The Freemium Model Is Coming To Music

"Start Me Up" roared across every TV in America during the summer of 1995.

At the time, many praised R.E.M. for maintaining its artistic integrity, while criticizing the Rolling Stones for gross commercialization. They were, many felt, "sellouts," a label that most musicians then and before did everything in their power to avoid.

My, how times have changed.

For decades, it was enough for a band or solo act to release an album and then go on tour to promote sales. But that model is mostly obsolete, thanks to music streamers killing albums sales and concert venues paying artists a much smaller slice of profits than ever before. As a result, making money in the music industry has become a tough slog, save for a precious few acts who can carry tours all by themselves.

That, in part, explains the rise of music festivals like Coachella. But events like these are hardly a cure-all for musicians. Not only is there a relatively limited number of them but most young people cannot afford to shell out hundreds of dollars for tickets, to say nothing of the travel and lodging costs to go to more than one festival per year.

As a result, we are starting to see the first makings of the "freemium" model take hold in music, where artists are paid little if anything to perform but can use the free exposure to build brands, which they then leverage into selling merchandise, including clothing, shoes, beauty products or cars.

Think about Jimi Hendrix. If he came of age today, he’d play a few shows a year and likely shun spending weeks on end in the studio, focusing his energies instead on growing a following online and racking up corporate sponsorships – much like the one Nick Jonas enjoys with John Varvatos, whose empire spans clothes, perfume and a record label. Purist don’t want to accept that, but it’s true.

In other words, the most successful bands of the future will more or less be living and breathing advertising platforms, and in an abrupt turn from the past, no one will say they are "selling out." On the contrary, most will appreciate that it's the only way to build an audience and make a living producing music.

Evan Agostini/Invision/AP

Thank Kanye West, Rihanna and Taylor Swift for taking the trend mainstream. In a world where everyone wants to be an influencer, big-time artists like them have no peer, with Swift alone having 120 million followers on Instagram.

The Yeezy Adidas sneaker brand, for instance, could make West at least as much money as his music ever will. The same goes for Rihanna, whose partnerships with Fenty Beauty and Puma have helped make her one of the richest self-made women in the country. Meanwhile, last month, Swift headlined the Amazon Music Concert in New York, which was streamed to more than 100 million Prime subscribers a few days ahead of the company’s much-hyped Prime Day.

Although Amazon likely anted up millions for Swift, going forward, many lesser-known musicians will have to settle for greater public exposure at festivals put on by the likes of Apple or Spotify in lieu of seven or eight-figure paydays. Therefore, how many social media followers an artist has and what they do with them will become far more important than how many albums they make or concerts they headline.

If you doubt the freemium model can work, look no further than the video game industry. Nearly 250 million people worldwide play Fortnite. Last year, Epic Games, its creator, raked in $3 billion in profits despite the fact that the game is free to play, generating revenue instead via in-game upgrades and other special features. That’s an approach that would have seemed insane a just few years ago.

Music is slowly adopting the same blueprint, and in time it will completely change how venues operate, musicians conduct business and people consume media. The freemium model is coming to music. Be ready.

Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment advisor with approximately $862 million in assets under management as of 5/01/19. Gerber Kawasaki clients, firm and employees own positions in Apple, Microsoft and Amazon. Please seek guidance from an investment advisor before making any investment. All investments involve risk and may not be suitable for your situation. Follow us @gerberkawasaki on Twitter.

 

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When Microsoft began to put together the promotional campaign to support the launch of Windows 95, the company reportedly offered R.E.M. millions for the right to use "It's The End of The World As We Know It (And I Feel Fine).” R.E.M. famously passed, opening the door for the Rolling Stones, who gladly took the money, and thus "Start Me Up" roared across every TV in America during the summer of 1995.

At the time, many praised R.E.M. for maintaining its artistic integrity, while criticizing the Rolling Stones for gross commercialization. They were, many felt, "sellouts," a label that most musicians then and before did everything in their power to avoid.

My, how times have changed.

For decades, it was enough for a band or solo act to release an album and then go on tour to promote sales. But that model is mostly obsolete, thanks to music streamers killing albums sales and concert venues paying artists a much smaller slice of profits than ever before. As a result, making money in the music industry has become a tough slog, save for a precious few acts who can carry tours all by themselves.

That, in part, explains the rise of music festivals like Coachella. But events like these are hardly a cure-all for musicians. Not only is there a relatively limited number of them but most young people cannot afford to shell out hundreds of dollars for tickets, to say nothing of the travel and lodging costs to go to more than one festival per year.

As a result, we are starting to see the first makings of the "freemium" model take hold in music, where artists are paid little if anything to perform but can use the free exposure to build brands, which they then leverage into selling merchandise, including clothing, shoes, beauty products or cars.

Think about Jimi Hendrix. If he came of age today, he’d play a few shows a year and likely shun spending weeks on end in the studio, focusing his energies instead on growing a following online and racking up corporate sponsorships – much like the one Nick Jonas enjoys with John Varvatos, whose empire spans clothes, perfume and a record label. Purist don’t want to accept that, but it’s true.

In other words, the most successful bands of the future will more or less be living and breathing advertising platforms, and in an abrupt turn from the past, no one will say they are "selling out." On the contrary, most will appreciate that it's the only way to build an audience and make a living producing music.

Evan Agostini/Invision/AP

Thank Kanye West, Rihanna and Taylor Swift for taking the trend mainstream. In a world where everyone wants to be an influencer, big-time artists like them have no peer, with Swift alone having 120 million followers on Instagram.

The Yeezy Adidas sneaker brand, for instance, could make West at least as much money as his music ever will. The same goes for Rihanna, whose partnerships with Fenty Beauty and Puma have helped make her one of the richest self-made women in the country. Meanwhile, last month, Swift headlined the Amazon Music Concert in New York, which was streamed to more than 100 million Prime subscribers a few days ahead of the company’s much-hyped Prime Day.

Although Amazon likely anted up millions for Swift, going forward, many lesser-known musicians will have to settle for greater public exposure at festivals put on by the likes of Apple or Spotify in lieu of seven or eight-figure paydays. Therefore, how many social media followers an artist has and what they do with them will become far more important than how many albums they make or concerts they headline.

If you doubt the freemium model can work, look no further than the video game industry. Nearly 250 million people worldwide play Fortnite. Last year, Epic Games, its creator, raked in $3 billion in profits despite the fact that the game is free to play, generating revenue instead via in-game upgrades and other special features. That’s an approach that would have seemed insane a just few years ago.

Music is slowly adopting the same blueprint, and in time it will completely change how venues operate, musicians conduct business and people consume media. The freemium model is coming to music. Be ready.

Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment advisor with approximately $862 million in assets under management as of 5/01/19. Gerber Kawasaki clients, firm and employees own positions in Apple, Microsoft and Amazon. Please seek guidance from an investment advisor before making any investment. All investments involve risk and may not be suitable for your situation. Follow us @gerberkawasaki on Twitter.

 

I'm the Co-Founder, President and CEO of Gerber Kawasaki Wealth and Investment Management, an SEC Registered Investment Advisor. I oversee Gerber Kawasaki's corporate an...

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