Monday, 9 November 2015

Where Radiohead went right, and Nine Inch Nails went wrong

In ECON110 every year we have a half a topic on the economics of media industries. Part of that topic is considering new revenue stream models for the media industries that are most 'at risk' from digital downloads (i.e. those industries that are most reliant on revenue from content, as opposed to revenue from selling audiences to advertisers).

One thing I always cover is the Name Your Own Price (NYOP) movement in the recording industry. There are a number of notable examples, like the Canadian singer-songwriter Jane Siberry, who allows downloaders to choose the price they pay for any song they download - if they choose to pay nothing, it is "a gift from Jane" (although I note now that her site is down?). Other examples include Radiohead's almost-free pre-release of their 2007 album In Rainbows, where Radiohead released the album on their website where fans could pick their own price. The pre-release was available from October 10 to December 10, 2007, after which the album was released in digital and physical forms in early January 2008. The pre-release was 'almost-free', because even if someone was to choose to pay zero, they had to pay a service charge of £0.45, plus they had to provide their contact details (a non-monetary cost).

A paper earlier this year (ungated earlier version here) by Marc Bourreau (CREST-LEI), Pinar Dogan (Harvard) and Sounman Hong (Yonsei University) looks specifically at the impact of Radiohead's strategy. Specifically, they look at the possibility of two effects occurring: (1) a 'cannibalisation effect', whereby the early online sales reduced later sales (that would have occurred had the pre-release not happened); and (2) a 'buzz effect', whereby the pre-release generated a lot of media attention, increasing the profile of the album and increasing overall sales.

They compare the release of In Rainbows to the releases of a control group of bands similar to Radiohead, based on a variety of criteria (the control group was Sigur Ros, Muse, Arcade Fire, Beck, Interpol, Bjork, Coldplay, The National, Arctic Monkeys, Franz Ferdinand, and Sonic Youth). They find:
In the case of conventional album releases, the estimated coefficient at the "peak" is about 2 for digital album sales... This is translated as an increase in the digital album sales, which are about 7.4 times higher in the week of the release compared to the previous week...
In the case of the PYOP pre-release strategy of In Rainbows, the coefficient in the "peak" is estimated to be about 3.7 for Radiohead's digital albums. This estimate suggests that Radiohead enjoyed an increase of about 40 times in its digital album sales compared to the week before.
It's easy to see that there is a substantial difference between a 3.7 times increase in sales, and a 40 times increase in sales. On the flip side, there was little impact of the digital pre-release at all on CD sales (they neither increased nor decreased as a result). The authors conclude that the pre-release strategy generated a substantial 'buzz effect' for Radiohead, that more than offset any 'cannibalisation effect' on digital sales. They provide additional evidence for this in the form of Google Trends searches for Radiohead, and mentions of Radiohead in print articles (from Factiva).

What about Nine Inch Nails? They released their 2007 album The Slip for free download from their website (it's still available there now). There wasn't nearly as much hype about this release as for Radiohead (according to Google Trends and Factiva), and Bourreau et al. find that the release had a negative effect on NIN's digital album sales (when compared with their control group: Marilyn Manson, A Perfect Circle, Tool, Queens of the Stone Age, Deftones, KoRn, Smashing Pumpkins, Massive Attack, Rob Zombie, and The Prodigy). In other words, the cannibalisation effect outweighed the buzz effect.

Overall then, a win for Radiohead (in more ways than one - In Rainbows won two Grammy awards). NYOP works, but only if you can generate enough hype to ensure that sales increase overall. Or, it might work also for new artists who are trying to overcome the information asymmetry problem (potential listeners have no idea if they are any good or not) - this is the model that is founded on.

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