minimum wage job pays, so ladies and gentlemen, it may be best to adjust expectations).

Holding these pieces of information in our mind, let's go back to the Macklemore story as our case in point. If this is your first visit to the blog -- welcome -- but you may want to click through to this earlier post that provides an overview of Macklemore's career path. As an independent artist, without a record label, manager, booking agent, promotional team, or budget Macklemore and his musical partner Ryan Lewis knew to keep their aspirations in check. Said Macklemore in a video interview entitled "The Business of Fun" on February 1, 2013, "When we made...the album I didn't think there was any chance that we would have a shot at commercial radio whatsoever...like, if we didn't sign a major label deal, in my head, I didn't think there was a percentage of a chance it would take off at radio." (So much for that hunch...the song went to #1 in countries around the world and currently enjoys quadruple platinum status -- 4 million downloads and counting -- on iTunes.)

After years of doing almost everything themselves -- writing, recording, booking, touring, producing videos, designing and selling merchandise, doing marketing and promo -- Macklemore said he and Lewis were "grinding so hard" but realized, around 2010 or so, that they may have reached an impasse. They had complete control of their career, they had successfully developed a loyal fan base, but to kick things up a notch more was needed, and that more was beyond the reach of the two of them. As Macklemore put it in "The Business of Fun" interview, "If you're an artist, in order to get shows, in order to travel, in order to accumulate some sort of fan base, an imperative step in that process is getting a booking agent....You're out there doing your shows at sports bars...performing in front of 75 people at weird restaurants and you're like, what is this? This is not a career."

Booking agent Zach Quillen enters the picture, a booker with The Agency Group, a company that specializes in matching artists to venues. Within a couple of years of booking Macklemore one of those aha moments occurs, and both parties realize it makes perfect sense for Zach to become manager, handling the growing list of day-to-day tasks that an artist with a career on the rise is confronted with. In other words, with a burgeoning career more capacity is required on the part of the artist, creating a need for some intermediaries.

As manager, Zach Quillen had a definite plan. It was to build on the solid foundation and great fan relationships -- somewhat counterintuitively -- by creating a sense of scarcity to increase demand. "I'll never put [them] in a venue they can't sell out", he saidEditor's note: on the topic of great fan relationships, check out this video, from an annual fan appreciation event Macklemore has been staging for the past few years, a pizza party with photobooth, where it's all about the fans relating to the artist as one of their own.

But back to our story. With Quillen now acting as manager an opening had popped up for a new booking agent, and Peter Schwartz, also from The Agency Group, moved into the role. He loved the strategy of booking Macklemore into small venues and making them bulge at the seams. "The idea is to have 300 people at a 300-capacity venue who loved it, then the next time there we can do 600 to 1,000 and you can grow from there. That's really what happened. We started really small and didn't want to skip any steps", said Schwartz.

This all ads up to a methodical approach, driven by the artist and a small core team, with the artist-to-fan diagram we saw above starting to add some new and necessary elements. And while it was probably possible to book Macklemore into slightly bigger rooms and sell a few more tickets every night both Quillen and Schwartz viewed that as short term thinking. Instead they wanted people to respond to the question "How was the Macklemore show you went to last night?" with an incredulous "It was amazing...it was unbelievably packed...the energy in the room was so cool...and the band put on such a great show!!"  This kind of response is like getting a 5-star review on TripAdvisor. Just try to keep people away next time around. Upon hearing about the sold-out, high energy show people tell their friends about it, post to their social networks, and so the strategy of creating scarcity actually creates abundance down the road.

The whole thing ended up playing out magically, said Quillen. “Our ad budgets are barely getting spent. It’s a very young demographic with an artist who understands social media very well, and understands marketing very well. I’d say that our efforts with social media and our own online marketing are the primary drivers of ticket sales...[we're] spending very little money on traditional advertising.”

Stay tuned for Part 2 of this post in which we'll look at how the core team has developed as audience size has grown.

Monday, March 11, 2013

Heavy industry, indie industry, and the new viral


For those new to this blog, a quick recap:

I'm interested in the new types of success that are attainable in the digital era.  There are market shifts in progress on both the production and the consumption side of things -- a demassification (hence the name of the blog) where large, established hierarchies once dominated, and on the consumption side, thanks to digital and social, we are seeing a large increase of media consumption outside of the the mass media and broadcast channels.

Macklemore excited at the prospect of poppin' tags at his local Goodwill
The last few posts have used the case of Seattle rapper Macklemore to illustrate the levels of success now attainable by independent artists. He is unsigned, meaning he has no affiliation with a major music label; therefore he has to fund and produce his own recordings, videos, and tours. Macklemore and his small admin and production team of four (of which he and his DJ Ryan Lewis constitute two) handle all tasks from graphic design to merchandising and marketing and beyond.

Digital media platforms are the new smokestacks
In the previous 'heavy industry' model of the entertainment business there were large companies, whether they were film studios, music labels, or agencies, that operated more like venture capitalists. They placed bets on artists and acts, knowing full well that they would not break even on 90 - 95% of them, but when one did break through with a hit, the hit was so large and lucrative that it carried the rest of the roster.  The other part of the deal on the music side of things was that funds were advanced for activities such as recording, touring, and video production, and these advances were to be later recouped, or paid back, by the artist, from (hopeful) revenues from sales and tours. Of course, this did not/does not happen much of the time, and so the system requires the existence of massive hits to subsidize the activities of the denizens on the roster.

I will examine the business side of Macklemore more closely in the next blog post, so that we may take a realistic look at what it now means to be an independent artist with access to a global audience, and how the artist has to be ready to cope with the success not just from the point of view of touring and recording but also as a person running his/her own business.

A quick review of the case of Macklemore, to provide a sense of what is now possible, in terms of global success and sales, as an independent artist. Granted, this is the extreme end of the spectrum, but it is still worth considering as a case in point.

The single Thrift Shop, by Macklemore & DJ Ryan Lewis, was released on October 9th, 2012. By January 2013 it had reached #1 in the US, Canada, Australia, Belgium, Denmark, Finland, France, Ireland, New Zealand, Norway, and Switzerland and went Top 10 in Austria, Czech Republic, Germany, Netherlands, Sweden, and Israel.

The chart below documents the iTunes sales of the Thrift Shop single:

iTunes sales of Thrift Shop

Date
iTunes sales
Cumulative Sales



First Week of Release: Oct 9th-16th 2012
78,000
78,000



January 4, 2013
Weekly Sales of 300,000+ per week begin; Week of January 21, 2013 Thrift Shop hits #1 on Billboard
1,000,000
End of January 2013

2,000,000
February 7, 2013

2,700,000
February 14, 2013

3,000,000
March 6, 2013

4,000,000




As opposed to being a massive hit 'out of the box', to use industry parlance, it took Thrift Shop three months to reach its first million in iTunes sales, three weeks to hit the second million in sales, two weeks to hit the third million in sales, and another two weeks to hit the fourth million in sales, which occurred in early March 2013.

We see a similar pattern, of incremental building, on the number of video views on YouTube. There Thrift Shop took 5 months to reach the first 70 million views, and then just 1 month after that to get the next 60 million views.  As I write the view count is at 155 million. Note that in the last 60 days (to 3/11/13) the video has been viewed over 65 million times on YouTube, and averages ~2 million views per day.

Compare these YouTube numbers with some of the viral video hits of recent years and note how the volume of views, and the time period in which they are achieved, has swelled in the past year or so. This speaks to a maturity of the self-serve entertainment market, but also to people's comfort with viewing and sharing videos via social networks and on mobile devices (which now provide YouTube with 25% of their view base, a quadrupling in the past 24 months.).


Viral hits 2007 - 2009 / Rate of Growth



Date posted to YouTube
View count after 2 days
View count
After 3 years
View count after 4 years
View count after 5 years
Current view rate (last 30 days to 3/11/13)
Sept. 10, 2007
/
/
/
45 million
163,723







Jan. 30, 2009
/
/
118 million
n/a
554,958







July 19, 2009
4 million
80 million
n/a
n/a
407,737


And a further comparison with Gangnam Style, the face of viral in 2012...


Date posted to YouTube
View count after 15 days
View count after 25 days
View count after 35 days
View count after 50 days
View count after 60 days

July 15, 2012
10 million
20 million
50 million
100 million
200 million

Note 1: After the 60-day mark the video was growing at a rate of between 5-10 million views per day, and five months after its posting Gangnam Style reached 1 billion views, the first YouTube video to achieve this milestone.  As of today (3/11/2013) the video is at 1.4 billion total views and in the last 30 days has netted 123.7 million views.

Note 2: In late April 2013 Psy set a YouTube record for most views in a single day when he clocked 38 million views for Gentlemen, his follow up to 2012's Gangnam Style


Stay tuned for the next installments in this series, which will break out the business side of the Macklemore phenomenon.



Related Post: When books go viral: How 50 Shades of Grey's E.L. James went from self-published to world's top earning author in just 2 years.