- November 5, 2007

Radiohead Freeloaders Abound, But Does the Business Model Work?

There’s been a lot of recent media buzz about Radiohead’s decision to sell their new album “In Rainbows” directly through their website on a “pay what you want” basis and what it would mean for the record industry if this new model were to prove effective. We decided to take a look at what Comscore data was showing and issued the results in a press release today.

Some will probably jump to the quick conclusion that with an average price per download (including both free and paid downloads) of just $2.26, the business model is not viable—or at least that a band is better off letting a record label do the heavy lifting in generating album sales. But, I don’t think that would be taking all the important factors into account.

First, because Radiohead is bypassing many of the costs of record label representation, a higher percentage of sales go back into their pockets. So, all other things being equal, even a substantially lower average sale price could still mean more money going into the band’s coffers.

Now if you look at the average price per paid download, it was actually $6. You could argue that many of the consumers who paid zero would have pirated the album anyway, or may not have had enough interest to try and obtain the album in the first place were it not available free of charge. So this number may actually be a better gauge of price. If you accept this premise, then the $6 in sales per album sounds like a decent sum when you consider that the record labels aren’t getting their standard cut.

Another argument in favor of the Radiohead model is that it actually encourages a higher number of consumers to download the album, potentially increasing a band’s overall fan base, which could generate incremental album (and concert ticket) sales down the road.

But perhaps what I found most interesting in the research was this fact: for every $1 in sales coming from album downloads, sales of their Discbox generated $2. Now obviously not as many people were willing to shell out $80 for the Discbox, but enough of them did to generate a very healthy stream of additional revenue. (Every 1 person willing to buy the Discbox represents the revenue equivalent of roughly 35 album downloaders.) So if this new distribution method drives incremental traffic to their website that is successfully converted into Discbox sales, it could prove to be a major boost to total album sales.

So let’s take a final look at the economics of the Radiohead model. The average e-commerce site converts about 5% of its visitors to buyers, so let’s take that as a lower-bound estimate for Radiohead sales (in reality, the conversion rates we saw on the site were significantly higher). If 5% of their 1.2 million visitors spend $6 per album, that’s $360,000 in revenue. When you factor in the additional sales generated by the Discbox, we’re looking at roughly $1 million in sales during the month. And again, this is based on the lower-bound conversion rate assumption. So I think it’s fair to say that this model, if executed effectively, can be a very legitimate sales driver. In Radiohead’s case, as the first band to venture into this uncharted territory they had the benefit of a media firestorm to help promote the album. If other artists decide to jump on this bandwagon, will they receive the same benefit?

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