Digital Music: Give It Away Or Sell It?

By Bernard Davis,

Is the band a business or is it just a hobby?

If the band is a hobby, then the free distribution of music, be it in hard copy or digital form, is an obvious choice.

However, if the band is a business, then many factors need to be researched, reviewed and proper business decisions made prior to answering the question: should the band give away free digital samples of its music?

The US Internal Revenue Service defines a hobby as, in substance, an activity in which profit is not the major

 intent, motive or purpose. The IRS considers all of the following factors in determining if your activity is a hobby or a business:

1. You carry on the activity in a business-like manner;
2. The time and effort put into the activity indicates an intent to make it profitable;
3. You depend on the income from the activity for your livelihood;
4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business);
5. You change your methods of operation in an attempt to improve profitability;
6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business;
7. You were successful in making a profit in similar activities in the past;
8. The activity makes a profit in some years and the amount of profit it makes varies; and
9. You can expect to make a future profit from the appreciation of the assets used in the activity. (For further information see the IRS website-publication #535).

Once the group has determined it is a business rather than a hobby, the next key decision is which business model will or does it follow.

Traditionally, there was only one business model, that being the major label business model. This model consists of the sale of the bands' music to a label in return for royalty income. The advantages of this model are: the label or its long established business relationships; a source of capital; and all of the label's marketing, manufacturing, distribution, promotion and advertising power. The disadvantages are the lack of royalty income actually received and a short-term 15-minutes-of-fame for your business life.

Technology changes have opened the door to another business model, that being the "small business band." The disadvantages of this model are that all aspects of the marketing, manufacturing, distribution, promotion, advertising and the sources of capital are now the obligation of the small business band. The advantages of the small business band model are the band keeps all income and has a long-term business life.

The free digital distribution of music may work for those chasing the major label business model, but for those who desire to operate their small business band for a 20-30 year working life instead of 15 minutes of fame, free digital distribution needs further investigation.

If a band has determined that their business model is the small business band model, the band must prepare a business plan. A business operates in accordance with its business plan. That business plan should consider the following four categories:

(1) Start-up,
(2) Growth,
(3) Maturity, and
(4) Decline of the business.

Included in the business plan will be information such as:

Sources of income of the business: performance, merchandise-albums-music videos, merchandise other-t-shirts-logo based products, merchandise- nontraditional such as, clothing line or perfume line, music-lyrics-song sales to others, media based commercials-jingles, video games-educational training videos background music, movies-TV scores and other.

Financials: income projections, profit and loss statement, cash flow projection, balance sheet, break-even analysis and deviation analysis.

Expenses: fixed expenses, variable expenses, income taxes and sales taxes.

Marketing plan: target, market, competition, distribution, advertising, pricing, product design-manufacture, timing of market entry, location, industry trends, market niche, market research, and demographics.

The free digital distribution of music falls under the distribution methods and advertising or promotion methods of a business plan.

Distribution methods: the basic distribution methods to deliver your product and/or service to the market are: live show- performance, merchandise sales at live show- performance, merchandise sales by others at other live shows, online merchandise sales at your website, online merchandise sales at websites of others, online merchandise sales at online stores, merchandise sales at retail stores, radio royalties, internet radio royalties and free distribution of digital music.

The free digital distribution of music samples is simply one method of distributing your product, being your music, to a potential buyer of that product.

Advertising plan: the advertising plan sets forth all aspects of the promotion and advertising of each specific product. The traditional forms of advertising are: newspapers, magazines, radio-traditional, radio internet, television, cable, promotional products, direct mail, yellow pages, outdoor signs, banner ads, e-zines, music based website, press releases, interviews, message boards, blogs, press kits, e-press kits, CD demo, retail merchandise table, articles, business cards, business letterhead, word of mouth, classified ads, street team, vehicle sign, direct mail, interior or point of purchase display.

Advertising is an investment. The purpose is to make potential buyers aware of your products and/or services and to convince them to buy your products and/or services. You advertise to sell your products and services. The key is that people will hear or see the advertisement and then go and buy your product or come see you perform.

The key to advertising is the ability to calculate a return on investment (RIO). (RIO: you invest $x in advertising which returns $y in sales.) Traditional forms of advertising cannot provide a RIO. Most traditional forms of adverting cannot tell you the exact number of people who saw or heard your advertisement.

Free digital samples of your music are simply an advertising method. The advantage is that you know your music has been listened to and you can even determine, with proper software, the exact number of people who have listened to your music. This advantage makes free digital samples, in certain ways, superior to traditional advertising methods. But you may not know the actual person who has listened to your music. Short of following the RIAA and commencing legal actions to obtain the name and address of the "computer" that receives a digital music sample, technology has not advanced to the stage of providing the customers name. Maybe one day the government will require computer registration with names and addresses similar to a phone book so the information can be cross referenced.

Without the customer's name, this type of advertising method is similar to traditional advertising in its inability to properly calculate a return on investment. But it does permit the ability for immediate comment, such as a vote for this song contest, but you do not know the demographic information of the person who has commented. It could be a 5-year-old who cannot purchase your music or a 65-year-old who also may never purchase your music, or even just a potential buyer who decided to type unreliable information.

Digital distribution does, however, permit the immediate purchase of your music. This is a distinct advantage over many other advertising methods, but also requires a charge card for which the majority of the pop-rock music market does not possess, being the 13-15 year old. So the question of digital distribution should be further defined into specific genres-styles of music, and the specific demographic information of geographic areas, income and gender.

Remember, as a small business band, these individuals are not your fans, they are your customers. Your goal is to receive their name and address for further marketing and sales. You want a direct sale to the customer so most income is yours as distinguished from a royalty check in which most income is someone else's. Your advertising plan must take this fact into account or it is deficient and unreliable.

The decision of whether free digital music advertising results in increased sales and profits must be determined based upon specific demographic information within the market niche of your band. There is no single rule to determine this question. At present, there aren't many reliable research studies being performed to provide any answers. Each band must perform the necessary market research in order to determine its demographics and market niche and prepare its advertising plan accordingly.

Provided by the MusicDish Network. Copyright © Tag It 2005 - Republished with Permission