Yesterday I posted a review of music streaming platform Spotify. Spotify has been available in the UK for a while, but the platform is only now about to become widely available in the US. Currently, the only way for US users to get access is through an invite. Fortunately, the good folks over at Spotify have been so kind as to give me a few invites to give away to Creative Deconstruction readers.

Here’s how this is going to work: I am able to give away up to 20 invites. Unfortunately for you (but very fortunately for me) more than 20 people read this blog on a regular basis. So in order to qualify for an invite you will need to take one of the following steps:

• Subscribe to the Creative Deconstruction feed via email.
• Become a fan on Facebook.
• Do both for two chances to win.

If you are already subscribed or are already a fan of Creative Deconstruction on Facebook don’t worry – I haven’t forgotten you! I will pick 10 winners from new subscribers/fans and 10 from existing subscribers/fans to make sure you get your chance as well.

And there is one last step – and this one is important – you have to leave a comment on this post letting me know that you have subscribed or become a fan (or both)!

Does all of that make sense? Let me know if you want anything clarified, but otherwise good luck!

The future of the music industry as we know it will depend on how it responds now that the product on which they’ve built their empire is no longer profitable. While the major players are intrenched in red tape and beauracracy, independent artists and record labels have an incredible opportunity to adapt and thrive under the new market conditions. So here’s the question: what do listeners and consumers value, and how can artists provide it to them in a way that enriches the experience of their music?

Six Different Forms of Supplemental Scarcity

First a little recap. Recorded music lost a lot of value when it transitioned to digital formats. Digital files can be freely copied an infinite number of times, which means that demand can never catch up. How can finite demand compete with infinite supply? (Read more about this subject here.)

That’s where ‘supplimental scarcity’ comes in. The idea is that if you have an infinite good such as digital music, something scarce (as in, existing in limited supply) must be offered alongside it in order to add value. There is a fantastic article at the Technium that has become something of an Internet classic. In it, author Kevin Kelly describes eight different forms of supplemental scarcity.  I have chosen the six concepts that I felt were most relevant and applied them directly to the business of being an artist. I’ll talk about three of them here and the rest in a separate post due to length.

1. Personalization

Fans love feeling like they are part of the music - part of the experience. Personalization makes the experience that much more valuable. The different ways that an artist can personalize their products for their fans are limitless. Jill Sobule, in an effort to fund her next album and avoid signing with a record label, offered personalization in exchange for donations on her site. Donate 10 grand and you get to sing on the record. Five thousand dollars bought you a private concert in your living room. There were different “gifts” at each donation size, each one welcoming the fan further into the process in some way. Sobule’s fans loved it and she reached her goal of $75k in only 53 days.

A more classic example of personalization would be to utilize packaging to engage fans. Radiohead recently charged an arm and a leg for a special-edition vinyl package of In Rainbows. Imagine what they could have charged if they had offered to sign and dedicate a limited number of copies. Offer something unique at key gigs in order to drive ticket sales, and make sure you aren’t offering it anywhere else. Provide functionality on your website that caters the user’s experience based on a profile they create for themselves. I could go on and on, but you’ll be most successful if you and your band figure out what kind of personalization would be most valuable for your core fans and working out a way to give it to them.

2. Interpretation

Authors have been doing this for decades at their book signings. They come to a local bookstore with their new hardcover novel displayed prominently, and their fans show up to hear them talk about the new book. What was the author’s inspiration? What was his process? Where did he write it? What does it mean to him? They go out of their way to meet the author in person so that they can hear his interpretation of his work. This kind of interpretation is even better suited to music because lyrics are so often somewhat cryptic and mysterious. Find an unique way to let some of your fans in on your secrets – I guarantee they will be more committed to your art when you are finished with them.

3. Authenticity

The music industry has suffered a huge blow in this category over the past decade. Elements of pop music have always had an element of fake-ness to them – those acts are meant to provide entertainment, not create art. Yet, from the assembly-line boy bands to the Britney Spears albums written by pale-faced men in their fifties, I think the industry has overplayed its hand. Listeners want something real.

There are a lot of different ways to let fans know that what they are getting is authentic. Release a studio b-side of something you recorded when you were just goofing around. Live albums can have a similar effect. Think about the prevalence of online file-sharing and illegal copying. If a listener is downloading a track on Limewire she has no idea what it will sound like once it’s finished. Yet, if she knows that the download is coming straight from the band itself she can trust that she’s getting the very best quality out there – first generation stuff. Kevin Kelly writes, “Digital watermarks and other signature technology will not work as copy-protection schemes… but they can serve up the generative quality of authenticity for those who care.” Find ways to set the products you sell apart from those who resell them. Bonus tracks, bundled music videos, etc. Anything that will let your fans know that what they are purchasing has come straight from you.

Share Your Ideas

So there you go: personalization, interpretation, and authenticity. I have only related the basic concepts here – there is so much that can be done with this list. Let me know what you think, and please post what you come up with in the comments section so that everyone can benefit! If you follow a band that has done something creative or innovative with supplemental scarcities please share that as well. The last three items on the list, embodiment, patronage and findability are described in Part Three. I’ll try to have it finished up and published here by tomorrow so check back soon. Also, remember that you can find out when new articles post by following me on Twitter.

In the CD’s heyday the average price of a disc reached nearly $19. Record companies took in huge margins and saw unprecedented growth. Now, less than a decade later entire albums are being given away free of charge all across the Internet. Even superstars are giving their records away. So… what happened? How did the recording industry go from lucrative cash cow to staggering giant in such a short span of time?

Supply and Demand

There are a host of reasons for the declining price of recorded music, but at its heart is the issue of supply and demand. The more demand you have for a product that is limited in availability (generally known as a ‘scarce good,’) the higher the price of the product will rise. Conversely, if the availability of the product exceeds demand, price will be driven lower in an attempt to increase demand and move excess units. It shouldn’t come as a surprise to anyone that at this point the supply of recorded music far exceeds demand. In fact, it just about obliterates it.

One reason for this is competition. As the production of recorded music becomes cheaper and easier, more and more bands are flooding the market with their tracks, hoping to get heard. The choices available to listeners have become nearly limitless. There are just too many artists vying for a finite number of fans. Bands are giving away their music in an effort to increase their share of the listener pie.

Infinity vs. The Recording Industry

There is more to the issue, though. The transition from physical CDs to digital downloads has introduced a new challenge into the industry. The model of supply and demand is built upon the concept of scarce goods – if there is no limit to the availability of a product, it is impossible for there to be enough demand to make it profitable. How can finite demand overtake infinite supply? This is exactly the challenge with monetizing digital music files. Digital files are infinite goods – they can be copied ad infinitum at no cost, and no significant investment of time. This is why the price of music has dropped, and this is why so much recorded music has been made available for free. The transition from physical to digital made free recorded music an inevitability.

Three Ways to Respond

Inevitable or not, this decline in value presents artists and rest of the music business with a real challenge. Strategies have to change. If digital music files themselves hold little value, value has to be added from somewhere else. The industry has three main options for accomplishing this, all of them related to adding scarcity to the infinite-ness of digital music.

1. Artificial Scarcity

Otherwise known as DRM. What Digital Rights Management is designed to do is place artificial limits on digital files that prevent them from being copied. I call this ‘artificial scarcity’ because while real scarcity has a direct, positive effect on value, DRM actually decreases the value of music. DRM has been proven time and time again to inhibit consumers from legitimate use. Even as a kid I remember being frustrated that I couldn’t bring a video game over to a friend’s house because it was only registered on my PC at home. I wasn’t going to copy it for him, we just wanted to play it while we were at his house! Regardless of their own personal experiences, most people can’t stand DRM. The consumer backlash has been so overwhelming that even Apple – notoriously IP centric – decided to get rid of DRM, and was even willing to raise prices past their trademark 99 cent/song in order to get the major labels to drop it. Consumers aren’t fooled by artificial scarcity, they just get irritated and take their business somewhere else.

2. Legislative Scarcity

Otherwise known as the RIAA. I’m referring here to the practice of issuing threats or actual legal action against individuals and institutions who engage in sharing digital music. This is by far the least sensible approach. First of all, it just isn’t practical. RIAA – you’re really going to go after individuals one by one until you have fined every single file-sharer or frightened the rest into compliance? How’s that going for you so far?

More importantly, though, these aggressive and costly lawsuits are a PR disaster. The record industry has never had the best image with consumers, but now they have taken whatever they had and dragged it through the gutter. The RIAA, with the blessing of the larger recording industry, has turned consumers and fans into crooks, thieves and pirates. Never mind that these same people have shown themselves to be the industry’s single largest group of paying customers. It’s just bad business!

3. Supplemental Scarcity

 The idea here is simple: accept the fact that technology has decreased the value of digital music files and find something else to sell.  It is sad to think of music in any form as being devalued, but the benefit of this approach is that it is the only one that embraces innovation rather than trying to suppress it.

So what do we sell? There are many ways to use this new market reality to the advantage of the independent artist. I will talk more about the different scarcities that can provide value along with recorded music in Part II,  as well as how those different revenue streams can add up to a successful career for an independent artist. So stay tuned, and please feel free to add your comments below.

Right now the whole music industry is caught in a Catch-22. The major record labels are bleeding money and lack the capital to invest in real talent. Real talent is usually risky, and right now the majors can’t absorb any risk. Yet, the ones who would rise up and bring the creative deconstruction have their hands tied.

As Bob Lefsetz puts it, “Rights, distribution and radio.  Those are the three cards the major labels and their controlled publishing companies hold.” Napster got busted because it tried to bypass the rights piece. They quickly found out that you can’t take a product that someone else owns and give them away. Sites like Pandora, Last.fm and iMeem are trying to bypass radio with online streaming. Last.fm has to find new ways of increasing revenue to keep from losing money to licensing fees, and iMeem has all but faded away.

Lefsetz’s words again: “Innovation has been locked out.”

“Innovators in the music sphere have been hamstrung by those rights the labels and the publishers still hold.  How many stillborn online music services have we had?  Playing by the established industry’s rules is a license to go out of business.

For the past few years, the innovators have thrown up their hands.  If you want to be in charge of your own destiny, you create an iPhone app, you don’t try to solve the problem of music distribution.

But this is going to change.

New acts see value in giving away their music.  And if you control it, you’ve got the right.  How long until there’s enough unfettered new music, tunes the creators control as opposed to the fat cats, that someone from the outside can roll up these rights and create a viable alternative to the established game?

It’s just a matter of when.”

This is a frustrating time to be a part of the music industry, but it is also exciting. The very people who are supposed to be creating an environment where artists and their music can thrive are instead hobbling their own industry from the inside out. At the same time, the opportunities that exist for great talent and innovative entrepreneurs are nearly limitless. IF they are willing to take the risks and make their own rules.

Free markets are cyclical. Economic trends will start out slow, pick up speed, boom, plateau, BUST. Take our current recession – three years ago even someone like me could afford a McMansion and a four car garage (boom,) and now we’re losing sixty-thousand jobs a month (bust.) The same can cycles can be found in the cost of goods and services.

Apply this principle to the cost of music and you end up with what Seth Godin has coined “the new free.” Here’s what he writes in a recent post to his marketing blog:

Free online has two distinct elements. Breakthrough free, like the first free ebook or the first free email service, and sample-this free, which decreases the cost of trial and lowers boundaries of the spread of an idea.

As the market for free gets more crowded, we’ll see more and more people promoting their free products, stuff that people used to have pay for. A complete shift from ‘you will pay’ to ‘it is free’ to  ‘I will pay for ads to alert you it’s free’ to ultimately, ‘I will pay you to try it’.

Mr. Godin is not a prophet – this cycle has already begun to run it’s course in the music industry. In fact, as we reported several weeks ago, at least one band has reached what Godin might call the final stage of free. The industry should have seen this coming a long time ago when CD’s began climbing higher and higher in price until they became downright ridiculous. A bust was always imminent.

Where does this leave musicians?

I’ve been telling people to give their music away for a while now, and I don’t plan on stopping. Regardless of where the market cycle is taking us most indies don’t have the resources to stand alone as the sole band still charging for their recorded music. If you don’t give your music away you won’t find the audience you need to fill venues and build a solvent career.

On the other hand, more progress needs to be made in the search for ways to add value to recorded music. We really can’t get to the point where everybody is pulling an Officer Roseland and paying fans to download – where would those resources come from?

I can tell you right now that the first place bands should be looking as they evaluate how to elevate their music above the din of a saturated market is the quality of their songs. It sounds simple, but in the social-media driven world we live in it can be easy to focus all of our energy on marketing and PR and forget about quality all together. Are your songs really all that good? Are they better than the thousands of other songs freely available to the same listeners you are trying to hook? That may sound harsh, but it’s what it will take now that you can’t price your music any cheaper.

The Chicago Tribune ran an article a couple of days ago by music critic Greg Kot. In it Kot talks about the way that the ‘Darknet’ – closed networks where users engage in illegal file sharing – may cause the government to impose tyrannical restrictions on the Internet in order to protect copyrighted materials.

Kot paraphrases Rick Carnes, the president of the Songwriters Guild of America and one of the major proponents of this conspiracy theory:

“When the government starts putting the screws on rogue Internet traffickers, ‘You won’t be able to get on the network unless you have total identification,’ including finger-printing and complete background information.”

Sound a bit extreme? Kot does point out that the music industry has friends in some pretty high places, but Carnes’ picture of online doom and gloom is nevertheless more sensational that rational.

While the RIAA and other industry groups here in the US still appear to be taking a primarily legal and political approach to combating online file sharing, the fact that the four major labels back Google’s ad supported MP3 search  engine in China is a good indication that the recording industry has realized that they cannot stem the tide of free forever.

It’s a shame that by the time the music industry tires of lawsuits, crackdowns and threats enough to embrace the change that has already progressed so far without them, there may not be much of an industry left.

Business Week ran an article recently that talks about the “problem” of online music streaming services. The article claims that while online streaming was initially intended to promote music, and therefore promote the purchasing of music, it has actually had the opposite effect. The author describes a 23 year old man who has gone from spending over $100/mo. on music purchases to only $10/mo. because he figures he can simply stream whatever music he wants to hear at any given time.

Despite the account of the single consumer they interviewed, I disagree that online music streaming has really caused the sale of recorded music to decline. The fact is that online streaming does promote music. The listener is exposed to music that they may never have encountered otherwise. When a listener hears something she likes, she will look for more music by that artist and may end up a loyal fan down the road. Does that guarantee that she will someday purchase the music that she has enjoyed via the music streaming services? Of course not, but she is much more likely to do so than if she had never heard the artist in the first place

This perspective also seems to ignore the fact that conventional radio has been doing the same thing for decades. (Of course, Billy Corgan has decided he doesn’t like that either – but that is another post entirely!) Listeners do not pay the radio stations that they tune into, and the stations - particularly online stations – pay big royalties on the music they play. It is understood that the artists benefit from the free publicity, and the radio stations make their money from advertising dollars that exist because so many people are able to listen for free. The listeners obviously get to enjoy music in their homes, cars or wherever else they happen to have a radio. It works the same way online. Granted, there are at this point fewer listeners, and the ad dollars haven’t caught up with conventional radio, but the free publicity piece remains unchanged. If both services ‘stream’ music into the home, why is one generally accepted as promoting the sale of music, and the other as discouraging it?

The answer is that this entire discussion is irrelevant. Free online music streaming is not discouraging it’s listeners to purchase music any more than conventional radio. In fact, it is almost certainly helping music sales, especially for lesser-known artists. The real issue is that the old Industry models are broken in far more serious places. Consumers have decided what they want – free music that they can listen to whenever and wherever they want – and the established Industry doesn’t like it. The argument against online streaming is just another straw man that the Music Industry has erected in an attempt to reclaim some of it’s former control.