Music Advocacy Journal Issue #1: What’s a sell-out and who’s doing it?

Introduction

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Welcome to the Music Advocacy Journal, and thank you for your participation!

Here at MYnstrel we debated and deliberated for a long time about what the first Music Advocacy Journal article should be. You see, there are so many problems in the music and entertainment industry right now, we have seemingly endless work to do on behalf of music lovers – and on behalf of our culture. No worries, MYnstrel is on top of the job!

We chose to address the infamous “sell-outs” of the music industry first because the issue impacts so many aspects of the music we choose (and the music that we would like to choose if we even knew it existed).

We’re all about the music, Artists, and Fans; therefore, spreading the ability to correctly identify “sell-outs” will definitely help the music community. It may also give you a refreshing perspective on certain artists and businesses!

Definitions & frame of reference

First of all, what is a “sell-out”? It’s important to define up front, because if we aren’t all operating within the same frame of reference, we’ll get lost in semantics. I will define a sell-out as a person, artist, band, or business who turns their back on their pre-existing mission with a primary motivation to make more money or to gain popularity.

The term, “pre-existing mission”, is critical. Incorrectly identifying that will lead us away from the real problems, and probably create fuzzy definitions of a sell-out. I’ve come across a few cases of this mistake:

  • People call a business a “sell-out” if they turn their back on previous “customer expectations” – First of all, customer expectations can vary from person to person, just like the things that fans think are important about a band. Sometimes a business needs to change what they promise to customers based on changing market forces, in order to continue to serve their greater mission to the maximum potential. If a band changes their music against previously built fan expectations, it may not necessarily be all about money or popularity.
  • People call a band a “sell-out” if they turn their back on their artistic integrity – This one is tough. Can you define artistic integrity? If an artist has music that’s coming from their heart and serves their mission, are you confident enough in your judgment to tell them it’s not genuine?

Let’s now get deeper into music-exclusive anti-definitions. A sell-out is not necessarily:

  • An Artist that got popular – The fact that an Artist’s work was so well-liked that it made them famous is not a black-and-white indicator of artistic integrity.
  • An Artist that changed their sound – Music evolves over time and artists change their interests.
  • An Artist that sounds like another popular Artist – Imitation is the highest form of flattery. As you get more into the technical aspects of music, you realize that the vast majority of a composition is an amalgam of pre-existing sounds that inspire and influence the Artist. In addition, how many times have you had an original idea, only to find out that someone thought of it first? There are artists out there who have been doing original things for years only to see someone else beat them to the public.

So if we can see into the hearts of artists and understand what their motivations are, and what their mission is with their music, maybe we can figure out who is selling out. This leads to another interesting question: why do we care who is selling out? If we enjoy the music, are we all that concerned about what the motivations behind it are?

Many people are concerned because they hope that the inspiration for their favorite music is truly genuine and coming straight from the heart and soul of the people who are performing it. Moreover, it is a logical conclusion that when popularity and money become the primary driver of artistic creation, the overall effect on the greater market is that the music products lose their genuine passion and originality that makes them timeless.

On behalf of the MYnstrel community, I say, we are concerned with the potentially negative impact of sell-outs on the quality and integrity of the greater music industry. The bigger question for MYnstrel is: what can we do to address the root causes of selling out?

It starts with this journal article, MYnstrel technologies, and with your participation, so read on!

Is earning a living a double standard for Artists?

Since we’re on the same page with the definition of a sell-out, we can talk about the apparent double standard that artists are held to in regards to earning a living with their products, services, and talent.

Now, for many professions society doesn’t seem to have a problem with workers who are primarily motivated by financial compensation. Does anyone believe that a hard-working patent attorney enjoys every aspect of their meticulous job? I’ve got to tell you, I’ve loved the challenge of high-technology for many years, but there were a few nights in my engineering program when I sat hovered over that green grid-lined paper, just wishing that I could pick up my guitar and escape some frustrating error which would have sent my satellite burning up in the atmosphere instead of into the intended orbit.

For many different jobs, we’ve heard apologies in the spirit of “they’re just trying to make a dollar to help themselves, to support their families, or to pay for college.”

Do we hear this apologetic rationale for hard-working musicians who perfect their craft over many years?

I remember seeing a satire related to this topic on a popular comedy show, in which a fictitious band called “Moop” was used to put forth two erroneous points of view:

  1. If you play music and make any money at all, then you’re a sell-out
  2. That it’s morally acceptable for consumers to steal digital music online because they’ll still pay to see a band play live ‘if the band is good’

As for the bad definition of a sell-out, we’ve already addressed it somewhat with our accurate definition. Ideally, we’d like to see truth, fairness, and virtue prevail by retiring the double standard for artists. Why shouldn’t an artist be able to make a fair living for their work? How is what they do any less important or worthy than any other entertainment worker, whether they are in sports, video games, motion pictures, or literature? Are musicians superhuman creatures who don’t need a shelter over their heads, or food on their tables? Do people really believe that the vast majority of music-related workers are living the uncommon lives of luxury that are portrayed in music videos?

As for justifying the theft of digital music, by supplanting a purchase of digital music with a promise of attending live shows – an examination of the facts proves this mantra to be misguided as well. Without delving into the realities of compensation for live music performance and recorded music, for now, let’s just say that this isn’t a fair trade, and that no other business would apologize for analogous expectation of ‘free goods’ (we’ll talk about this in greater depth in a future Music Advocacy Journal edition).

To be certain, we do sympathize with the level of confusion in the marketplace concerning music products. Part of the reason that there are so many pervasive myths about compensation in the music industry is because within the last century, there have been many shady dealings – some of which persist today.

MYnstrel technologies, business innovations, and community organization will increasingly help to rectify those iniquities. When our dream is fully realized, sell-outs will have a harder time competing with true artists, and the double standard for artist compensation will be just a blip on the radar of music history.

How can we spot sell-outs?

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I remember a certain song by the band Tool off of their album Aenima in which they satirize a fan who accused them of selling out, to make the point that the eternal value of the music experience is all about the synergy between fans, the art, and the artist. Of course Tool is one of my favorite bands, and in their prescient words: “All ya know about me’s what I sold ya…I sold out long before you ever even knew my name.”

Of course the grand irony of anyone accusing Tool of selling out is that they are the band that was going against the popular fad of grunge rock with their progressive rock styles, and they are the band that has continually pushed the boundaries of rock music with virtually no homage to popular music trends. Here, we see another example of bad sell-out definitions – in Tool’s case, they were slandered by the notion that if a band gets popular and succeeds, they must be a sell-out.

Notice that Tool is still selling out arenas decades later, while the vast majority of fad-grunge rockers from the early 90s are doing what? Right, I don’t know either. There must be something very special about Tool, something genuine and intrinsically good. And these are the artists who could never be fairly labeled as sell-outs. You know the real deal when you hear it, because no one else can do what they do, even if there are droves of passionate imitators. Can money create that originality, inspiration, passion, and born-talent that people can just feel? I don’t think so.

Chances are, if you’ve got the music flowing through you with an open heart and mind, you can tell who is selling out when you fire up your stereo, and crank up the volume, only to get that disappointing feeling of stale inspiration, generic blandness, and fleeting catchiness that’s here-today-gone-in-two-weeks.

I’ve found that some of my most treasured, long-lasting, and enduring songs are the ones that took me a few listens to really appreciate; music that is much like a fine wine, or a young adult slowly gaining appreciation for coffee or beer.

Who’s selling out?

By now you might expect – I’m personally not ready to accuse artists of selling out. It’s not that I don’t believe there are many sell-out music workers hanging around, waiting for the next trend to latch onto, and then streamline it into a cookie-cutter press for a quick buck. It’s not that I couldn’t name a few scandalous songs of 2008 which were blatantly uncreative mockeries of the art of music – using a prospect of gross controversy in lieu of exceptional musical development, just to get attention and sell more albums. Why would I call out these travesties and give them more press?

Really, it’s just not worth our time to even spend negative energy on things that deserve absolute zero attention, when there are so many incredibly talented and well-meaning artists out there who deserve our energy. MYnstrel has built the Artist Spotlight in order to feature an ever-increasing number of the truest and best artists of past and present. We promise that you will never find a sell-out artist on our prestigious Artist Spotlight.

And finally there’s that perplexing question bouncing around in the back of our heads – do we really care about who is selling out? Maybe we do, maybe we don’t. Those droves of grunge bands that just disappeared along with the fad may or may not have really been sell-outs. Many of them may just have been passionate and enthused imitators; it is true that imitation is the highest form of flattery. Can we know for sure what their motivations were? Are we confident enough in our own judgment to be so bold? Is it critical to know what our ears can’t discern from the audible product?

For my part, I would gladly welcome a dozen more bands that sound like Faith No More, Lo Pro, Led Zeppelin, Element Eighty, Vivaldi, Pavarotti, Lee Ritenour, and so many more of my favorites. The question in my mind is – will they be genuine enough to not sound generic, stale, or fleetingly catchy? I suspect that if they’re not selling out, they might just have a shot.

I remember being one of the first fans of Incubus before anyone knew who they were. I also remember identifying immediately how they were overtly inspired by many aspects of my favorite band, Faith No More. Yet Incubus never disappointed me, having delivered dozens of fantastic songs over the years that became some of my all-time favorites.

As music lovers, we hope that artists continue to discover the genuine inspiration that elevates our art and the business. At MYnstrel, we will continue to build technologies, invent products, and business processes that will make the music landscape more difficult for sell-outs to traverse, and more negotiable for the incredible artists who deserve our attention.

I am Tommy Kurek, on behalf of the MYnstrel community, thank you for your participation in the Music Advocacy Journal! We hope you’ll tune in next time as together, we continue to elevate the art, business, and technology of music.

Music Advocacy Journal Issue #2 : Technical Treatise on Record Piracy – Part 1, Yin & Yang

Introduction

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Some have said, we should just copy each other’s digital music collections. They say that record-sharing technologies like the original Napster should be legal. Where is the harm? Unlimited ‘free’ music is actually ‘free’ promotion for the bands who want people to hear their music, and the bands will just make their money in some other way to put food on their table. Besides, bands don’t make that much money off of a record sale anyway, so people who take records without paying (digitally or otherwise) are kind of like Robin Hoods – getting economic revenge on the ‘corpulent’ major labels.

As with much of the common knowledge in the postmodern era, the previous conclusions are novel ideas based on half-truths, and they are only possible in a vacuum of full awareness. Personally, I wanted to avoid rushing to judgment on record piracy, Napster, and record labels, so I chose years ago to go against the grain – to educate myself on the business of music so that I may discover the truth.

As a huge Music Fan, an accomplished Artist, and an aspiring technology and business guru, I sought to find the answers. I wanted to constantly shift gears to view the problem from the purview of three roles – Music Fan, Artist, and Music Business Professional. I believed that only by understanding the experiences of everyone involved, could I arrive at valid answers to the burgeoning questions on everyone’s minds:

  • Is it wrong for me to take MP3s (or other record formats) and not pay for them?
  • Who does it hurt if I take those records without paying for them?
  • Can the Artists find another way to make money, so they can get paid fairly for their hard work, dedication, and skill?
  • When the practice of taking MP3s without paying becomes more commonplace, how will it affect the music that I get to listen to? Will record companies still be able to offer me the same quality, variety, and choice?
  • How can record labels truly protect their products from piracy? Is Digital Rights Management (DRM) the answer?
  • Free Goods have always been a part of record promotion (estimated at around 10 – 15% of the gross) – so how does a nominal proportion of consumer-forced Free Goods (i.e. piracy) mesh with the historical model?
  • People have been copying records for a while now – the only difference is with tapes, you could only copy a tape so many times before it lost sound quality and the copying process was relatively slow. In contrast, the propagation of digital records is unlimited, fast, high quality, and mostly uncontrollable. So how does unconstrained, illegal record propagation and unfettered catalogue access impact the consumer’s perception of the actual product – a recorded piece of music?

Part One of this treatise simply introduces the questions for you to ponder, and shares an entertaining story from my life concerning music piracy to illuminate conflicting philosophies. Future parts of this treatise will illuminate:

  • DRM’s inevitable crash into oblivion
  • Attempts to thwart music theft from past to present
  • A breakdown of where your money actually goes when you buy an album
  • What can the philosophy of technology and technocracies tell us about the problem of music piracy?
  • Finally, my conclusion on the subject which has guided MYnstrel’s own music retail Research and Development (R&D)
  • Why MYnstrel is the first music organization in the world (yet again) to take these riddles seriously and solve the issues, rather than responding in a reactionary manner

If you ever decided to get involved with a “Napster” conversation, or discussions on MP3 freeloading, or music piracy, you will definitely enjoy this treatise. I would encourage any Artist or Music Business Professional to consider the information that I present here.

With the premise well-established, let’s continue!

Yin and Yang (one more epic light-saber clash, Jedi-style)

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Sometime in 2008, I was at lunch with twelve coworkers at a local Indian Restaurant. I happened to get seated next to a guy who immediately gave me an unpleasant vibe. He was tall, thick, balding, almost twice my age, and apparently a decent amateur basketball player for his age. Let’s call him “Johnny” for the sake of anonymity.

Johnny was the kind of guy who could take a normal conversation and destroy it with a single sentence, leaving everyone silent. To some people, he might have imposed an intimidating presence; to me, it was quite the opposite. I’ve had many rewarding experiences in taking on aggressive opponents. The trick is to turn them upside-down on their heads, as if applying verbal judo to the unwieldy girth of their arguments. It’s at that point when age, nor title, nor money, nor heritage seems to matter at all. Big Johnny was about to choose to make himself my next challenger.

Johnny initiated an argument with me about the business of music. Apparently he played basketball with a big shot lawyer from the RIAA. He didn’t have a very high opinion of this lawyer (berating him with various insults), and proceeded to excuse himself from moral wrongdoing for his vast pirated digital music, MP3 collection (which he apparently acquired by posting huge illegal MP3 file shares with his friends at work). After letting him do most of the talking, I just asked him a few questions:

“True, artists make a small percentage from album sales, but what do you know of the total compensation package for artists, and what it costs to make that album, promote, and produce their products?”

He didn’t know.

“What do you tell an artist who you know is talented, but they failed their sales expectations? They might just need some time to become known and make the kind of sales that can subsidize a $50 – $250k expenditure on just the recording. There were many stars that came out of the late 70s who failed on their first 3 albums, only to make it big. Artists today don’t get that shot – and a large part of the judgment to drop them is based on record sales. What do you tell them when you pirate their album? You don’t care if they’re around for a 2nd or 3rd album?”

He didn’t know.

“Would you change your mind if you knew that 95% of artists in 2006 did not even make up the costs that they consumed in getting their music to market, and actually lost money for their labels, and that less than 0.5% of albums accounted for over 50% of all sales for 70,000 albums released? Are you comfortable with that homogeny and disparate stardom?”

He didn’t really know. He thought quickly on his feet, and proposed that 99.5% of the music out there is garbage anyway, so he didn’t think that was a bad deal. I just disagreed with him and moved on. No need to go off on a tangent about good music vs. popular music. I continued:

“You can only sample perhaps 100 albums in one year, if you are an avid listener. Most of what you’ll sample is what’s being put right in front of you by promoters. Since the music you are being spoon-fed has big promotion money behind it, don’t you think there is a chance that some of your favorite music is hiding somewhere, perhaps not even accessible in the record store, just another one of those 70,000 albums per year that you’ll never even know about?”

He had an idea about this one. He said that it’s the same scenario for authors and their books.

I told him that I was not educated on the industry of literature, so I couldn’t disagree with him (although I had a feeling he really wasn’t a scholar of that business either). I retorted:

“Pointing to a similar iniquity in another industry doesn’t negate the severity of the matter at hand for people who care about music. Since we’re talking about music, let’s focus on that. Just because there are challenges in the literature business, doesn’t mean we should just accept similar unfairness in the music business. We’re trying to solve the problems, not excuse them away.”

Now Johnny was very frustrated. He direly wanted to go home and feel like a fantastically moral guy with his immense illegal music collection. I’ll never forget his last words on the topic to me, “You know Tommy, haven’t you ever heard of the ‘starving artist’? They’re supposed to have it rough and live turbulent lives so they can entertain us better.”

You would think he was joking right? But he wasn’t. He was 100% serious. I closed out the conversation with my crane kick, Mr. Miyagi-style. Again, paraphrasing what I told him:

“Well Johnny, I’ll have to agree to disagree with you. Because I’m a passionate musician myself, I deeply want to see music be a viable occupation that is rewarding and stable. I feel terrible for some of my favorite bands that have spent decades of their lives perfecting their craft, only to get sucked up by a broken business system, spit out the other end, and then dropped from their labels after only a few albums. You spent many years of your life perfecting your skills in business to get where you are today; can’t you image what it would be like if those skills were so devalued that someone made a similar comment about guys like you, who pursue your career?

Not only does it break my heart to see this happen to Artists, but also to know that fantastic artistic potential is being crushed, never to be shared throughout our culture again. No, I don’t think you are bankrupting Michael Jackson because you stole some of his MP3s, but without the money to subsidize future gambles on up and coming artists, your piracy may have been part of the financial losses that created the fiscal situation in which one of my favorite new bands couldn’t get a shot at a second album. The money that was lost on piracy could not go to subsidize more losses on struggling bands – which as I’ve stated, is the majority of them.

Don’t get me wrong, there are many broken business processes in the music industry, and piracy isn’t the only variable. And I don’t think that the RIAA suing people is going to be the solution to the problem. It’s a large, multifaceted problem. I’m trying to look at it from everyone’s point of view, and figure out viable solutions to do what I can to help. I think there are a lot of people who want to help make music better, but I don’t see how you’ll be part of the solution with the attitudes you’ve expressed to me.”

And that was it. A few months later, I told Johnny about a death in my family and he never offered condolences. Sometimes you just get a feeling about people. Johnny’s mentality was a great example of an extremist point of view, which made my experience with him interesting. He gave me a great inspiration. I asked myself, “How can I get a guy who thinks like Johnny to support artists, and buy more music products?” You see, in Johnny’s mind, it wasn’t a question of whether or not he wanted to consume the music products, but rather, how much he could get for nothing.

If I could figure out how to get Johnny to pay for the music, I would be able to solve the problem for all Music Fans, Artists, and Music Business Professionals. When we began MYnstrel’s R&D on our revolutionary music retail products, this was the inspiration I gave to my team. Our objective was simple and clear: make Johnny enjoy paying for great recorded music.

Next time…

We’ve laid out some concepts about music piracy in Part One of this treatise. In the next article, Part 2 “Where Does Your CD Money Go?” we’ll establish a robust analytical model to determine where all of your money goes when you buy a single CD. It’s important to know where the money for a CD goes to understand how piracy impacts the workers responsible for getting the album from the artist’s mind and into your hands.

Music Advocacy Journal Issue #3: Technical Treatise on Record Piracy – Part 2, Where Does Your CD Money Go?

Introduction

In Part 1 “Yin and Yang”, I laid out the critical questions surrounding music piracy and shared a true story that exhibited a polarized point of view on the topic. We talked about how MYnstrel approached the problem of music retail from a neutral position – concerning ourselves with all of the competing interests of different parties, and digging up the facts.

In Part 2, “Where Does Your CD Money Go?”, I will share some of MYnstrel’s analysis that was generated in our music retail Business Process Engineering activities. The key question in this issue of Music Advocacy Journal is simple:

  • Where does your money go when you purchase a CD?

It’s important to know where the money for a CD goes to understand how piracy impacts the workers responsible for getting the album from the artist’s mind and into your hands. In addition, there have been numerous ideas about music piracy in the past five years that seem to have some validity, but are actually harmful to artists and fans because the ideas don’t consider the full realities of music recording, production, distribution, and manufacturing. For around 100 years, music has been fixed into recorded vehicles of consumption that the public has enjoyed. Over the years and behind the scenes many things have changed, but many of the principles are the same.

Haven’t you always wondered what you’re paying for when you purchase recorded music? I think this is a fascinating article not just for Artists and Music Biz Pros, but also Music Fans. Let’s dive in!

Those evil record companies…

More than a decade ago, before I knew much about the actual business of music, I was an engineer-in-training, learning how to solve complex problems with applied mathematics, computer science, physics, chemistry, biology, and economics.

I heard word on the street that the major record companies were evil corporations, and they ripped off artists and fans. The only justification I heard for this judgment is that “Artists only make a dollar or two from a record sale.”

In my younger more impressionable years, I was more inclined to believe subjective claims. Now, with a plethora of facts at my disposal, I have a different opinion.

My conclusion? It is likely that history is repeating itself. During the Great Depression in the USA, the record industry’s annual revenue declined from $100M to $20M because they blew off the impact of radio, erroneously confident that music fans would always want their own personal record collections.

The music industry didn’t predict the Great Depression, and they didn’t predict the widespread sufficiency of radio as an alternative to personal record collections. Does anyone see a parallel today, in 2009?

In addition, by the time we get through this series of articles, you’ll realize something – the vast majority of the money collected from a music retail sale is not going into the Record Label’s pocket. It is going into an insurance pool that the Record Label manages. This pool was created by everyone who has listened to popular music for the past five decades. It is the effect of narrowcasting, the price we pay for diversity of choice – and the immense financial risk that is created by that uncertainty.

This is easily observable any time you hear a fan say something like, “Yes, I like rock, but not rock style x, y, z, metal, nu-metal, hard rock, soft rock, pop rock, funk rock, emo, screamo, classic rock, punk rock, goth rock, etc. etc.” Although Urban/Hip Hop/Rap is less narrowcasted because of its relatively young age, it’s well on its way too.

Today, musical sounds and bands are so highly specialized, it’s difficult even for the most trained ear to pick the ones that will make their money back – and on the contrary, the albums that will burn up hundreds of thousands of dollars without coming close to making the money back. The albums that succeed largely subsidize the albums that fail. It’s a gamble. Most of your money pays for that gamble, so we get the wide variety of choices and diversity that we create with our highly specialized preferences.

Today, I don’t believe that record labels are evil, although they are definitely unscrupulous at times (like any business). I purport that the record industry has made some crucial miscalculations over the past two decades, and all of the people who depend on them for music – Fans, Artists, and Music Biz Pros – have suffered the consequences of those miscalculations. When you see the economics that underlie a record sale, you might agree with me.

Where does my money go?

When you buy anything in a store, your money is going somewhere. So where exactly does the money from a single record sale go? What are you paying for? Seems like a simple question, right? Buckle your seatbelt for a real treat! MYnstrel dove into over 2,000 pages of textbooks on music business, legal proceedings from major law suits, and dozens of annual reports from music industry publications, so that we could extract the figures that would underlie a normal CD sale. It took over 20 spreadsheets to generate our analytical model of the cash flow from a CD sale.

Now, understand that there are all sorts of variables. In most record contracts, the artists don’t get paid for largely discounted CD sales. Some cuts of the money from the sale are hard and fast amounts, some are percentages, and others depend on the number of songs on the album (and length of the song).

We’ll start by figuring out how much front-end revenue an average CD generates ($16.83), accounting for the retail stores and the government. It’s important to note that all the individual numbers in this analytical model are estimates that might be off by small orders of magnitude, because of how many dozens of factors and variations contribute to the model. Regardless, the model is very accurate as a whole, and the concepts shine through because we used industry-wide stats, values present in standard music contracts, and the Law of Large Numbers. By the time we’re finished, we will have derived a comprehensive cash flow diagram. For this issue, we will only cover Retailers and the Government. The following diagram illustrates the cash flow that we’ll explain in this issue:

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A little intrigued? Let’s start explaining all the interesting facts that our model illuminates.

Retailer Cut: $1.46 (8.7% of the total money out of your pocket) – and they took it from you when you bought something besides the CD

Stay with me, because the retailer is a tricky player. We have to start here, because…well, that is where you spend your money! It all starts with your decision to buy a CD at a retailer like Best Buy, Amazon.com, or Walmart.

Let’s determine the average price of a CD in 2007. Well that shouldn’t be too hard…or should it? Based on the 2007 RIAA Market Sales Report, the number of physical CD units shipped was 511.1M. The gross revenue for CDs was $7,452.3M. Their numbers are very accurate because they only count the manufacturer’s unit shipments and retail value, after returns. In addition, we dug around to find prices online offered by various companies for wholesale CD lots (minus the ones who sell liquidated inventories). Interestingly enough, typical wholesale costs for CDs were right in line with the RIAA Market Sales Report. So we estimate the average wholesale price of one CD in 2007 to be:

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Now this might give you pause. When you go to Walmart, Best Buy, or Amazon.com, you will rarely pay more than $14.58. So am I telling you that when you buy a CD for less than $14.58, that the retailer who sells it to you is not making any money, and in some cases, losing money? Yes, that’s what I’m telling you – at least the vast majority of the time.

Sometimes there are “bargain” CDs that have been slashed in price by the record label, and sometimes CDs are priced higher for special features like dual disc or DVD extras. But those outlier cases are negligible in our model thanks to the Law of Large Numbers (we’re estimating here, folks).

You ask, why in the world would a merchant sell something at a price that makes them lose money? This is nothing new in retail. It’s called a loss leader. Those retailers are making huge amounts of money on your other purchases for electronics and other devices; they use CDs to bait you and increase the frequency that you go to their stores. In addition, the volume of sales for their media products is so large that even if they make a small amount on the normally priced items, it also subsidizes the low-priced CDs.

So don’t feel like retailers are doing any favors for you – if you’ve ever bought something other than media from them, then you’re paying more than the difference out of your own pocket.

You can even do your own little experiment (not that MYnstrel has tried this, or recommends it). Put on your spy hat and go to your local electronics retailer like Best Buy or any other. Start up a friendly conversation with any worker, and ask them, “What is your employee discount on store items?” They’ll tell you “We get huge discounts on car audio devices. We never get discounts on CDs that cost $10 to $13, because they call them ‘sale’ items. Even on CDs that are $15 or $16, we barely get any discount.”

Now you might be asking, “Why do retailers choose to sell CDs at a loss?” Let’s drive the point home: because it generates lots of foot traffic and you will then buy other things with huge profit margins. Oh, and there is one more concealed motivation – running other companies out of business, and ensuring that no more pesky music-only stores can pop up as time rolls on. Look to the lawsuit filed in August, 2000 by 29 states, led by New York, Florida, California, and Texas. But that’s a story for another day. Trust me, these large retailers are profitable for discernable reasons.

So let’s do this. Let’s say the average price of a CD to the CD buyer is $12.99. Sounds fair, right? Now consider a gross profit margin for a large retailer like Best Buy during a quarter close to the time we did this analysis – 23.5%. They’re hedging their bets that in a macro sense, their items will yield a 23.5% gross profit margin, and that foot traffic they generated with the undercut CD price will yield 23.5% return on that $12.99 CD purchase you made. So what do they get out of it? They get:

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Consequently, the electronics-buying customer is subsidizing the $1.59 loss on the purchase, and giving the retailer an additional $1.46 in profit. A company like Best Buy will actually pay the loss of $1.59 per CD to the record distributor, hedging their bets that using the CD as bait to increase foot traffic will continue to drive a typical gross profit in 2005 of 23.5% – 25%.

By doing this, even though they’re selling the CD to you at a loss, they still get a net positive from subsidizing that with volume transactions and sales of more profitable items – the sales that the CD foot traffic drive. In addition, they get to monopolize the retail space so that all those small pesky music-only stores can’t come back and take some small bites out of the business. Let’s face it – it’s a lot more expensive to make a new Best Buy/Circuit City/Walmart chain than it is to open a music-store chain.

Among the large retailers, they now all possess nearly the same business model. I’ve got news for the judges, state governments, and plaintiffs involved in that lawsuit – consumers are still paying the $1.59 per CD, we’re just doing it through an obscure process.

So what about those music-focused stores? If you’re really motivated, maybe you’ll be able to put small record stores in malls where there is a lot of foot traffic and people will pay a little bit more for the CDs, and forget about the cheaper prices while they’re out with their friends at the mall (FYE, anyone?).

Next up, what else but…

The Government: $0.79 (4.7% of the total money out of your pocket)

With an average retail sales tax of 4.9%, the Government is taking $0.79 of the sale from the customer’s pocket (the handful of states with zero sales tax drag the average down). Of the total money out of your pocket, that turns out to be 4.7%. This is over and above the $12.99, because we will credit the tax on the loss leader subsidy and total revenue generated by the CD since the retailer attributes that “foot traffic” to generating the subsidy revenue and more. These facts yield the average sales tax revenue from a CD sale:

MAJ 3 pic 5

Your average CD cost: $16.83

Let’s now summarize the average figures for a CD sale. The record distributor sells the CD to your retail store for $14.58. In turn, the retail store offers it to you for $12.99, but you pay an additional $3.05 out of your own pocket whenever you purchase something else with a higher profit margin. The tax on the final cost of $16.04 comes out of your pocket too, for a total of $0.79 per CD.

You can look at it one of two ways: either you’re paying too much for the price of electronics that subsidize the cheaper CD, or you’re getting a steal on the CD by never buying electronics from such retailers, instead opting for bargain hunting online for electronics (in which case, other consumers are paying for your discount). Whatever way you look at it, $16.83 is coming out of your pocket. The retailer gets huge amounts of profit as they draw you to the store to purchase high-profit items using CDs as bait.

So what amount of money is headed to the music companies and artists? You got it – $14.58 per CD on average, as depicted below (average wholesale price for one album):

MAJ 3 pic 2

Next time…

In Part 1 “Yin and Yang”, we laid out the concepts surrounding music piracy and exemplified the philosophies with an entertaining story.

In this article, Part 2, we have established a robust analytical model to determine where all of your money goes when you buy a single CD.

In the next article, Part 3 “Stratification & Levies”, we will show you what happens to your money on the back end after the retailer has made the sale. Who exactly is responsible for getting a great-sounding recorded piece of music in your hands? What do they get paid for their labor from that CD sale?