Like Sand Through a Sieve

More cogitation on power law, this time as regards to the music business by Tim Oren. My head may explode from all of this analytical thinking.

So, why can’t the big dogs just go away and leave the little guys and us customers alone? Or even try the trick themselves? They aren’t ignorant of the possibilities. A few of the words I omitted from Mr. Urie’s earlier quote:
“Suppose you could reach those people just with the touch of a button? You could hit those 100,000 – 200,000 people. That is an incredible efficiency of marketing. I believe that the record label of the future will have 20 or 30 artists on its roster who are just like that, artists who sell a quarter of a million records to an established fan base. But whereas now they are so-so money makers, in the future they will be the financial core of the label because you?ll be able to market them so efficiently and they’ll have an avid fan base that you can count on. That’s my vision of the future.”

There are two reasons he won’t be able to do it. The first is channel conflict. Mr. Urie again:

[Remember a customer for him is a big retail distributor.] “…competing with our customers, I think that’s a valid concern. Our directive coming from … Universal’s Vice Chairman is that, ‘We are not retailers.’ And I sat in a meeting where he told Best Buy that, in exactly those words: ‘We are not retailers, we do not want to be retailers.’ So everything we have done, such as digital downloading – now that we’re beginning to have conversations about subscription services, is going to be through the customer. If we finally get to the point where the subscription model works, we will offer that through our customer base, through their Web sites, to their customers, and they’ll have a piece of that action.”

Recall his current business model fails if his big hits aren’t so big, because the distributors become mad at him for sucking part of the business out of the store and onto the Internet. So he has to cut them in on the deal. That adds markup and overhead to the value chain, and the continuing need for promotion means he also can’t knock down the costs.

And the second reason – now we finally get around to power laws. While we don’t have rock solid proof, we certainly have suggestive evidence everywhere from the evolution of television, to the number of links pointing to blogs, that the small-audience tail of the power law distribution grows by displacing money and attention previously given to large audience plays, be they television broadcasters, AOL, or multi-platinum music albums. If the soundness of your business model, your portfolio risk management strategy, depends on the size of the big hits, then this is a scenario for being nibbled to death by ducks. The ducks being those harmless looking niche and back label artists and their low-rent business models. What our exec wants is 20 to 30 of them on his list. What he’s going to get are 3000 of them, and none on his list. And the blogs? We’re the word-of-mouth medium that’s going to do the same thing to the media and promotional business that exists in symbiosis with the labels.

Whether the RIAA truly believes that direct theft by MP3 filesharing is the root of their problems, I have no way of knowing. There certainly seems to be evidence that it’s a wash – displacing some sales, but causing others. What is certain is it’s just collateral damage compared to the mortal threat of channel conflict pinning the labels into place, while their audience is eroded by a power law distribution with a much longer, commercially viable tail.