Musicians have been relying on cross-subsides for a long time now (cross-subsidies: not making much money from album sales, but depending on complimentary sources of income in order to earn money and build a reputation).

A NPR interview with The Dresden Dolls from 2007 exemplifies the importance of cross-subsidies for musicians. Singer Amanda Palmer explains that the bulk of their income is from merchandise sales, “We make almost no money off our recordings.” She goes on to explain the value of other profitable measures such as music licensing and how they earned $40,000 by allowing their song “Coin-Operated Boy” to be in a TV ad in Austria.

Although the retail price of an album typically fluctuates around the $15.00 mark, most musicians never see more than 6% ($1.00) from each album sale. Over the last few decades, 94% of album-generated revenue has been procured by record labels in order to recoup distribution and manufacturing costs.

The argument raised at this point may claim that one dollar of profit multiplied (by even a relatively low) 100,000 units sold is $100,000—a decent sum. However, the fact is that such profits are quickly sliced by standard distribution agreement contingencies.

For the most part, artists that sign to a major label enter a standard distribution agreement that grants them a royalty percentage on album sales. Initially, the label awards the musician a large advance to cover recording and living expenses. However, the musician will only begin to earn a profit after all these costs are repaid to the label. The largest percent of royalties goes to overhead and marketing.

In the end, the debt is so high that most musicians (over 85%) never pay it off [1]. For example, a band would need to sell over 250,000 albums (earning $1.00 in royalties from each album) just to pay off a typical $250,000 advancement [2]. It’s for this reason that musicians rarely make a living on album sales alone, relying instead on a large fan base to boost ticket sales, merchandising, and licensing opportunities.

Traditionally, musicians earn very little from CD sales, thereby making it reasonable for them to sacrifice these miniscule royalties for a larger audience, which will in turn generate more income through cross subsidies, or external sources of income—often concert ticket, merchandise, and licensing profits.

The value of cross-subsidizing is already well-known and accounted for in the music industry. Through the typical standard distribution deal agreed on between most musicians and labels, the musician agrees to a smaller amount of profit from album sales in exchange for a higher return in cross subsidies. In economics, cross-subsidizing means earning less on ‘Product A’ in order to promote ‘Product B’, where in the end overall earnings exceed the cost. Wal-Mart does this by offering DVDs below cost in order to lure you into their store (Anderson). They assume people will buy other products while in the store, thereby eclipsing the loss taken from the under-priced DVDs.

To draw a parallel, musicians can under-price their album— or give it away for free, as I’m arguing—and assume people will buy other products.

A great overview of Creative Commons:

When I was in music school the “poor man’s copyright” was often recommend as a way of legally protecting my music. The basic concept is that you mail a copy of your music to yourself, after the package arrives you leave it unopened, and then use the post office’s date stamp to prove ownership.

I never actually tried using the poor man’s copyright (and I’m not sure if my friends did either). The idea seemed too easy for someone to fake, and I didn’t actually believe it would hold up in court. It turns out I was correct - for the most part.

The U.S. Copyright Office’s website remarks, “it is not a substitute for registration.” The UK’s Copyright site goes a step further and insults the poor man: “It is so easy to cast doubt on such evidence, we believe it is next to worthless.”

This would make you think that registration is the only option for obtaining a copyright, but the opposite is true: copyright is automatic. An original work is legally under copyright the moment it is created in a tangible form, and does not require the signing of official documents from the government.

If it is automatic then why pay the $45 fee to register?

According to the U.S. Copyright Office’s website:

“Many choose to register their works because they wish to have the facts of their copyright on the public record and have a certificate of registration. Registered works may be eligible for statutory damages and attorney’s fees in successful litigation. Finally, if registration occurs within 5 years of publication, it is considered prima facie (ie. by first instance) evidence in a court of law.”

What I take from all this: registering will hold up better in court. Next time I’ll look at why traditional copyright may be harmful for musicians.

“Practically everything web technology touches starts down the path to gratis,” explains Chris Anderson, editor-in-chief of Wired Magazine and author of an upcoming book detailing why free is the future of business. He notes that when a tangible product can be effectively distributed as an intangible product, we consume it differently. Production costs become less, delivery and storage fees dwindle, and eventually so does market value. Many products once sold for a profit are now free in their digital incarnations: stock quotes, maps, encyclopedias, etc. This trend has already transformed myriad industries, and made others completely obsolete.

Google has anticipated this continuing price depreciation by offering most of their online applications at no cost to consumers. Before Gmail launched in 2004, offering one gigabyte of email storage, competitors like Yahoo offered only four megabytes (256 times less). Three years later, Yahoo has followed the trend and offers “unlimited” email storage. Those who can recognize consumer trends early have the most to benefit. This strategy has been a key factor in establishing Google’s dominance in various online markets. Google uses free products to reach a wider audience, and then leverages this ubiquity to sell advertising space and alternative products.

As the price consumers are willing to pay for CDs drops, musicians should anticipate this trend in the music industry and use their recorded music to reach wider audiences.

Wired has set up a 10 round “smackdown” between Trent Reznor and Radiohead. Reznor seems to be cleaning up the most votes from fans. One of his more notable accomplishments, “Reznor advised Australian fans to steal his music after Universal priced it at AU$30.” As of my writing this post, the only category Radiohead has won is the “timing” category for the accomplishment of releasing their album first and “turning the music biz on its ear with the Oct. 10, 2007, In Rainbows release.”

Check out the fight and vote at Wired Magazine’s website.

Today musicNeutral attended Lawrence Lessig’s talk about his new project “Change Congress.”

Lessig, who founded Creative Commons in 2001, gave his last free culture speech back in January and has since then refocused his efforts on fighting corruption in Washington. Using examples and a fast-paced powerpoint-ish presentation, Lessig pointed to obvious problems that Washington has “failed” in solving: the Iraq War, global warming, copyright etc. Lessig states a “dependency on money” as the reason for these insufficient solutions. He believes politicians are sacrificing trust and quality for money.

Change Congress is seeking commitment directly from the candidates and legislators. Once taking the pledge, these politicians can embed a small “widget” on their official website making it known that they comply with Change Congress’s rules for transparency. This is similar to the approach used by Creative Commons because it’s a proactive method of getting the decision makers directly involved.

In much the same way Lessig’s Creative Commons licenses have reworked copyright law to permit the sharing of information, hopefully Change Congress can remove Washington’s dependency on corrupt money in an effort to create a higher level of trust and quality in our government.

The site is still in beta, but more info can be found here: www.change-congress.com

Marketing genius Seth Godin had a talk with some music industry folks a few weeks ago.

He has a great analogy of free music as “dating”.

Basically, let the fans listen to your music. See how this first encounter feels (just like “dating”). If it all goes well, then go on another date. Hopefully after enough listening, if it works out then you’ll fall in love. He sums it up with this point, “I have every record Ricky Lee Jones has ever made including the bootlegs that she sells. Rick Lee Jones should know who I am!” The idea is that when people fall in love they will spend lots of money to nurture that relationship, but you can’t just walk up to a random person on the street and propose marriage! You have to date first.

More insight and the full transcript is on the Seth Godin Blog.

People used to say that it didn’t matter if you were the greatest band in the world because no one would ever care unless you got played on the radio.

Today there is infinite airtime available on the internet and the game has changed. Musicians are competing for the consumer’s attention and the best chance a band has of recruiting new fans is to let everyone have the album for free. If your band is worth something to those people, then maybe they’ll tune in again (and maybe next time they’ll buy something).

Eventually - at least to a handful of people - you may be the greatest band in the world!