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Insider: A new model for music distribution

From Canadian Business magazine,

Insider: A new model for music distribution

Radiohead plays both sides of the digital divide with its latest record release.

Article Tools

"It's up to you." That's how much a digital copy of English superband Radiohead's latest album costs. Crazy? Not really. Artist loyalty is a big factor in whether someone pays for music, according to research by HEC Montreal assistant marketing professor Jean-Francois Ouellet, and Radiohead's pay-what-you want model certainly proves that one of world's the biggest bands trusts its fans. But the band is playing both sides of the digital divide — it's planning a conventional CD release for early 2008, and it's also getting tons of positive press coverage. From a business perspective, Radiohead might not lose out even if the average fan pays only a few dollars for the download. Why is this business model bad news for record companies? See below.

1997

• EMI pays for Radiohead to make the album OK Computer, and spends money to promote it.

• The CD is made, and the cost is added into the final price.

• It gets distributed and that cost is added into the final price.

• The disc finally makes it to the retailer, and then the price gets marked up once again.

• The consumer pays about $17 for the CD, which probably cost the retailer about $14.

• EMI gets first cut of each sale and recoups its investment. If the band's estimated royalties are 14 points on a CD with a $20 suggested retail list price (royalties are calculated on the list, not the sale price), the band gets $1.79 per CD.

• But the producer (Nigel Godrich) typically gets three points of the band's royalty. This amounts to roughly $0.38, which leaves the band with $1.41 per album.

2007

• No longer signed to a label, Radiohead pays to record its seventh album, In Rainbows, with Nigel Godrich producing.

• Radiohead pays to set up a website to sell its new album as a pay-what-you-want MP3 download that's free of digital rights management software, allowing consumers to listen to it on as many players as they wish.

• Consumers decide how much they want to pay. If they pay anything at all, there's a 45-pence (about 90 cents) credit card processing fee.