Radiohead Economics

[UPDATE: the early reports are in from the band and external sources. Estimates put the average price paid at $5-$8, which largely agrees with the informal survey here. Approximately 1.2 million people downloaded the album from the site and at least another 500,000 got it for free from BitTorrent. The PR value of the excercise: priceless.]

First Prince, and now Radiohead decide that they can't wait for the music industry to innovate its way out of the current mess. From an economics perspective, Radiohead's experiment with the set-your-own price model is fascinating. What do you think the average price that people choose to pay for the digital download of "In Rainbows" will be? (answers in comments, please, ideally with a sentence about why you guessed what you did)

A) Less than $5

B) Between $5 and $10

C) More than $10

(There have been several reports that you have to pay at least 1p with a 45p credit card transaction charge, so the minimum price will effectively be 46p, or $0.93. However, I just tried it and it accepted $0.00. So let's assume that free is indeed an option.)

Note: this has been done several times before, although never with as high-profile a band. A Canadian artist named Jane Siberry even shares the statistics from her experiment (right of page, scroll down), although note the important difference that she lists a "suggested price". Street performers also let people set their own "price", as do many museums, although they too tend to list a "suggested price".

Regardless of what the average consumer decides to pay, this is another example of a business model enabled by FREE. They only way Radiohead can enter into this with no idea of what people will pay is because they have a product whose marginal cost of manufacturing and distribution is close to zero.

In this case, I suspect that the attention that Radiohead is getting for this stunt will ensure that it does far better, between direct music sales and concert attendance, than it would have otherwise, so the opportunity costs are probably negative.

The Charlatans, for instance, are following Prince's model and making their next album a free download. Their manager explains:

McGee said the band "could not lose" from the revolutionary approach. "We looked at the deal we were being offered by Sanctuary and said, 'Let's just do it ourselves'. We increase our fan base, we sell more merchandise, more fans talk about the band and we get more advertising and more films (soundtracks). More people will get into the the Charlatans and will probably pay the money to see the show. I presume it will double the gig traffic, maybe even treble it." He put the suggestion to the band's singer, Tim Burgess, who immediately agreed, and the rest of the band were subsequently persuaded to go along with the plan. Burgess said: "CD sales are on the decline and for any one copy sold there are nine copied from that. The future is in playing live." The Charlatans have a November tour lined up to coincide with the release.

BTW, Radiohead is also selling a physical boxed set, which contains the new album on CD and on two 12" heavyweight vinyl records, along with a second enhanced CD containing more new songs, digital photographs and artwork. The set also includes lyric booklets and all are encased in a hardback book and slipcase. It's £40 ($80). Some information wants to be free, some wants to be really expensive.

Comments

[Jackson]

I paid $8.50. I think this is actually "above average" for what an album is worth. I paid that much because I really like Radiohead. For a band I was less sure of or less fond of, I would pay less. I am thinking the average price will be about $6.

Now, I wouldn't include the $0 downloads in the average price calculation. I think those downloads should be considered a cost of doing business and not in the revenue calculations. Getting registration information for those downloads should provide value to Radiohead b/c before they knew nothing about who (and how many) were downloading the music for free. Also, I may have bought the album and then had my hard drive crash. I wouldn't feel obligated to pay again, so I might just download it at $0.

If you include the $0 downloads in the revenue calculations then I would say the avg price would be $4.50.

So, my final answer is B when > $0 and A when >= $0.

Both answers mean that Radiohead will see more profit to their bank accounts from this album than from their others.

[Derek G.]

My answer is B.

[Ryan Holiday]

Has anyone asked whether the album is good or not? It seems to me that regardless of that validity of the experiment, THAT--it's quality--will be the most decisive factor I mean, doesn't that matter a little? We don't live in a vacuum. Distribution is a means to deliver a product and more than anything, the product dictates how successful that method will be.

[Randall]

My answer = A.

I paid 1 pound and 45 pence, which seems a fair price from me considering that I have previously paid out multiple times for duplicate Radiohead music on different media. I own vinyl, cassette, cd, iTunes and import versions of the same material, but I like my "Punk Floyd" - so I am a bit partial.

[Jeff Atwood]

B) between $5 and $10

Because that's the fair market value for a digitally downloaded album today.

[Michael Moncur]

I'll go with B for my answer, because I think most people will try to be "fair" and pay what an album usually costs.

Personally I tried to pay $0, because while I'm curious about this experiment I don't like Radiohead at all. But they wanted all kinds of personal information, so the download wasn't "free" after all. I'll stick to iTunes.

[Paul Morriss]

I would go for A because I reckon the people paying $0 will skew the figures. I think if you take all non-zero values, then the average would be B. My thoughts as I was confronted with that form were interesting. I was going to put 0, then I thought, "no, I'll read some reviews first, and pay what I think it's worth".

Magnatune.com have "pay what you want", but their bottom price is $5, not free.

[Interrobanger]

Most people, between $5 and 10. Nobody wants to be a free rider. Die-hard fans like myself, more than $10 -- and maybe some anti-RIAA, tech-savvy types, too. Sheer goodwill could earn them big bucks for this, at least the first time. Only first-time debit card owners and the truly despicable will try paying $0.

On a related note... of course, you can't pay $0. 45p in the UK is going to mean over a dollar here. It's the damned credit cards, of course. Where are our micropayments? Why not let people pay through Steve Case's Revolution Money? That card undercuts Visa and MasterCard on interchange fees. Click on my name and check out the website of a group I work for -- merchants have been trying to make consumers aware of the exorbitant fees the banks extract from them for processing cards, and maybe this is just the event to do it.

Meanwhile, Radiohead can cut out the record industry, but not the credit card industry. Damn. The revolution isn't over yet.

[gards]

B - paid $10 - which is what I would typically pay for an iTunes album.

[juepucta]

I would pay $5 (option A). It is several times the amount they would have gotten from my purchase of a $17 Capitol release. And this time i am not getting anything but files.

Mind you i will most likely end up buying a proper CD version of the album (not the ridiculously priced 40 pound UK ) eventually.

-G.

[Niva]

A !
I paid 25p, but it was really frustating when i found out i would have to pay 45p to visa.
The reason i liked the way they're selling the album is that it was suposed to cut out the middle man (record companies), but after all they had just got a new one (credit card companies).
So I end up giving more money to visa then to radiohead....

[Jorge Procopio]

Chris,
this is great news. The music business needs to understand that times have changed and that we are not going to accept being taken down their path anymore...I live in Brazil and 80% of all the music I like don´t even come out here. Some years ago I had to wait months before a "new" release got down here. Thank god and the Long Tail those times are behind us. Some artists such as Radiohead and NIN do such a great job at packaging and producing that I have no problem at buying their work for whatever prize they charge.
Looking foward on seeing you here in Brazil in November.
Jorge

[Bo]

Depends on the age. You should have been more specific and asked for not only our vote but our age range. The younger they are the less they will pay. And the Charlatans are somewhat right. Concert attendance is dropping. Concert ticket prices are going up. I wonder why? The future of music will be interesting for sure.

[Soul on the Verge of Aim]

Chris,

I think that you will find the arp come in at 5 or below. I blogged about this topic on my site and a few others, mentioning a study done by listen.com a couple years ago on the elasticity of demand for downloadable music. As the price drops, sales rocket. I think this ultra elasticity of demand will end up being a positive to Radiohead because the economics of digital downloads support virtually no marginal costs.

Radiohead is just collecting a nominal fee, like an ATM machine to support the cash cow... the tour, the t-shirts, the equity in attention.

for what its worth, I also see the long tail in Radiohead's move which is how beneficial this mode of distribution is to an artist. Just aisles and aisles of virtual shelf space, filled with music that never collects dust. Add some price versioning with the Disc Box and you have a pretty good set up to maximize value.

[Soul on the Verge of Aim]

Chris,

I think that you will find the arp come in at 5 or below. I blogged about this topic on my site and a few others, mentioning a study done by listen.com a couple years ago on the elasticity of demand for downloadable music. As the price drops, sales rocket. I think this ultra elasticity of demand will end up being a positive to Radiohead because the economics of digital downloads support virtually no marginal costs.

Radiohead is just collecting a nominal fee, like an ATM machine to support the cash cow... the tour, the t-shirts, the equity in attention.

for what its worth, I also see the long tail in Radiohead's move which is how beneficial this mode of distribution is to an artist. Just aisles and aisles of virtual shelf space, filled with music that never collects dust. Add some price versioning with the Disc Box and you have a pretty good set up to maximize value.

[Soul on the Verge of Aim]

Chris,

I think that you will find the arp come in at 5 or below. I blogged about this topic on my site and a few others, mentioning a study done by listen.com a couple years ago on the elasticity of demand for downloadable music. As the price drops, sales rocket. I think this ultra elasticity of demand will end up being a positive to Radiohead because the economics of digital downloads support virtually no marginal costs.

Radiohead is just collecting a nominal fee, like an ATM machine to support the cash cow... the tour, the t-shirts, the equity in attention.

for what its worth, I also see the long tail in Radiohead's move which is how beneficial this mode of distribution is to an artist. Just aisles and aisles of virtual shelf space, filled with music that never collects dust. Add some price versioning with the Disc Box and you have a pretty good set up to maximize value.

[Ryan Miller]

I'd say 50% pay less than $5, with a skew in that range toward the one pound free-riders. 35% between $5 and $10 and 15% at $10 or above. Maybe 1-2% buy the box set.

In the end, I bet the weighted average hovers at around $5 per album sold, which is about what artists get nowadays anyways after the industry takes its cut... I would love to be surprised with a higher number though.

By the way, when I blogged about this I posted an open offer to Radiohead to let me run the analytics on their experiment. I didn't spend $120K on a Wharton MBA for nothing you "know. This is where my education, career, and relentless listens to "Paranoid Android" and "2+2=5" magically join into one path:

http://mediatrending.com/2007/10/02/radioheads-new-album-has-infinite-price-points/

Thom? Jonny? Ed?? Colin? Phil??? whaddya say?

[Pena Schmidt]

I paid 5 GBP, just above 10 USD

Looks like a Long Wiggling Tail, now. We are happy, clearly.

It's nice to see many people/blogs I'm reading along converge on the matter. Please check Freakonomics for OK comments.

[PC]

I paid 1 pound. I would've paid more if they had samples to the album. But they didn't so it was a completely blind buy to me. I'm not the biggest Radiohead fan but I think they're great and have enjoyed their prior albums.

All in all, they made more money off of me then they would've otherwise. If I didn't hear about this, I would've downloaded the album (bittorrent) for free.

I'm a big concert fan, so that's the way bands that I truly enjoy really make money off of me. If I find this album to be truly awesome, perhaps I'll purchase it again.

A fair price to me is $1 per awesome track (iTunes-ish).

[Michael H]

More than $10 - This is a great band, and I would gladly pay top dollar knowing I am supporting them directly. Their core following is so strong that this will absolutely prove to be successful. I don't think the media giants are sweatin' real hard yet, but this will definitely help continue to put the heat on them. Don't you love it?

[The Limes]

About 4 or more years ago, I helped out my friend Sean Cripps and his band, The Limes, and put up a website with payment via the honor system: PayPal him what you think it's worth. The site has the 8 songs from their pre-release demo. It's nice to see Radiohead adopting the Lime's business model.

cheers,
Chris

www.WeAreTheLimes.com

[Mack MacDaniel]

Long run? Insert drum roll:)...having not listened to the album, no idea. But I do have an idea about the equilibrium price per "good" song and how that might affect all downloaded "album" sales in the future (your basic yield metric)...

Probably 70 to 90 cents per "good" song NET to the group. If this album/ collection of songs has five quality songs- equilibrium will settle at around $4.00 for the "album". It doesn't matter how many songs are compiled, just the number of quality ones.

Results:
Good part: "Quality" and "Worth" are finally converging.
Bad part: We've potentially got a lot of extraneous humans running around.

[Ryan Troy]

I paid $30 because they are the most relevant band around and I thought I should offset the amount of copies I made for my friends when I go the early leak of Amnesiac. Funny enough I also bought the boxset, unaware a download was inclued, and at check out my bill looked like this:

Download -$30
Boxset -$40
Total $10

Bug or subtle reward. Not sure, but stoked regardless.

That said I think the average price will be B, because I think most fans share in a mutual respect and will pay more than nothing, but less than $10 because honestly, to most, music has lost its value due to an over abundance of selection. Important to note though that most would be willing to pay more(not free) for Radiohead simply because their music is just that much better than anything out there. Ok maybe I'm just a fanboy, but my 2cents.

[Ryan Troy]

I paid $30 because they are the most relevant band around and I thought I should offset the amount of copies I made for my friends when I go the early leak of Amnesiac. Funny enough I also bought the boxset, unaware a download was inclued, and at check out my bill looked like this:

Download -$30
Boxset -$40
Total $10

Bug or subtle reward. Not sure, but stoked regardless.

That said I think the average price will be B, because I think most fans share in a mutual respect and will pay more than nothing, but less than $10 because honestly, to most, music has lost its value due to an over abundance of selection. Important to note though that most would be willing to pay more(not free) for Radiohead simply because their music is just that much better than anything out there. Ok maybe I'm just a fanboy, but my 2cents.

[Joe]

I paid 5 pounds because Radiohead publishes a quality product. They have integrity. I like their music. They deserve it and a major record label industry that looks upon its customers as criminals does not.

I hope many more bands use the Radiohead (Wilco) model. I for one will support it.