Last Updated Apr 15, 2010 6:57 AM EDT
Unfortunately, this logic depends too heavily on the kindness of strangers and the belief that people prefer quality. History and data suggest those assumptions don't hold because, on the whole, people are rarely willing to pay for quality and value. More often than not, they're satisfied with whatever seems good enough.
Leonhard articulates a world-view that is seductive for both consumer and content producers alike, because it suggests a solution that gives everyone what they want. Content companies and individual artists want to create viable businesses in of the strange and threatening world of online content. Consumers want to get something for nothing. (Who doesn't?). Leonhard says:
Imagine when buying access to eBooks, you wouldn't just pay for the authorized enjoyment of the authors' words, but you would also gain instant access to highly curated and socially-networked commentary, a fire-hose of meta-content provided by your most important peers and friends that may also be reading these books, and their ratings, explanations, slide-shows, images, links, videos, cross-references -- and maybe even some direct connections with the author or the publisher. In an access-based, bundled and cloud-centric content ecology, being a legitimate and authorized user enables engagement, conversation, relevance, personalization, meaning... i.e. it unlocks really valuable benefits for the user. Connect with Fans + Reasons to Buy (as has been mentioned on this blog a few times, before, I believe) - that's where the money is.What Leonhard describes is the online equivalent of the "special edition" DVD. However, if the perceived difference in price is high -- and you don't get much higher than any amount versus free -- then, as happened with normal DVDs versus Blu-ray, you kill sales of the premium version. Why? Because the cheaper option is good enough for most people.
Consider the freemium software services market as an analogy. A company provides services from a website. There is a base offering that's free for anyone, and then one or more plans that offer enhanced and extended services for paid subscribers. Conversion rates from free to paid users are on the order of one to three percent. The reason the conversion is so low goes back to that fundamental consumer law: most people are happy when products and services are good enough, especially when the price is low.
You can make a business out of a freemium model, but you generally need massive scale to get enough people to convert to paid accounts to get sufficient revenue to operate. In successful freemium markets, you'll generally find a few dominant players, maybe some smaller ones, and then nothing. The number of people who want even the free service isn't large enough to sustain more.
Now consider content. Most books do well if they sell even in the tens of thousands of copies, with a hundred thousand being a hit. An album that sells a million receives special notice. Top magazines may reach audiences in the millions, but only a fraction likely reads any one given article. Few online videos will get even get to six digit audiences, let alone more. Given the amount of media in the world from a variety of sources, only a few prominent writers, directors, performers, or content creators ever attract big enough audiences to generate enough conversions from free to paid users to, in turn, generate significant income.
Traditionally, large companies have provided investment capital for content creation. Artists get money up front to create and distribute work. It's true that artists make more per sale if they deal directly with consumer, but then they must then find their own funding to devote the time needed to do the work in the first place. Unlike a media company that uses a few big hits to float its entire operations, the individual is in an all-or-nothing situation. If the song, book, or video flops, that's probably the end of their business.
Mind you, I'm not saying that media companies are "good" or that draconian controls on media are the answer. But let's recognize that some outcomes seem inevitable. When big media companies go out of business -- and many will -- few independent content producers will earn enough to stay afloat. Many will drastically cut back on their creative output to focus on making a living in some other way. That's because most assumptions about how much money people can make from these new models are overly optimistic. Look at Leonhard's concept:
The music industry needs to ask itself this question: if a permanent, unprotected download of a song would cost only $0.10, or if an ad-supported version of a on-demand, all-you-can-eat music service would be seamlessly bundled into your mobile phone subscription - would anyone still bother to scour the web to find badly ripped, virus-laced tracks for free?There are plenty of people who dislike paying for anything, and who will continue to scour the net for free material. Their number may be fewer than today, but to assume that the percentage drops to near zero is unrealistic.
But nevertheless, let's grant that conceit and do the math. Say that a band has a big hit -- a million downloads of a track at ten cents each. The popular track also drives sales of some additional "high value" material to 2 percent of the buyers, who pay an additional $5 each. All told, that's total revenue of $200,000. From that, you must deduct the following:
- a year of modest employment for all band members, who must also factor in taxes and benefits
- all marketing and promotional expenses (and, no, it's not all free just because its online)
- costs for recording studios and production
[UPDATE: As a reader reminded me in a comment, Courtney Love wrote an article in 2000 that explained the economics of recording for musicians. It's worth the read.]
And so, the band goes back on the road, because there is a separate market for live music. The band makes little on CD sales, as people download the music. That is unfortunate, because touring is expensive and not necessarily that remunerative. Musicians depend on selling CDs, t-shirts, and other paraphernalia. Nevertheless, for most people, free is good enough, and the financial return on live performances has dropped significantly, especially at a time when the band depends on the success of ancillary sales.
So few people, in fact, buy the extra value offerings, which have their own cost to produce, that the band can't afford to produce them any longer. The whole concept sounds good, but for most artists, it's unrealistic.
I'm not trying to paint a bleak picture or wag a finger. Nevertheless, few people think though the ramifications of very cheap music, or any other sort of content â€"- ramifications which, by the way, I think are inevitable. People don't recognize the true costs behind the cheap download. No reason they should, as we've all been brought up to believe that distribution, not content itself, is the real expense. Some content producers will be fine, at least monetarily. They'll produce material for corporate sponsors, or they'll be in a relatively low-cost type of activity, like writing, and will have enough of a name to sell directly. Or they may have established names and followings. But emerging artists will find the going fraught with poverty because, after all, free is good enough for most consumers. Sadly, we may all end up poorer for the music, books, art, and films that we'll never get to see.