Thursday, January 24, 2008

Radiohead: The Business Model

Free is not a business model. Some things occurred to me about the recent Radiohead experiment (nee "revolution").On TheDrama20Show there is a lengthy piece on "consumers are cheapskates" provoking comment on the model; one of the comments is very very telling, and very very important: "Cutting out the middlemen lowered the price that a Radiohead customer was willing to pay for Radiohead’s music. The loss of the middlemen did not entice non-customers into becoming customers. This makes sense since the loss of the middlemen did not make Radiohead’s music more valuable, it simply made it less expensive" The comment is unattributed but wow, nail-on-head. But it did not end there: oh no, Drama20 returns: "Do you really believe that the elimination of the middlemen factored into the customer’s evaluation of the value of the music? I personally doubt that the average customer calculated the costs eliminated by the removal of the middlemen and adjusted the price accordingly" I've also heard someone say this about their kids, i.e. that they knew what the royalty split was and just decided on a price point that gave more money to the artist (i.e. artist may have received $3 under old programme, so paying $4.50 seemed a good up to them). And kids talk, especially about music, and especially about their favourite band, so if this "fair price" got out there in circulation, I have no doubt that the "crowd" might set a price (not that it is one crowd). The argument goes that the "studio system" is required because it fosters bands brings bands to the attention of the audience, that only 5% of bands actually make money for the record company, i.e. most bands don't find an audience (product-market-fit failure), i.e. the company is a two sided platform that doesn't work very well. (hatip Umair ). Name-your-price/ priceline model is a great way of segregating customers; it's a great way of gaining attention by being viral. On my own front page Radiohead own the chart; they are probably played 5 times as much as anyone else. Will that translate into more ticket sales to gigs? Absolutely. Will it sell more T-Shirts? Absolutely. i.e. the "profit pools" lie in ancillary services, attention is the razor, belonging is the blades. Given the moves by companies such as Newsgater to offer their products, once premium priced downloads, for free, is premised on the rationale that having experienced the products in a personal capacity, end users will understand how paid-for enterprise versions could be value adding to their companies ( i.e. Free in consumer to cross subsidise marketing to the enterprise). It's an interesting hypothesis, but essentially it is betting that "the ultimate customer", in this case the enterprise, is also willing to pay for your product, and that another competitor isn't cross subsidising entry into your market "for free" in order to gain access to their own "profit pools" (imagine IBM giving away free Publisher Manager in order to sell you business process improvement consulting?). So, not only is "Free" never "Free": sometimes Free might just be putting a time-delay between you and the realisation that some other bigger animals are slowly sauntering towards your profit pool. Of course, I could be way, way wrong....

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