5. The business model examined
What is the (new) business model of the entertainment and music industry? What does this entail? What is the artist’s value proposition in the world of EDM?
Estimated reading time 18 minutes
Presently, internet and social media are often viewed as the new remedy to win fans and clients, to increase turnover and to raise the brand awareness. In recent years many companies, organizations and brands have increasingly invested in digital presence. Many of those promptly point out that this presence delivered low yields at high costs, except possibly brand awareness. The business model is not addressed at all.
As pointed out in the previous chapter, the music and entertainment industry has changed dramatically in recent years due to the introduction of digital tools. A new dynamic has evolved, resulting in new paradigms that determine whether an artist, festival or event is successful or not. One of those critical new rules is the application of direct digital media. Within EDM and its industry, the disruption of marketing, communication, sales and innovation happens at a staggering pace.
The reality of ’24/7/365 connectivity’ enables artists and festival/event producers, more so than ever before, to maintain a direct relationship with the fans or client. Digital channels, like websites, online campaigns, blogs, social media and mobile devices offer the most flexible, effective and scalable means to establish these relations. However, artists and festival/event producers have to uphold this new paradigm. The business model really has changed.
In ‘old style’ contact, artists and producers concentrate on getting exposure at a limited number of key channels (i.e. certain magazines or radio stations); they opt for a selective presence. The new paradigm demands continuous presence on all relevant channels. After all, fans and clients determine when, to what extent and in what manner they contact you, the artist or event producer. For the record, in this chapter – as pointed out earlier – artists are perceived as companies. What is the (new) business model of the entertainment and music industry? What does this entail? What is the artist’s value proposition (his added value) in the world of EDM?
The right business model focuses on the product’s value to the fan or client; not on the product as such. For example, a fan or client is not interested in solar panels, but in the benefits they bring.
The book ‘Business Model Generation’ describes the term ‘business model as follows: ‘a business model describes the central idea of how an organization creates, delivers and retains value. Its concept must be relevant to and easy to grasp by consumers, without oversimplifying the manner in which the company functions.’
The book introduces the business model Canvas. This model takes up one page and describes in nine modules the logic of a company’s business strategy. Central to the Canvas model is the value proposition: a description of the cluster of products and services that create value to a specific segment of clients. The value proposition is the solution to a problem of the client or provides for a requirement of the client. They are the benefits the company supplies to its clients. Some value propositions are of an innovative nature. Others align to what the market has to offer, albeit with added characteristics and attributes. Subsequently, the eight remaining aspects are filled out and typified around the central aspect, the value proposition.
Many artist or producers of festivals and events use a value proposition which essence is: ‘We provide music, a festival or an event, and we add a bit of support, in exchange for a slightly better margin’. They often lack genuine interest in their supporters or clients. All was well, until the internet reared its head and social media became established. New competitors have entered the market, bringing new and lean business models. Moreover, a new type of fan or client has emerged: always connected, well informed, and more able to select and choose. Fans and clients have become more assertive and less gullible. They demand transparency and claim personal contact with their idol or provider.
On Marketing Online (a Dutch marketing blog), Mark Hedema expounds four challenges to companies in formulating an appealing proposition that has actual value for their clients. He suggests that:
- Companies have insufficient understanding of what a value proposition is, let alone use an adequate value proposition;
- Companies have insufficient understanding of the client’s value and his (or her) needs;
- Companies work from an outdated proposition that used to be successful yet is no longer fitting;
- Companies completely reject formulating an all-encompassing and clear-cut value proposition.
In today’s digital realm, your value proposition as an artist or an event/festival producer must include and express the fan’s (or client’s) complete experience. It implies that a value proposition can no longer be limited to marketing or sales, but has to be supported by the entire organization, both management as well as shop floor. An adequate value proposition is based on detailed knowledge of the fan or client. Besides businesslike and rational knowledge, this includes knowledge of a personal and emotional nature. Who are the decision makers and the arbiters of taste? What catches their attention? What excites them? What lights their fire?
The value proposition is often confused with a ‘unique selling point’; a ‘mission and vision statement’; an ‘elevator pitch’; a marketing message; or simply used as a different word for product or service. However, a value proposition is much more than any of these. A properly formulated value proposition includes the following aspects:
- Why? What do I believe in? What sets me apart?
- How? Experiences and perceptions that are delivered to fans and clients;
- What? The sum total of content, product and/or services on offer;
- When? Manner and moment of company-induced interaction between you and your fans or clients.
The foundation of every business strategy is looking and thinking ‘outside in’: empathize with the fan or client. Step into the fan’s or client’s shoes and see the world from his (or her) perspective. Who is your client really and what are his or her values? Thinking about the client from the client’s point of view helps to formulate client values, which can be used to assess what differentiates you from the competition.
The ‘Business Model Canvas’, developed by Businessmodels Inc. is also known as Osterwalder’s business model. It is a tool that helps to establish a value proposition. Adding the selected business strategy, in order to differentiate your company from the competition, completes the model.
The canvas is predominantly focused on ‘what’: the materialization of the strategy, the reason why a company, organization or brand exists. In the ‘outside in’ approach, the ‘what’ is what it is all about for the fan or client.
Every enterprise has a business model, even if it is not aware of having one. A company’s business model includes a number of essential functions:
- Who are the potential clients? What is the intended group of customers?
- What do we offer the clients? What is the proposition?
- How will we deliver the proposition? What is our marketing strategy? This accomplishes the proposition!
- How much? How are we making money via the proposition? What are the costs and how much will we sell?
The business model lays out this idea: ‘who’ (i.e. the intended group of clients) provides the turnover, ‘how’ (i.e. the accomplishment) determines cost, and ‘what’ (i.e. the marketing strategy and proposition) makes for the profit (turnover minus cost). The business model denotes what value the company creates for the fan or client, how it creates that value, and to what extent it can corner the market and claim its share of the value, formulating a projection of its profitability.
Income (revenue) model
The income model is part of the business model. A software supplier can charge for items sold, per time unit of use, or simply hand-out his product for free and generate revenue from advertising or consultancy. A generic product offers many ways to raise profit, so you have to decide how you will differentiate from the competition. The income model is nothing more and nothing less than the way the revenues are structured.
The simplest example of an income model comes from the sale of goods. Entering the local supermarket, dropping stuff in your shopping cart and paying at the check-out counter is an example of the sale of goods. You pay money and in return you get goods right away.
Here is another example. Interested parties are frequently offered the option of subscription at a lower rate per item as opposed to regular one-off purchases. An annual subscription means a steady source of revenue for the seller and a discount for the buyer, plus guaranteed supply and convenience as added benefits.
And here is one more example of an income model, the consume model. In the consume model, the user is charged a smaller price as he consumes more of the product or service. It usually entails a starting rate that decreases with increased use, in order to encourage consumption. Some examples are the use of water, gas and electricity at home, and calling from a phone box.
Offering advertising space is an example of the advertising model. It is a well-known source of income for daily papers and magazines, and for sporting clubs that display billboards around the grounds. The advertising model is frequently applied in the media sector.
For a festival or event, the most important revenue streams are:
- Ticket sales
- Content licensing (radio, TV, internet, IP-TV, (subscription) video on demand, music services, video services)
- Media value (advertising, sponsoring, endorsements, brand integrations)
- Additional services (membership, lockers, etc.)
A business model must be plain and simple. It should take no more than 20 minutes to write all key elements down. These key elements are:
- The problem that is being tackled
- Intended groups of fans, clients and users
- The unique value proposition
- The solution
- Distribution and communication channels
- Streams of revenue
- Cost structure
- Numbers, metrics and analytics
- The unfair advantage (which cannot be copied or bought)
Content is vital strength
Text, audio, video and illustrations are the life blood of internet and may even determine its vital strength. Without content, internet would be an ‘empty’ technology. Blogs and online magazines, streaming services for music and video, download services, online radio, applications, social channels and so on, it is impossible to separate the internet from its content.
The artist or event/festival producer is actually a content creator. Every day, a mass of content is produced, often unsolicited. This content can be curated and (re)distributed in limitless ways via the internet.
The content generated by artists and event producers, whether or not live, gives them a unique and distinctive capacity. This content is mostly entertainment, infotainment and music. Apart from the festival program, artists and event producers can create more unique and relevant content that can be distributed online. Because fans are able to consume the content via multiple channels, the content message is amplified and thus strengthens the bond with the fan. Moreover, the content is available for cross-media exploitation and can be applied to a new income model. The information that can be distilled from the fans’ social media behavior leads to an understanding that in turn inspires new products and income models.
Content is available everywhere, anytime, in many different forms. It is an integral part of the digital economy and generates significant revenues for all sorts of internet companies (search engines, social media, online retail and distribution) and providers. The data collected by these companies must be stored, analyzed and related to the artist’s or event producer’s data (i.e. information). Content thus generates supplementary data about your fan and helps to better understand him or her.
Everything is a timeline
Social media are websites (networks) where people communicate freely, share and discuss information and talk about their lives, aided by a multimedia mix of text, photos, video and audio. Individuals and groups create the content of these websites. Its distribution is dependent on the relationship between the individuals, which determines the degree of interaction and the type of conversation.
Over the last two decades a densely populated and multi-varied social media landscape has emerged. It includes, among other things, blogs and micro blogs, forums and message boards, communities of digital friends (Facebook, Google+), wikis (Wikipedia), virtual Worlds (Second Life), social bookmarking (Reddit, Digg), digital storytelling and scrapbooking, sites for sharing music and video (Pinterest, Instagram, YouTube), and podcast portals.
Many of these sites have become household names, like Facebook, Instagram, Snapchat, Twitter, YouTube, and more. All these networks comprise a timeline. In fact, they are a timeline. The most current and relevant item is shown first. The online domain of the artist or event producer, his website, is also beginning to show network characteristics via the multimedia mix of test, photos, video and audio. Moreover, the domain exhibits an increased use for interaction and fan dialog. It creates a timeline.
From product to network
The trend is for social media and the internet to merge and become more and more intertwined. It is no longer social media, it is the social web. Smartphones are taking over as the first choice-device for communication, whether it is email, text messages or messaging via an WhatsApp-type service.
In terms of activities employed by users, social networks break down roughly into four main categories:
- Publishing (blog platforms)
- Sharing (platforms for music, video and photos)
- Communicating (the various platform for digital friends and communities)
- Networking (the business equivalent of the social network)
Here are some examples:
- Publishing: Blogs (such as Blogger, Live Journal, TypePad, Tumblr and WordPress) and wikis (such as Wikipedia and Wikia)
- Sharing: Music, photos and videos (Flickr,Pinterest, YouTube, Vimeo, Dailymotion, Deezer, Spotify, SoundCloud), apps (Instagram, Vine) and communities (Behance, TheFancy)
- Communicating: desktop-based platforms (Quora, Reddit, Github, Disqus, Skype, Sina Weibo, Tencent Weibo) and mobile apps (WhatsApp, Snapchat, Facebook Messenger, BlackBerry Messenger, Kik, MessageMe, Telegram, Pheed, Viber, Nimbuzz, Hike)
- Networking: business-to-consumer (Tagged, Nextdoor, Qzone, vKontakte, RenRen, Mixi), business-to-business (LinkedIn, Viadeo, Xing), dating (Badoo, OKcupid) and the mobile equivalents (Happn and Tinder)
In an overcrowded market of DJs, artists, festivals and events, innovative (original and unique) and authentic content is crucial for grabbing and maintaining the attention of fans who linger in the social web.
The artist or event producer is a brand. He wants to catch the fans and clients attention in an organic fashion. This is achieved by feeding, on a daily basis, the fans insatiable appetite for relevant content, like news updates, up-to-date features, social media and video. A sports brand for example no longer has a need for advertising. When the brand produces relevant content on nutrition, physical exercise and health and shares this content on social media, the intended group of customers will try it out and come back for more advice. Possibly, it will follow it up by purchasing one (or more) of the brand’s products. In this way, the focus shifts from your product to your network.
Brands need to create their own content
Brands that have some knowledge of and experience with the digital realm realize that relevant and authentic content is the future of advertising and marketing. That is why leading brands organize content creation in-house, as opposed to outsourcing it to outside parties. Their aim is to win the consumers of their content over as future clients.
Red Bull is fine example of this trend. The soft drink producer has redefined itself as a media company and in the process created its own network. Why? To express the quality and depth of the brand. Red Bull’s content varies, from attempts at breaking records for bikes, mopeds, motors, cars, planes to skydiving from space. Red Bull is virtually a media company, creator of its own network within the internet ecosystem, that competes with various traditional radio and TV broadcasters. It has shifted its attention from its product to its network.
In order to win over the fan and connect him (or her) to your company, all in the digital realm, one has to set up a new business unit. This unit is flat, small and aimed at creating new opportunities for sources of income for the company, organization or brand. It should actually be managed like a start-up company; it should have time to learn how to deal with digital interaction with fans and clients. How to connect to someone living in the app economy? How to connect to someone living his (or her) life on the internet and social media? Are they the same people? Or different? In what way are they different? What is the plan to integrate these kinds of contacts into your network?
The data generated by your own internet ecosystem can be regarded as a business model, applicable to Osterwalder’s Business Model Canvas. Since this business unit is run like a free-standing company, it should work with its own ‘profit & loss’ calculation. It has to be managed like a profit center. In the next chapter more will follow on how to organize the business unit for content creation.
The artist or DJ
So far we have discussed the new business model for producers of events and festivals. What about artists and DJs? Experience learns that in the entertainment industry and the music business in particular, innovations take a long time to land. One of the reasons is that challengers of the status quo are ever dependent on the establishment. This state of affairs is illustrated by the lack of urgency to re-evaluate content or asses the vitality of current business practices.
Not too long ago, record companies and music publishers dominated the world of music and dictated its practice. Musicians were reliant on them for financing, marketing and distribution. Those days are over. Self-published content is more powerful than many realize. It can be the launching pad for a career in music (or writing, or cinema, etc.). The key issue is to create a fan base, which is more important than making money from the self-published content. In the music industry of today it is still not clear who is responsible for, or has to invest time and money in the internet strategy of the artist. All parties involved – record companies, music publishers, booking agencies – point at their neighbor, so nothing really happens. So what is the artist’s or DJ’s new business model?
- Start a ‘house of copyrights’. A house of copyrights is a legal entity (private limited company or foundation) that owns, administers and exploits the artist’s intellectual properties. It makes it easier to negotiate deals with organizations in the music business, such as record companies, music publishers, booking agents and the like. It simplifies the application and management of the artist’s internet ecosystem.
- One of the house of copyright’s objectives is the exploitation of the artist’s rights. At the close of the financial year, the organization will take stock of the results – what the rights have yielded – and pay out the share in profits according to agreements with parties involved, for example manager, record company or music publisher.
A house of copyrights is a veritable ‘360-degrees cooperation’; after all, it represents a common interest. Moreover, and this is contrary to the situation of old, it is not a defensive collaboration. Before, the standard contract implied that the record company owned the copyrights. It limited its risk and protected its investment.
This new 360-degrees cooperation is currently the juridical solution for the changes internet has pressed upon the music business. Decreasing revenues from record sales and pay-per-downloads oblige the artist or DJ to look for new income models within the business model. Furthermore, the value proposition must be the focus, not the income model. Artists are aware that internet gives them endless opportunities to connect with their fans. They want to adopt to the new dynamic of the music business.
This dynamic sees borderlines dissolve and music companies entering a territory that used to be the professional area of complementary businesses. In other words, the record company is no longer in pole position. The booking agency is on the rise, since the bulk of the artist’s revenues come from live performing. However, the 360-degrees contract frequently fails to deliver on its promise. Record labels, as well as many booking agencies, are simply not able to fully exploit the copyrights or work in tandem with outside parties. Releasing and marketing music – which is an income model, not a value proposition – is the record label’s core business and top priority.
Fans want to be close to an artist or DJ. They want to decide whether, and how much, they pay for music, a live performance or merchandise. Who ‘owns’ the artist’s or DJ’s fans? Not the record company nor the booking agency; not the management nor Facebook, actually. Obviously, it’s the artist or DJ. The fan connection is his only tangible asset.
Although the DJ or artist has more data on his (potential) fans and followers than ever before, the vast majority of these data is not stored or valued. As a result, the artist or DJ misses out on opportunities to extend his fan scope. And let’s not forget, the direct contact with the fan. Thus, the artist overlooks what could very well be the crux of the matter, which is the monetary value his fans represent. After all, the fan base represents financial value, which can be added to the balance sheet. This is the new paradigm.
The artist or DJ should collect only data that really produce relevant knowledge or result into transactions. Only then can the data be added to the balance sheet as monetary value. Often, these data are at the artist’s or DJ’s disposal, yet he or his management has not figured out how to exploit the information. Indeed, the present day artist or event producer collects, without realizing it, an extensive volume of fan-related data, produced by his email data base, Facebook friends, and friends and followers on various channels like Twitter.
The artist or DJ can start a direct relation with friends and followers, who, in turn, can be recruited to raise new friends and followers. This helps to expand the scope of news items on upcoming performances, merchandise and music. Moreover, the connections provide endorsement and sponsor options, due to the links that will emerge from cross-referencing the data base: the data base is a map of the artist’s audience. Information of this kind will help to negotiate a favorable contract with record labels, music publishers, booking agencies, event producers, brands, organizations and companies.
For fans, the cement that holds the artist-fan relation together is the music, the story and the personality of the artist or DJ. In fact, the artist or DJ himself is the intellectual property via his music. He (she) makes the connection with the fans, which subsequently results in the data that the artist or DJ can capitalize on. In the right 360-degrees collaboration, the manager is the artist’s business partner who operates in a ‘full rights management’ business model that supposes the artist or DJ as a brand.
All the artist’s or DJ’s rights, like personality rights, trademark rights, related rights, copyrights and other rights, are the access in the manager’s arsenal in negotiating a favorable contract for his client or business partner. These rights are part of the house of rights that is administered by the artist’s or DJ’s management. From this house of rights-construction, you can license the rights per area to an operator who is best at his chosen field. In this way, records labels, music publishers, booking agencies, event producers, commercial sponsor raisers and merchandisers have become service providers.
Business Model Artist (DJ)
In the new business model, the most important revenue streams for the artist or DJ are:
- Content licensing to radio, TV, internet, IP-TV, video-on-demand, subscription video-on-demand, music services, video services;
- Concert ticket sales;
- Sale of merchandise;
- Media value (advertising, sponsoring, endorsements, brand integrations);
Obviously, many additional income models are conceivable. For inspiration, the blog of the Future of Music Coalition offers a selection. The Future of Music Coalition explains the routing of the cash flow; it does not describe in detail the finesse of the income models.
Content = relation = information
The ‘content = relation = information’ principle is the foundation of the value proposition of the entertainment and music industry’s business model. The parties (i.e. artists and producers) that furnish the optimum 24/7/365 experience for the fans or client, and are able to read out the data and use these data to strengthen the relationship, will eventually reap the rewards. The paper ‘Radio will never be the same again’ explains the principle very precisely.
Wilbert Mutsaers, director broadcasting of Dutch public radio station 3FM, writes in 2012 on Dutch public radio-affiliated music blog, 3voor12:
“Radio = Visual radio = Social radio = Social audio = Social video stream = trans-media platform = Media brand. The user can choose. These assorted options enable the content producer who works with a potent and transparent radio proposition to profile himself as a well-rounded media brand, can go anywhere his audience is, and transpose his content to trans-media platforms.”
Mutsaers confirms my thesis that the content of radio broadcasting stations must be distributed in a decentralized manner; the connection with fans or clients (in Mutsaers’ case the listener) comes first and foremost. Paraphrasing Mutsaers’ postulation, we can state that the artist or event producer who has a potent and transparent value proposition is enabled by the endless opportunities of the digital world to profile himself (or his event, in case of the event producer) as a well-rounded media brand. This implies it has to be wherever his audience is.
In its broadest sense, an internet ecosystem is often depicted as the sum total of interaction between industry, brand, product, data and people. It incorporates all stakeholders: partners, suppliers, competitors, clients, analysts, commentators, journalists, bloggers, prospects and individual fans or clients. The technical infrastructure and the functions supported by the network are also part of the internet ecosystem. By regarding the internet ecosystem as a ‘business ecosystem’, one actually sees the emergence of new value models in the relationships of all stakeholders in the internet ecosystem.
Up to now, your greatest value as an artist or event producer was probably your brand. According to Wikipedia, brand value (or brand equity) is the monetary value that the brand itself represents. Usually, brand value is identified with future cash flow generated by the brand. Your brand is not (yet) included on the balance sheet. However, it represents a hidden value, the goodwill.
The literal meaning of goodwill is ‘sympathy’ or ‘benevolence’. It is used in the world of finance to indicate the companies’ immaterial assets. Goodwill usually only becomes relevant in situations such as sale or take-over of the company and is regarded in the world of finance as the added value of a company, on top of its net value. Thus goodwill represents future revenues of companies, organizations or brands; it has to be added to the balance sheet, yet exists in terms of know-how, customers, brands, human resources and such like.
So content cements the relationship with fans or clients. It supplies the information that enables you to make strategic decisions and help to capitalize on various income models. The business model of the entertainment and music business, ‘content = relation = information’ plus its matching income models, has thus taken shape and will be the starting point. Next is the challenge of how to structure the team that supports you, the artist or event producer. This is the topic of the following chapter.