Beware Risk-Free Business Models

Related link: http://economist.com/displaystory.cfm?story_id=S'(X%20*RQ%3B*!%20%224%0A&tranMod…

After years working in high tech media, and having drunk the kool-aid more than once, I've come to value dumb questions. And the same dumb question keeps occurring to me when I look at magnatune, weed and other net-based alternatives to record companies: How do you earn rewards without risk?

So far in business history, there's been a requirement that risk and reward roughly balance. Someone takes on the risk of investing time, effort and/or money, and society rewards them if they produce something of value. The existing record industry, for all its faults (and they are large and many), is based on labels taking on a lot of risk in hope of big rewards. The risk takes the form of trying to create a pop culture phenomenon, which is based not just on musical merit but on a complex mix of music, sex, ritual sacrifice and timing.

Many of the alternative models I've seen seem to be based on the assumption that merit is enough: people will hear good music and recommend it to their friends, who will want to buy it. But it's at that point that the model appears to go risk-free. Peer-to-peer recommendations are supposed to take over from the million-dollar marketing investment that a major label typically puts behind an attempt at a hit song. But that marketing investment is the risk in the risk-reward equation. In particular, it's the "impresario fee" for finding an artist that is extraordinary in some way and then doing all the things that have to be done to, in effect, modulate pop culture with the image and sound of this artist.

If the risk is eliminated, what are customers paying for? Good music? I'm not so sure. Ask the average jazz or classical musician how much money they make from sales of recordings.

Actually, I don't think the risk is eliminated--it's just transferred to the artist. And the artist is unlikely to be able afford to take it on, especially since the same technology that makes the alternative record companies possible also makes it possible for everyone in the developed world to flood the market with content, making it exponentially harder to be noticed.

This is not to say that the aggregators (magnatune et al) can't make money by collecting all this effectively free content. Even there, the more successful ones will probably be the ones taking on large risks.

In a recent Economist article (subscription required for full text) on magnatune, the reporter notes that "It will only take one rock star born on the internet, after all, for everyone to pronounce the old model completely dead." This leads to another dumb question: Why so few stars from the net? It's been a long time now, and in the mean time American Idol and the like, which are based on the old business model with some new twists, reliably produce stars every season.

At myspace.com, the band Hollywood Undead has come from nowhere and gotten hundreds of thousands of plays. But I'd be interested to know how much money that's generating. As long as there's no risk behind Hollywood Undead, there may be no money coming.

If that changes, we may really see something new. But I've heard that story before...

Standard disclaimer/flame interrupter: I'm questioning, not attacking. I'm a big fan of the democratizing potential of new media, and very aware of the negative effects of the control of media by a few giant corporations.