Your Music is a Loss Leader

In business there is a term used to describe products that are designed to get you in the door and buy bigger ticket items. It is called loss leader pricing. When you break that phrase down the first word “loss” is because the business is probably loosing money selling those items. The word “leader” means it leads you to buy other products. We see this all of the time, but probably don’t even realize it.

For instance you can buy a brand new razor with two cartridges for around $10, but if you want to buy additional razors themselves you will have to fork over $25 for an eight pack. 

Have you ever purchased a new printer? What a steal you can get a whole unit with ink for under $50. It isn’t until you need a refill that you realize the cartridges alone will cost you over $50. 

Loss leaders are everywhere. Go into a supermarket and buy an 18 pack of water for $3, two bags of chips for $4, or a 12 pack of coke for $3.99. These are all tactics to get you to buy other, more expensive, things.

Well that is what music has officially become… a loss leader.

According to Apple’s 10-K filings for 2011 iTunes made $5.4 billion. Amazing right? Now think about this. Forbes reported that Apple sold five million phones within three days of their iPhone 5 launch on September 21st, 2012. Now even though the vast majority of these phones were at reduced rates through cellphone carriers, companies such as AT&T, Verizon, and Sprint still needed to pay Apple a subsidy to get the new highly in-demand product. According to CNN money that subsidy averages about $450 per phone. That equates to $2.25 billion dollars for Apple. A little under half of what their iTunes division made last year. So in three days Apple's iPhone made half of what their entire iTunes store made in a year. 

Last week Samsung, Apple’s biggest rival, announced they will start buying up smaller music streaming and distribution companies to strengthen their own music network called Hub. The technology bohemian isn't doing this to sell more music. They are doing it to "lead" consumers into buying one of their Galaxy smartphones or tablets. Samsung is finally catching on to something Apple, Amazon and Google have known for years. You sell more technology devices if you can easily fill them with low cost music. 

Using music to get consumers through the door to lure them to buy bigger ticket items isn’t necessarily new. For years Wal*Mart had isles of CD’s. That’s right I said “isles” of CD’s. They did this because you had to go somewhere to buy new music. This was before you could beam it to your phone while you borrowed your neighbors Wi-Fi connection. When you went to Wally World to buy that new Pearl Jam CD. I know I’m old. You were forced to look at those beautiful big screen TV’s, stereos, DVD players, and other high priced electronic items, and chances are, at least once,  you walked away with one of them. In the end your $16 CD purchase cost you about $500. That is a loss leader.

But today music has completely become a loss leader. If you don’t believe me look around. If you are a Starbucks card holder you will get the occasional free download of a new music track, or you can buy those albums in their stores for $10 while you drop another $8 on a cup of coffee, plus another cup for your friend, and, oh wait, one of those awesome muffins.

  

Artists don’t make money by selling music anymore. That is an antiquated business model and if a manager or record labels is telling you otherwise start running back to your day job because you will make more money and work less there. Just take a look at the sales numbers according to www.gloriousnoise.com.  Total album sales were at $616.6 million in 1996 and have dropped to $330.57 million last year, and yes that includes digital sales for 2011.

But for some reason artist’s still think that they make money by selling albums. The truth is in today’s market they don’t. The smart ones understand how to use their music as a loss leader just like Apple, Samsung, Coca Cola, and Starbucks. Trent Reznor gives his music away and uses those free tracks to encourage fans to buy his concert tickets, merchandise, autographed memorabilia and anything else he can make money on. He understands that the market has changed their valuation of music. To them music no longer has a monetary value. Napster has taught them otherwise. Incubus’ manager Steve Rennie said it best “for some reason college kids can afford their beer and weed money, but will not pay for their favorite song.” 

On a good note music has not lost its intrinsic value and that is why ad agencies, film companies, and big businesses still fork over money to attach their brand to a particular tune. To make money in today’s market artist must stop thinking that people will pay for their music. Instead they must start using their music to get those consumers to buy into their brand. Hell it worked pretty good for Apple.  

The Degree is Over, But the Learning has Just Begun!

It has been a long time coming...This week I will graduate with my Bachelor of Science in Music Business Management.

Over the past two and a half years I have been studying, but not in a classroom.  Because I was "on the road" I had to obtain my degree with the help of technology...Online.

I chased that degree while I worked on cruise ships, paying 35¢ per minute to watch my lecturers, research and upload assignments, and participate in virtual discussions. At some times this cost me close to $200 per month in Internet bills alone.

For a while I got to study "on land" as I worked as a show band drummer for a five star resort nestled in northern New Hampshire. The remote spot where I lived lacked an Internet connection, so I went to my virtual classes via a mobile hot spot. It was slow, so slow that sometimes I drove an hour out of town seeking a stronger cell signal to upload my assignments.

I worked hard for those two and a half plus years. I think I averaged about 45 hours per week on school work while I traveled, played some late nights, and then traveled some more.

With a few months left before graduation I moved in with family in Florida and started working for Apple Retail. Luckily my sister had a really good Internet connection so I could finish my tenure at the college strong. I was up early every day and in bed late as I polished another assignment, researched another business topic, or read another chapter.

And in the end I got my last grades and was pleasantly surprised to find out that I had achieved a 4.0 for all of my hard work. The same hard work that put me at the top of my class in Music Business Management at Full Sail University.

Many people question the validity of such a degree. I do not.

The music business landscape has radically changed. Everything is different from marketing to promotions, artist management, the record deal, contracts, and, of course, distribution. What is funny is that if you asked any "Joe blow" on the street he would tell you the same, but for some reason so many artists think otherwise. They still dream of that big record contract, the globe trotting tour to packed football stadiums, the debut album that goes platinum in the first week.

Without people like me, people who have trained in the modern music business landscape, they would starve. Or worse yet return to a normal 9-5 job. You see during this degree that many would deem somewhat useless I have studied how artists can not only survive in this new marketplace, but also prosper.

In the end I am proud of what I have accomplished thus far, but I am even more excited of what is to come. If the music business has shown me one thing, it is that the Internet is here to stay and those who don't hop on board will wither and die. I have studied one industry that almost died at the hands of an interlinked world, now I will learn how to leverage that power to help both myself and the lucky organization I will eventually work for succeed in the modern marketplace.

So you may see my posts change a bit.  I will continue to talk about the drumming world, but you will probably see more research on the modern music business landscape and the power of the Internet taking a larger role.

I look forward to sharing my experiences with you!