“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.
• 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.
• 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.
• The consumer is happy because they probably paid less than they would have for a digital album download elsewhere, which enhances loyalty to the band.
• Radiohead is happy, because if the average fan pays $1.50 (net of processing), it makes at least as much as it did when it was signed to EMI (not accounting for publishing royalties). Who’s not happy? The record company, which is effectively cut out of the value chain.