Still the music industry’s least favourite four letter word

Chris Anderson, the author and journalist best known for developing the “long tail” theory, has published its long-awaited follow-up, Free. In short, the central argument is that, in the age of mass broadband use, companies should give away at least some of their content and products. Moreover, they might have to if they want to stay in business. The differences between the digital and physical worlds, Anderson says, have created a major shift. It now costs a fraction of the cost of distributing a physical product to distribute it online. It is easy to copy, share, edit and customise content online. The digital world has torn down the barriers that stopped people from offering content and allows everyone to be a content producer, owner and distributor.

Since the cost of offering products online is so low, Anderson suggests that companies might as well go the whole hog and give it away. In these instances, revenue and profit can come from other related sources. He cites budget airline Ryanair, which charges next to nothing for its flights but makes a significant proportion of its revenues from associated services, as an example of how this model can work.

Rights holders are already feeling many of the dynamics Anderson is describing, albeit not through choice. These dynamics, plus increased broadband penetration and speeds, have led to a world in which a nearly limitless amount of any type of content is easily available online, more often than not free.

Great news for consumers, but less so for businesses, many of whose content is already being given away and not exactly to their benefit. A few content owners are benefiting from this model. Online games that are free but in which users can buy pieces of content that enhance or improve game-play have been a great success. And musicians, many of whom now accept plummeting sales of their recorded products, are increasingly looking to touring, merchandise and sponsorship arrangements to boost their bottom line. It’s no coincidence that concert-ticket prices have soared over the past few years. Nor should anyone be surprised that several previously warring band members who said they would never speak to one another again have buried the hatchet to reunite for that lucrative world tour.

But Anderson’s utopian future scenario will not work quite as well for all types of content. Movie makers, for example, are unlikely to be eager to rely on T-shirt revenues to pay for their hugely expensive products. The average Hollywood movie costs US$100 million to produce and nearly the same again to market. In fairness to Anderson, he does not say that all content should be free and maintains that paid-for content will always exist. The problem is that the lines that separate the types of content that people will pay for in the online world have blurred significantly.

For online video, advertising might seem the obvious answer. It is one that Anderson even addresses in his book. But the medium is still in its infancy. It’s worth remembering that YouTube only soft-launched in-video advertising two years ago. The format has gone from an experiment to the potential saviour of online video in lightning-quick time. But advertising will not offset the cost of creating, acquiring and distributing online content. Premium content costs money.

Spotify, despite its successes, is unlikely to rely on advertising revenues in the longer term. It is widely believed to be making less than £100,000 (US$161,000) a month in ad revenue in the UK. That is equal to mere pennies per user and is certainly not enough to fund all of those expensive label deals it has signed. Indeed, it seems that teenagers will only pay for experiences they absolutely cannot get for free online, even if it means watching illegal downloads or listening to stolen music.

Music & Copyright is a fortnightly research service published by Informa Telecoms & Media.