Radiohead revisited

Geoffrey Manne —  1 October 2007

I started writing this as a comment to Josh’s last post, but it got so long I figured I’d make a post out of it.  Thanks for the inspiraiton, Josh.

I really hope Radiohead releases the data on its little experiment!  My prediction: They will receive an average price of $2 and a median price of $0. 

And I think Radiohead has a better chance of succeeding than that coffeeshop Josh wrote about (which is somewhere near here, right?  I should really go grab some free coffee).  Their fans are rabid, and they feel an emotional connection to the band unlike I imagine anyone has to a coffeeshop.  There are people out there who believe that Radiohead changed their lives.  Incidentally, these people are also anti-capitalists.  And yet they will find themselves throwing money at the band, completely unnecessarily, simply because, well, it’s a whole new zeitgeist, man. 

For the rest of us–the more rational Radiohead fans (it’s hard to deny the quality of this band.  It’s hard to believe that the same public that loves Britney could also love something as good as Radiohead, but there it is)–views will be split.  Some will feel an obligation to compensate the band for their work, although they will find it hard to explain exactly why they feel obligated if the band itself is not obligating them.  Others will think it’s cool, and it’s an awesome slap in the face to the paleolithic record labels, and will contribute to the cause.  And most will know that they would probably have just burned the CD from a friend anyway, and entering credit card information is such a pain, and, well, why should I pay if they don’t make me?  And these people will pay nothing.  A large subset of them will claim to have paid $5.

So what does the band get?  For starters, some good press (although they hardly need that).  They also get to satisfy their moral desire to bring down the (putatively) evil record labels (to say nothing of DRM!) and to demonstrate their disdain for capitalism and consumer culture.  Consider it a form of charity. 

Or competitive advantage.  I can assure you that in a post-record-label/post-DRM world, where revenue comes from live performances and t-shirts, Radiohead will be in a considerably better position than the 4 million bands trying to make it on MySpace.

Here’s what else they get:  An excellent mailing and e-mail list.  To buy (or receive gratis) the album from the website one must enter name, email (and no cheating, since download codes are sent via email), address, cell phone number (but not home number.  Anyone see mass text messaging in Radiohead’s future?), etc.  For Radiohead, this is a valuable list, I imagine.  It may also be valuable to any number of direct marketers and online advertising companies. 

Mostly, though, I think Radiohead is leaving money on the table.  And I also think that the band will not release the data, and we won’t know the extent to which this experiment fails.

I, for one, have already pre-ordered my copy.  And of course I paid $5.

UPDATE:  Steve Levitt wants to crunch the data.  Note also the colorful quote from Thom Yorke (Radiohead’s front man) about the music industry’s “decaying business model.”

Geoffrey Manne

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President & Founder, International Center for Law & Economics

8 responses to Radiohead revisited

  1. 

    If there is money left on the table as asserted here, and Radiohead desires to maximize financial wealth, what will be the reaction of fans if this experiment does not maximize financial wealth and Radiohead decides to revert back to selling cds under the old model. Will fans be satisfied with just one free cd? I doubt it.

    A smarter strategy for Radiohead would have been to release content that is different from the usual studio recorded cd. For instance, release a live album for “free” with varying versions of upcoming studio songs. This would allow Radiohead to satisfy fans with a free product and also allow Radiohead to get valuable “feedback” from their fans. Software companies essentially do this when they release “alpha” and “beta” versions of software. Should be interesting..

  2. 

    What makes you think they receive more (net) than $2 a CD now?

  3. 
    market failure, right here 2 October 2007 at 12:27 pm

    Nice comment, Hanno.

    I’d add that I think that providing a secure download through the official website might decrease piracy through BitTorrent, etc.

    One of the main arguments people make for downloading pirated music is that most of the money goes to the record label. People can’t really make that claim with people like Radiohead, and, on a lesser scale, people like Kristin Hersh: http://www.throwingmusic.com/.

    So, while Strategy A may lead option 1 to cannablize option 3, it may also cannablize the black market.

    Also, I’d add that strategy A allows for a far greater level price discrimination, offering everything from the barebones download to the big boxed set.

  4. 

    Compare the expected value of two business strategies.
    Strategy A
    1. Free album download
    2. Customer information from (1)
    3. Album sales in stores with lyrics, cover art, and some other stuff that fans value in the bundle
    4. Concert ticket sales
    5. Merchandise sales
    Stragegy B
    1. –
    2. –
    3. Album sales in stores with lyrics, cover art, and some other stuff that fans value in the bundle
    4. Concert ticket sales
    5. Merchandise sales
    Obviously, the band expects A to be more profitable than B. In A, the main downside relative to B is (1) cannibalizing sales of (3). The upside is reaching a broader audience and increasing the loyalty of existing fans, which can reasonably be expected to translate into some incremental revenues from (3), (4), and (5). The information collected in (2) may also be valuable. Will that incremental revenue more than offset what Radiohead is leaving on the table? That very much depends (among other things) on how much the band would have made from selling records under a contract with a label. For most artists (teachers, consultants, lawyers, doctors, etc.), piracy isn’t the most pressing problem, obscurity is. Thus, a strategy of “giving away stuff in order to sell the same and other stuff” may make a great deal of sense. Radiohead’s decision to make copies of their new album available for free suggests that even for a headliner, the business opportunities from further increasing its poupularity (diminishing obscurity) outweigh the expected losses from cannibalization.

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