Selling Music Directly To The Fans, But At What Price?

I think the reason everyone is so excited about In Rainbows is because Radiohead is going directly to the fans, bypassing the label system and the online distribution hubs like eMusic, iTunes, and Amazon. This is the model the Internet has presented for years but nobody has really taken advantage of it.

It’s true that a band nobody has heard of can’t do this (yet). It took a band with a big brand to do this. But overtime, I think things will change and allow many others to do the same. More on that later.

I said that I paid about $5US for the record. I’ve heard a number of bloggers suggest that was low. Read Write Web did a poll that suggests fans think $5-$9 is about right for a mp3 download of a entire album.


That’s interesting and if the market settles into that range, then by all means I am happy to pay more than the $5US that I voluntarily paid for In Rainbows. But I think the $5 price is a pretty decent deal for the band and here’s why.

In the traditional label system, when a CD sells for $14, about $5 goes to physical distribution, to the distributor and the retailer, leaving about $9 per CD to the label. Of that $9, about $2.50 goes to the artist (depends on the royalty rate and the songwriting credits).

In the case of In Rainbows, Radiohead is getting the entire $5 I paid (and has to pay some costs associated with the web delivery system they are using). But they are certainly getting more than they’d be getting in a traditional label deal.

Silicon Alley Insider reports that In Rainbows has been downloaded 1.3mm times in less than a week. If $5US was the average price, that’s a gross of $6.5mm in four days. I think that’s a pretty good deal for the band, probably better than they could get in a traditional label deal.

But one thing that puts a wrench in all of this is that Radiohead is going to release the album on CD early next year through a traditional label deal. So everyone who paid for the download now feels that they might want the CD too. I really don’t understand why anyone would want the CD except for better sound quality. So, maybe Radiohead should have offered high bit rate mp3s, or even better AAC or FLAC.

If the technology platform that Radiohead is using were available to every artist in the world for a very low fee per download (say $0.25 per download), then we could see a lot of bands choose to sell their music this way.

Then we’d need some kind of marketplace to emerge to source up the most interesting music and point to the download services for each artist. That marketplace could even be advertising supported so that it wouldn’t need to charge for the "marketing services" it provides the artists. That’s how digg works today to surface interesting stories.

At $5 per download, an emerging band would only have to sell 25,000 downloads to make a decent amount of money off their music. The system that exists today sucks up so much money on marketing and distribution that 25,000 CDs makes no money for anyone. And that’s why we need a new model, the kind of model that Radiohead is pointing towards.

#My Music#VC & Technology

Comments (Archived):

  1. Andy Piper

    I paid about twice that – £5. It’s still a cheap price for the UK… my justification being essentially the same as yours, and since I wasn’t getting particularly high bitrate MP3s with no album art or embedded lyrics of anything (and I can download good DRM-free albums with artwork etc. from CDBaby for around the same price, or less).It’s an interesting experiment. On last week’s Dogear Nation podcast they mentioned this thing called TuneCore which might be an attractive option for independents who want to release music… no idea what it is like though.

  2. vruz

    who better than Amazon S3 / EC2 to become the next music business platform ?

  3. allen stern

    What I would love to see is the ability to buy music from any musician around the world directly. If I like Grunge Puppets and Meatsauce (made up name) from the U.K., why can’t I purchase this in the U.S. Does this radiohead deal fix that (copyright) issue?

    1. Peter Kafka

      allen, if you like grunge puppets and meatsauce, do i have a band for you! better yet, they’re real:…i recommend “out my way” and their cover of the stones’ “tumblin tumbleweeds”. pk

      1. allen stern

        nice one peter! :)will download later

  4. ErikSchwartz

    Albums are expensive, not because of manufacturing, distribution and promotion of the bands that are successful, but because labels spend a lot of money on bands that are ultimately unsuccessful. Yes successful artists make a pittance on album sales, however, unsuccessful artists are not required to pay back their advances and expenses.Solve the unknown band promotion problem and the labels can be disintermediated. The expensive part is building the brand.

    1. Garth Walker

      That’s another problem with the current model…. The reliance upon Britney Spears and Back Street Boys type crap in order to turn a profit and have the ability to take a “gamble” a lot of the real music out there.

  5. terrycojones

    I think a (probable) interesting factor here is the pent-up annoyance of your average music downloader with the music industry. Some part of the Rainbows revenue is due to regular music lovers who want to give the finger to the music industry, and encourage other artists to follow Radiohead’s example. I’m sure there are plenty of people who are sick of being called thieves, pirates, etc., (not to mentioned being threatened, hacked, and sued) by the music industry. Hell, I’d pay a few dollars to send them a message, and I don’t even like Radiohead.I wonder to what level voluntary payment would sink if all music were available via this model and there was no emotional up-yours-to-the-RIAA factor. It shouldn’t take long to find out.

    1. vruz

      there’s the interesting factor you mention, and there’s also Radiohead making great music.the kind of thing many musicians are unable to do under tight editorial control, the stupid race for the next big thing, the next single hit… the simple minded one-size-fits-all approach to selling it looks like the know-it-alls didn’t really know what they were doing.praise to Radiohead, for both the musical talent and the entreprenurial drive !!!

  6. Bruce Warila

    It’s a chicken and egg thing for artists. iPods are the new radio right, and every artist needs “spins” to sell music. I advise artists to do everything possible to get into 200,000 iPods; including using the strategy of screaming out FREE music ( everywhere you can. Using a 5% conversion (listeners to fans) gets you 10,000 fans that may spend $50 over a 24 to 36 month time period (what’s a fan worth?).. The obvious challenge is to get into the mix on 200,000 pods. If you can keep your customer acquisition cost low, and if the lifetime value of your fans is high (they go to your shows, buy your shirts, traffic your site), you have a win… I have thought about going a step beyond Radiohead (as a stunt) – “I will pay you to put my artists’ songs into your iPod” – I believe in the music and I am confident I will get a high conversion ratio, and Jediah’s demographic (DMB, Coldplay, U2) is high value… Check out gogolbordello live – (this isn’t my deal – I went to the show on Thursday – great live show). Cheers.

  7. maths

    I think that sometimes the debate about the bit rate of the Radiohead downloads is misplaced. iTunes has been distributing 128kbps quality tracks for ages which the market in general was accepting, and Radiohead decided that the time was right to up the bitrate to 160kbps. Of course as stated on this blog, there are the obvious dissenters but surely that responsibility cannot be placed on Radiohead’s shoulders alone – they have done enough to bring the evolution of music distribution to another level and it is surely the responsibility of all the others in the space to step up. Russia’s already carried the mantle of being the most sophisticated online music store in the world with its breathtaking range of formats – here was a forward looking store that innovated by investing some of their so-called ill-gotten gains (this piece is not about the rights and wrongs of and I’m not getting into that either) into consumer-friendly service and yet, not one of the major prominent online retail stores saw it fit to adopt some of these features and product formats that introduced. And surely it is too much to ask of Radiohead to pander to everyone’s varied tastes at first time of asking – they are still basically a band first, and in time, I’m sure their retail offering will evolve. After all, as Jonny Greenwood stated in an interivew (…, their 160kbps has already raised the bar “We talked about it and we just wanted to make it a bit better than iTunes, which it is, so that’s kind of good enough, really. It’s never going to be CD quality, because that’s what CD does.”So the gauntlet should be laid at the feet of the iTunes, Yahoos, Napsters, Rhapsodys and all other retail store pretenders, it’s about time to wake up and offer more to consumers, as Ian Rogers of Yahoo Music stated in his now famous blog at… .

  8. Geoff

    Type your comment here.As a total aside I went to see Control last night the film about Ian Curtis of Joy Division. Incredibly sad about the pressures bands are under but simply great music score.

  9. donroll

    I agree that $5 to $9 is the right range but only if they go to a lossless format as you suggest. Bit rates of 128 to 192 just do not sound that great on a good stereo system. As storage capacity grows cheaper and smaller, everything will eventually go lossless.

  10. ppearlman

    u musta seen lefsetz rip em a new a on the news… love it when this guy rants…

  11. Douglas Karr

    It’s amazing how business will try to right itself – supply and demand at it’s best hour! If CDs cost $20, people share and download the music via P2P sharing… with the business losing ALL the money. If the music costs $5, though, people are willing to make the purchase.It really makes this industry, digital rights management and suing of single moms terribly wrong, doesn’t it? They are simply trying to push upstream.Rather than adding more security and legal bills (that cost money), they should simply be lowering the price!

  12. dub

    I paid 32 cents because I have been so angry about their stance against putting music online for download. I overpaid for the last 3 albums, so I feel vindicated, but the album is worth $20.

  13. Steven A. Carpenter

    Fred-I am a bit surprised at these findings and they run counter to my experiences in the digital music world. Prior to starting Cake Financial, I was the Senior Director for Strategy and Business Operations at Rhapsody, where I helped manage the streaming and download businesses.What we found there was that sales were overweighted to tracks over albums and that labels were desperately trying to increase album sales. I worked with some of the labels on pricing elasticity experiments and the overwhelming evidence for most artists indicated that $4.99 was the sweet spot for albums, especially back catalogs. Interestingly, new release hip-hop albums could fetch a much higher price, upwards of $9.99-$11.99. So, it will be interesting to see how bands, especially top acts, as they get more savvy at pricing, will ride the price curve, much like the book publishing industry does.

    1. fredwilson

      StevenI agree with you, $4.99 for an mp3 download of an entire album seems to meto be the sweet spot. That’s why I chose that amount myself.Fred

  14. D Ashcart

    “… if the market settles into that range, then by all means I am happy to pay more than the $5US that I voluntarily paid …”Why on earth would you let the “market average” dictate the value of a commodity to you? Is it something moral or the alleged “wisdom” of crowds? If I wished to use the Radiohead CD as a coaster, I’d have paid 25 cents (or 50 cents since I could use both sides). However, I paid $4 for it since I’ll probably listen to it a few times (less than 10) and move on.

  15. Felix

    Fred, you say that “Radiohead is going to release the album on CD early next year through a traditional label deal” — which is something I’m desperately trying to get clarity on. Do you know this? If so, how?Because I don’t think it’s true. Yes, Radiohead are going to release In Rainbows on CD next year. And yes, they’re talking to the big record labels. But I suspect that what they’re talking to the labels about is much more of a simple distribution deal than it is a traditional label deal. Indeed, it *can’t* be a traditional label deal, because under a traditional label deal, the label pays the up-front costs of recording the album in the first place.So if you have any information on what Radiohead may or may not be talking to the labels about, I’d be very interested to hear it. Given what they’ve said about the labels in the past, though, and given that they bypassed the labels with the download experiment, I’d be a bit surprised (and disappointed) to learn that they were negotiating an old-fashioned contract.

    1. fredwilson

      FelixYou are probably right, it’s a physical distribution deal they are workingonfred

  16. Dhru Purohit

    Thought you might be interested in this:“AmieStreet, of which Amazon is a recent investor, is a social market place for artists to onnect with fans and promote and sell their music. The site has pioneered a “pay by popularity” model, whereby transparent market forces dictate the price of music. All tracks on AmieStreet start off free, then the more the track gets downloaded, the more the price increases in increments, all the way up to the industry standard of 98c.”Got this from Nipun:

    1. fredwilson

      I like aime street, but one thing I think they should fix is the musicshould also decline in price if it’s popularity wanesIt should be a true market

  17. Don Jones

    Six months ago, I bought an online MP3 direct from Harvey Danger – paid $5 for it.

  18. julienulrich

    I’ve been running, the domestic contender to iTunes, for 2 years now; relatively speaking we’re doing ok since we have about 20% market share here in France. We’ve been advocating anti-DRM for a while – we currently offer about 1M tracks in mp3/256Kbps format .We have conducted a bunch of tests which show that elasticity is far greater than one, so we’re convinced everybody would be far better off if we could cut prices but no label is willing to take a shot at it. I am convinced that the sweet spot for albums is indeed around 4 to 5€ – but we’re stuck with labels not wanting to lower their prices to us.They charge us about 6,50€ for an album that we sell for 9.99€ – the State takes 2€ (VAT here even for Internet purchases), so that leaves us with only 50cts gross – pretty hard to do anything to lower the price even when you’re Apple and you operate out of Luxemburg and only pay 5% VAT (nice padadox : European laws prevent us from operating from there because we’re European…). But Apple has no interest in lowering prices at this stage, and labels are too rigid to do anything about that either -some even think that they can raise prices!

    1. fredwilson

      Which is but one reason that radiohead is doing everyone a favor by showingthat price elasticity is high

  19. bsiscovick

    I am sure you’ve all seen the “uproar” about the sound quality of the free download and its relationship to upcoming CD release (and referenced in the post and comments here). Check out this video and article the topic on…At the end of the day, I don’t fully understand why Radiohead would choose the 160kbps route? Are the cost benefits so overwhelming to merit offering the album in lower quality compared to their previous releases? And if not, was this quality choice merely a ploy to spur CD sales later on?Either way, I think there are lessons to be learned for future artists to follow this distribution path: a) be extremely upfront with your audience about sound quality and future distribution plans, or b) avoid any PR dissonance by releasing albums in the highest possible quality (yet, cost-effective) format.

  20. Satya Patel

    I agree that the new model of online distribution can work for big name bands and even emerging artists, particularly because of the relationship that can be built between the artist and the fan when the artist sells direct. I expand on this point a bit in a recent post on my new blog and would love your thoughts.

  21. Jeff Grill

    What if “In Ranbows” was distributed for free with listeners having to pay after they have experienced the music. While I paid 2 pounds for the download, I would have paid 4 if I had known how much I would like it.As any good salesperson knows, you can always charge more after you have demonstrated the value.