The Swarm

February 08, 2011

Chris Holmes' Privateer Manifesto: Can It Save Music?

Chris Holmes


Chris Holmes is a longtime iconoclast, thinker and doer in the music industry. The Chicago-bred, Los Angeles-based musician, producer, DJ and songwriter has experienced it from every perspective – starting in the ‘90s, he gained underground cred with indie releases under monikers like Sabalon Glitz; as well, his band Yum Yum was signed (and then dropped) from a major label. Since then, Holmes and his partner Brian Liesegang have been working on their Ashtar Command project, which they will release this spring, via numerous innovative marketing and distribution avenues (he also co-founded the charity Voice Project to benefit women of the Ugandan conflict through artistic initiatives). As the music business as he knew it has crumbled around him, Holmes has been thinking a lot about how to best get music to the people that want to hear it, and how artists can continue to thrive under this new playing field. Below are his provocative thoughts on moving the goalposts so everyone benefits.


The Privateer Manifesto: How To Save Music, As A Creative Enterprise And An Industry
 
We live in a very strange and fascinating time. The spread of information, thoughts and ideas as social memes is nearly instantaneous. As a result, we have morphed as a culture, and as individuals, to a collective world where that instantaneous information sharing is commonplace and taken for a universal right. Ideas spread as such across the globe: a song that’s recorded in a bedroom in Omaha, can be written, recorded, mixed, uploaded and shared and the heard around the world in the same day.
 
But the expectation of that free flow of ideas has eroded the foundation of a group necessary for the survival and evolution of our culture. The recording arts have entered an economy with rapidly eroding ways of supporting itself.
 
When bands were on major labels, there was a “Robin Hood” aspect to stealing from mega-corporations and sharing that art with people. It was a way of liberation, an act of rebellion; as well, there is a human core value that art should be free.
 
But therein lies the problem. If there is no money for music, a whole economy collapses. Not only do the artists not make any money, but the studios, musicians, managers, video directors, makeup artists, set directors, tour managers, concert promoters, tour bus drivers, band merch companies and so on all fall apart in a domino effect. People leave the industry in order to find other ways to support themselves. At first, this gets rid of some of the excess and fat that always needed to go anyway, but eventually the foundations start to crumble and the whole industry falls apart.
 
There is a part of me that sees this as a victory for the common good of mankind: it was a horrible system ingrained with countless flaws, set up to exploit the artist for the benefit of the corporation. Music became a widget to help sell cars, cereal and beer. In that system falling apart, there is some reason to cheer, but at the same time the mass apathy of the consumer towards the artist has begun to fall apart. Why do we care if Metallica can’t buy another Lear Jet, or Justin Bieber can’t buy his 12th Rolls-Royce before he’s even legal to drive?
 
The problem is that we have all been playing by the same rules. Independent artists rely just as heavily on financial support through the purchase of their music as the majors. People say that records are solely a promotional item nowadays to promote band tours and merchandising, but all that leaves you with is shitty mega tours and Lady Gaga-branded ear buds. The downloading of music affects the major pop artist much less than it does the independent artist, who can’t rely on sold-out stadiums and perfume tie-ins to subsidize their recording career.
 
So what options do we have to fix this?  Right now the options are iTunes and subscription-based models like Zune and Rhapsody, but again we find these do very little to support anyone but the mega artists. There is only so much more room to advertise new artists on one site, and while Apple does a good job trying to find new music that is similar to your taste, ultimately it’s not much different than a Wal-Mart for music. As a result, Main Street shuts down, and our choices, variety and quality are dramatically reduced. Subscription models are just as bad: instead of the major artists getting most of the dollars, the major artists share in fractions of a penny. The only real winners are the telcoms, Internet service providers and the advertising that is hosted on the site.  
 
People were excited about Spotify, for example: everyone jumped on that bandwagon, but it’s an economic model that is unsustainable. Spotify got investors, and then paid mass sums to the major labels, who then reinvested that money in their failing architecture. In the end, even massive artists like Lady Gaga generated money that could literally be measured in pocket change for millions of listens, which is once again reinvested in a failed model; this trumps up the bogus infrastructure by pouring in new money from imaginary sources that don’t even trickle down to the major artist, let alone the independent artist.
 
Then there is advertising. While there is nothing wrong with the artist reversing the cycle of exploitation by using the ad industry to bring their songs to a new marketplace – in effect getting paid money to advertise their own music in association with some random product – this too has been mucked up by the major labels desperately seeking for some outlet for a return on their investments. They have competitively underbid others for the opportunity to promote their music, driving down the market for syncs and licenses considerably. At the same time, the music budgets for ads, TV shows, and movies have been slashed to try to cut costs.
 
As a result, syncs and licenses, once thought of as a golden ticket, have become scarcer, and less profitable. None of this addresses the fact that the artist has to tie themselves with some random product and whore out their music in order to stay afloat. People start making music that they hope will fit into ads and movies rather than making music from their hearts. It’s certainly no worse than being a gravedigger, but it eventually inevitably undermines the artistic process. 
 
There is a symbiotic relationship between the artist and fan. The artist, and the network surrounding the artist, relies on the fans to support their ability to make more art. Without that support, art withers on the vine. We all know and support public works like PBS, public radio, and art museums fpr this reason. If we don’t find a way to support this network, the arts will suffer. They won’t die, but they won’t flourish. Unless we want a world of Walmarts and Lady Gagas, this instantaneous and interconnected world needs to directly support the arts. It is a miracle that we can share our work instantaneously to people that we could never reach in a hundred life times of travel, but without allowing the artists to nurture and develop with support we end up getting lost in the chaos of “keyboard playing cats” getting more views and listens than Mozart got collectively in his life and the 250 years that followed. In the past, courts and kings subsidized the arts and sciences as patrons and benefactors; in our world, it would be ideal if corporations and governments did the same. In some ways they do, but it tends to be in supporting traditional and established outlets like museums and popular artists. This puts the responsibility back on the artist, and the fan/consumer.

In a world of instantaneous interconnectivity, we need everybody to become “local” instead of everybody becoming anonymous, and support the arts without having to dress it up as advertising or conspicuous consumption. We have a choice as an interconnected society to let the hive mind cater to the lowest common denominator, or we can elevate the arts as a community, without the hand of corporations determining the flow and output of the artists by selectively supporting artists they think can make a profit. We have been stuck in a “Flatland”-like environment, where we have only seen the Internet as an extension of the record store. That is a reductionist model: instead we should see the true potential of a new model for supporting the arts. We need a million record stores and bookstores and movie theaters, not just one or two corporate lowest common denominators. Otherwise, as a society we only see the worst of ourselves, using the convenience of the interconnectivity without exploring some of it’s most beautiful advantages. We have adopted the corporate sociopathic mind frame, devolving instead of evolving the collective individual.  

There is a fundamental difference between, say, the fine arts of painting and sculpture to that of making music. Music as output is almost like an exact photocopy of a painting, and in the digital age, is freely and perfectly reproducible. The 100th copy has an identical value to the original master.  Artist could collaborate with other artists to create one of a kind works, but in essence it’s just dressing up the work; the real value is in the collaborators’ contribution. What matters is the copyright: if it’s infinitely reproducible, then it has literally no value as an investment. But what is great about music, books, and film is that the copy retains the same value of the original. This is the seed of the revolution I am proposing…

While we all bemoan the death of retail market and the homogeneity of a monopoly, we sit on top of a potential and inevitable revolution, where at least for a while the artists and their fans can control their own fate. In the days of the major label, it was difficult if not impossible to collaborate with other artists because of contractual obligations and restrictions.  Those days for the most part are gone; in their absence, we need build up a community of artists for artists, an artistic league of nations. This is a call for open source collaboration, to build out the model and spread the word. We can all be our own record store, bookstore or movie store; in that individuality, we are guaranteed diversity and support of the arts. Fans need to know that the money they spend on the arts goes directly to the artists they support, and this process should be as transparent as possible. People who are doing the work of promoting and sharing that art need to be rewarded; as such, diversity is guaranteed by the proliferation of stores based on a wide variety of tastes and interests. No longer will it make sense for a store to feature the same ten mainstream artists on their blogs and stores because a million other stores are hosting the same thing. People must be encouraged to explore and find new material to bring to other people, and artists will then be encouraged to take chances and develop their own style and fan bases. Together, we will flourish as we pull back from the brink, but only if we can invest in a new model that addresses these concerns. The name I have chosen for this model is “The Privateer System.”

That name is based on the historical decree of the British Crown legitimizing piracy, so long as it was for the benefit of the crown. With The Privateer System, I am suggesting that as artists we do the same with file sharers and bloggers. The Privateer model provides a mode where tastemakers and file-sharers are rewarded and their contribution is encouraged, rather than in the current model, where they are looked at as a cancer that is eroding the system. We take that system, legitimatize it, and help the people doing the heavy lifting in the spread of music make a profit, all while making a profit for artists. As Privateers, we, as artists for the arts, can create a symbiotic system where fans can support the arts, and artists can blossom. We have taken a lose/lose scenario for the artist and the consumer and turned it in to a win/win: creativity can flow, and tastemakers can be rewarded and incentivized for turning people on to cool stuff. This model also works with film, books, music and any digital media. It is not a total solution, but it is a start.



 
The Privateer System: A Summary
 
The Privateer System is based on a simple but ingenious idea that uses incentives to create a vast digital music distribution network out of the blogging/file sharing/viral networks. 
 
The Privateer System rewards tastemakers and bloggers by empowering the music consumer to direct her dollars to the artists she wishes to support, as well as the people that inform her tastes (bloggers, file sharers). The beauty of The Privateer System is its transparency and flexibility, as the consumer can effectively determine how money is shared between the artist/label and the distribution channel. It also sets up an incentive based system to engage viral networks, and align their goals with those of the artist.    
 
Here is a quote from the game theorist Bruno De Mesquita that illustrates the problem with the current paradigm of viral file sharing that The Privateer System seeks to remedy:
 

We all promise to protect what we hold in common… And then some of us cheat on the sly to enrich ourselves, figuring our little bit of cheating doesn’t do any real harm. (Remembering, defecting is the dominant strategy in the prisoner’s dilemma.) To get people to sign a universal agreement, and not cheat, the deal must not ask them to change their behavior much from whatever they are already doing, whether that is cleaning up their neighborhood or making it dirtier. It is a race to the bottom, the lowest common denominator… When an agreement is demanding, lots of signatories cheat, when it isn’t demanding, there is lots of compliance what little is asked for but then there is also little if any beneficial effect. Sacrificing self-interest for the greater good just doesn’t happen very often.


 

The Privateer System essentially offers an added source of revenue that has gone uncollected, and has basically been written off as the cost of evolving technology. We capture that revenue by appealing to people not to act for the common good, but instead by appealing to their own self interest.


How The Privateer System Works

(The prices in the following examples are arbitrary; in addition, the margins at each level can be toyed with by the artist/label as they see fit.)
 
1) An artist/label sells its record directly to the public through a The Privateer System website for $10.00. 
 
2) Any party that buys the record directly from the artist/label we will call a “primary buyer.” The primary buyer receives a license and a Java widget with their purchase, enabling them to sell digital copies of the record for $7.50; $5.00 of that sale price goes to the artist/label, while $2.50 is profit for the primary buyer.    
 
3) A party that buys the record directly from the primary buyer we will call a “secondary buyer.” The secondary buyer receives a sublicense with their purchase to sell digital copies of the record for $6.75. $5.25 of that sale price goes to the artist/label, with $0.75 as profit for the secondary buyer, while the primary buyer sees $0.75 of profit. (The party that buys the record from a secondary seller we will call a tertiary buyer.)
 

Bloggers/Tastemakers Within The Privateer System

The Privateer System employs the use of viral collaboration, and sets up a reward-based incentive structure that compensates both the artist and the blogger/file sharer.
 
Blogs and tastemakers have replaced record stores, radio, print media, and physical distribution. In the void, music is being shared for free, while bloggers and file sharers aren’t being compensated for their role in the evolution of the music industry. As a result, artists don’t have money to continue making music, studios are shutting down, labels are closing their doors, and industry participants from video directors to recording engineers are being forced to find other ways to make a living.

While distribution systems such as iTunes, Zune, Amazon, and Beatport allow people to purchase music online, and other systems such as Rhapsody offer a subscription based model, the majority of music files on the Internet are downloaded illegally for free. There are hundreds of thousands of blogs and file-sharing networks which illegally distribute the large bulk of the music downloaded from the Internet. This is a model where everyone loses.
 
The Privateer System allows for those bloggers, tastemakers, and viral networkers to profit while still acting in their own self-interest. Instead of fighting against the current paradigm of viral file sharing, it aligns the self-interest of the file sharer with those of the music industry. Blogs and file sharing networks aren’t benefitting from their role in the distribution network, because the files they are sharing are being shared illegally. The Privateer System seeks to legitimize that distribution network, and reward the people who find the solutions to the current crisis in the music industry. The Privateer System will reward bloggers and tastemakers for hosting, publicizing and distributing the music, letting them profit alongside the artists that they cover. The Privateer System appeals to all parties, taking advantage of the evolution of technology rather than fighting against it. This approach is similar to an initiative created by the Massachusetts Institute of Technology’s Media Lab called the Red Balloon Challenge.
 
The Privateer System sets up what MIT’s Riley Crane calls a “Cursive Incentive Structure.” By employing viral collaboration between tastemakers, bloggers and file sharers, a system is created where people are rewarded for acting in their own selfish interest, because that self-interest aligns with the goals of society at large. Here is an example what could happen for a popular artist via a high-volume blog using The Privateer System:
 
Primary sale to blogger/file-sharer direct from artist: $10
Profit for artist: $10 
Secondary sales from blogger or tastemaker to consumer @ $7.50: $80,000
Profit for seller (80,000 x $2.50) = $200,000
Profit for artist (80,000 x $5.00): $400,000
Tertiary sales (sales from recommendation by consumer via Facebook, apps and social media) @ $6.75: $180,000
Profit for sum of secondary sellers ($.75×180,000): $135,000
Profit for primary seller ($.75×180,000): $135,000
Profit for Artist ($5.25×180,000): $945,000
 
Total profit breakdown:
Profit for artist: $1,345,010
Profit for primary seller: $334,090
Profit of secondary sellers: $135,000

The artist as well would see profit from all other secondary sellers and tertiary buyers that decide upgrade to become primary sellers @ $2.50 and $3.25. All resulting transactions would set up new distribution networks and spawn new tertiary sales, which would then result in additional upgrades.
 
The prices have been set at these cost points so that after just one sale at each level, everyone has an equivalent discount for the record:

$10.00 – $2.50 = $7.50 (secondary sale cost point)
$10.00 – $2.50 – $.75 = $6.75 (tertiary sales cost point)
 
This gives each participant a personal incentive to sell, and the more they sell the more the price is discounted until they start to turn a profit.
 

Pirating and Compatibility with iTunes and Labels
 
Obviously The Privateer System won’t stop piracy, and it won’t stop people from downloading music for free, but it will incentivize many of the key players to participate, and that participation will ripple through the network. Once other bloggers see the profits being created with blogs associated with The Privateer System, then they will have added incentive to join up. 
 
It should also be noted that The Privateer System is not at all meant to be exclusive. Artists are encouraged to still sell their records on iTunes, and at record stores; The Privateer System just acts as another outlet, or distribution network, giving artists and labels an outlet to access a massive audience base that has been cut out in the current paradigm.
 
It is also important to note that the system is compatible with everything from independent bands to major-label signings: again, this is an added source of revenue that has gone uncollected and has been written off as the cost of evolving technology, yet it is a massive percentage of the music shared and downloaded online. 
 

Record Labels & The Privateer System

As the actual business of manufacturing records has been reduced, the line between artist management companies and recording companies has been blurred. Record companies’ fundamental function is now providing various resources (financing, PR, experience and expertise, artist management, marketing, etc.) to its artists in exchange for a cut of profits. Competitive advantages are few and far between, and this has led to considerable consolidation. For niche labels, competitive advantage increasingly lies in the label’s tastemaking abilities, rather than a superior ability to allocate resources to artists. In this context, The Privateer System does not subvert record labels, nor render them obsolete. Because this is a logical step in the evolution of music distribution, the record labels that have weathered the digital revolution well should thrive with The Privateer System. 
 
A large, deep-pocketed label will have the experience and resources to promote each artist within The Privateer System as it sees fit. p. Smaller, tastemaking labels will have a nice competitive starting point in a game where the playing field gets more level every passing day. The most profitable sales within The Privateer System will be direct to consumer; labels, like bloggers and taste-makers, will once again benefit by having a reputation for selling consistently good music.    
 
Most importantly, labels, artists and artist management companies will be the biggest beneficiary from the potential subversive effects The Privateer System might wreak. In the end, The Privateer System as I’ve described it above might ultimately go extinct as it evolves and a new, grassroots distribution network emerges and strengthens. This network will change in unpredictable ways to serve its customers. For example, I believe models like subscription-based distribution have a better chance of achieving widespread acceptance as The Privateer System matures and changes the music industry. Competitive pricing, for example, would cause The Privateer System to serve as a distribution model rather than a label, for Artists that are already signed, via a micro-universe of blog-based record stores. For artists who aren’t signed to a Label, the company could provide basic services that traditional labels once served without all of the bloat, middlemen, and “creative” financial accounting.
 

Artists & The Privateer System
 
The Privateer System benefits artists in several ways. First of all, by incentivizing bloggers and tastemakers to promote and then distribute music, The Privateer System could very well result in an increase in music consumption similar to spikes generated by the introduction of the iPod and file sharing. This is an important point: The Privateer System should produce a large network of tastemakers that have huge incentives to find innovative ways to make music consumption fun.   
 
That leads to my second point: if bloggers and tastemakers see more of the industry’s profits, label-free artists stand a much better chance at getting their music heard by consumers. In The Privateer System, bloggers and tastemakers have a huge incentive to mine undiscovered gems that nobody else is finding, since a popular record would be featured in thousands of blogs, and a lesser known artist would be hosted on only a small handful of blogs. This incentivizes blogs to find material that is unique and interesting; it also encourages the tastemaking that has already started to happen as traditional magazines have morphed into blogs. This is a boon for obscure artists with no label or support.      

Again, within The Privateer System, pricing is flexible and artists can tweak their prices as they see fit. Additionally, artists and labels can always opt out of this system if they think the more traditional distribution approach makes more economic sense for particular releases.     
 

The Privateer System & Traditional Distribution Channels
 
The Privateer System’s effect on iTunes is an interesting topic for discussion: iTunes has a dominant position in digital music distribution, and a market share of 70%. Apple has fought major labels on variable pricing while maintaining decent margins for artists/labels (about 70%, though this can be lower if digital wholesaler middle-men are used). The success iTunes has had in withstanding direct assaults from other large retailers such as Amazon.com is evidence of the huge moat around Apple’s music distribution business at this point in time. 
 
While iTunes has done a masterful job of protecting its competitive advantages, I think The Privateer System could be a game-changer that frees music distribution from Apple’s stranglehold.  If it is widely accepted, The Privateer System would not only expand the size of the digital music distribution market, but the 30% gross margin that Apple currently earns on digital music sales would instead be absorbed by more active participants – the tastemakers – that would invest more of their earnings into the industry. Again, this is part of a natural evolution. As more profits flow through the grassroots distribution system created by The Privateer System, there will be more tinkering and innovation that will ultimately benefit the music consumer.

So am I crazy, or am I on to something?




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