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Free music downloads. The blight of the music industry, so the industry says, but are they really, or are they simply an evolution to how music is distributed and how artists are compensated? With a simple thought experiment, I’ll show they are an opportunity for artists to make more money and while I’m at it, I’ll figure out how much money Radiohead made on their last album.

I’m not going to go into whether the practice of downloading free music is morally right or wrong because that doesn’t matter any more. It is happening right now and there is no way of stopping it, short of passing ridiculous laws.* I will say though, that someone has to pay something, because artists need food and shelter, just like you do.

There has been only one large-scale attempt to put legitimate free downloads alongside commercial sales: Radiohead’s current album In Rainbows, which is offered for download at any price the downloader wants, including zero. Radiohead has released no sales figures, but I think it was a smashing financial success.

Making money from free music downloads starts with a simple idea: music has only ever been sold to fans of the artist. People who don’t like the artist, who are indifferent or don’t know about them do not buy the artist’s music. If it’s offered free they might listen, but otherwise they don’t buy. This seems so simple, but the way the music industry has been going on lately it’s like they don’t grok this.

It is also important to note that the fans have always been willing to pay, but these days they feel they are paying too much. Prior to the widespread adoption of file sharing technology, music fans had no choice but to dish out money for their favourite artists and the dedicated fans did. The rest listened for free on the radio or went over to a friend’s house. Since the fans had nothing else to compare it to, they figured that 25 bucks for an album was a bargain. After all, they could have charged $50.

But these days, the fan sees his friends downloading the album for nothing while he ponies up that $25. He wants to support his bands, but at $25 a pop? Especially when he can get it for free…

It should be pretty obvious to everyone by now that people will download for free whatever tickles their fancy. But I have found that even though they can do this, they are still willing to support artists. People are willing to support artists financially, but only the ones they really like. As mentioned above, this has probably always been the case, but the artificial nature of the music industry has masked this behavior by manipulating the supply.

Here are some hard numbers from doing data recoveries on people’s computers.

Roughly 75% of the personal computers we see in the shop have free downloaded music on them (39 out of 50 computers observed).

Less than 10 percent have purchased iTunes tracks (3/50)

This tells us that many people download free music, but hardly anyone purchases it from record industry sanctioned online stores. Given things like copy protection, this comes as no surprise.

Related to this, I’ve asked about two dozen people over the last few months: “Is downloading music against the law?” Most people I asked said “yes” and only one person knew that it was perfectly legal to download music in Canada (though not necessarily without civil liability). Many people conflate criminal liability with civil liability. But either way, people don’t seem to think it is a crime or a risk, or even wrong, because three quarters of them do it anyway.

Another interesting thing to note, is while almost everyone I know downloads free music, they all still purchase CDs despite being able to download anything they want for free. I don’t have a good way of knowing how much they are buying, but they are still buying music in the traditional way. So people are still willing to pay for music.

Curious about these things, I asked a series of questions to various people, friends and customers to get an idea if my hypothesis had any merit. This is not a real study, but an informal one meant only to gauge the waters.

When asked how many favourite artists someone had, artists they would pay to see in concert and pay money for produced albums, the average number worked out to around 10. This jives with my own personal experience, as I have about 10 music artists I ‘follow’.

I asked people if $1 for a single MP3 track was a fair price. Three quarters didn’t think so. Many thought you should pay $1 for a MP3 track only if you like it. Otherwise you shouldn’t pay. When I asked if it is a fair price for a track they like from an artist they like, at least three quarters said yes, and maybe a third said more is not unreasonable. One fellow even said he would pay $5 bucks for his favourite track if the rest of album was free.

When I asked what a fair price for a physical CD from an artist you like the average response was around $10. I asked around two dozen people I know if $5 is a fair price for a guaranteed high-quality, DRM-free album download from an artist you like and three quarters or so said yes. But when asked if they knew they could get the same thing for free from a friend would they copy it, three quarters also said yes. Ok, so people still like to copy.

But the real interesting question is: if an artist you liked asked you donate something, anything to help him pay for the album, over three quarters said yes. Three quarters also suggested they could financially help artists they liked in other ways by purchasing swag or going to concerts, which most believed made the artist more money (which I believe is true in most cases).

This is not a scientific study by any means, but what I get out of these responses is that most people will:

• pay for music they really like, if they have to, or if the situation calls for it
• download and share music if they can
• download music if it is available for free
• give money to artists they like, if asked
• five dollars is not an unreasonable donation/sale price/margin for the artist

So people want to support their favourite artists and are willing to give them money in some way. Five bucks is also not an unreasonable average to get from this. Most people who aren’t totally poor think nothing of spending a fiver on something trivial. In Canada, a large coffee and a donut is $3-5; millions of variations on this combination are sold daily in this country.

I will now make an assumption. While around 75 percent of the people I talked to say they would give an average of $5 to an artist they liked, only a third actually will. This assumption is based in part on comScore’s survey which found that 60% of downloaders paid nothing for In Rainbows. A variety of factors contribute to this, forgetfulness, laziness, ease of copying, ease of free downloads, etc… It also found that those who paid offered an average of £2.90, which is around $5.

Keep in mind that this completely ignores the millions of additional indifferent listeners who will download the album as well. They are not fans, and would have never paid for the album if they had to. They are not factors. What we are focusing on is the 33 percent of genuine fans donating an average of $5. This is the beginning of a financial model. Let’s apply it to In Rainbows.

Radiohead’s last album, Hail to the Thief, has sold nearly one million copies in the U.S. alone, according to Wikipedia. So that’s at least one million fans who are willing to lay out money for their albums. It is also safe to assume they would all want to get this one too. Based on the thought experiment above, we can estimate Radiohead’s gross:

1 000 000 x 0.33 x $5 = $1 650 000

1.6 million is chump change to a large music company but to a band this is a considerable sum of money and a lot more than artists typically earn off of album sales. More importantly, not a dime of it goes to any record company, the band gets to keep it all after the expenses are paid. And this is on top of the sales of the physical box set, touring, merchandise sales and any other economic activity the the band has going on. Based on these simple calculations, Radiohead has struck it rich. It would seem this is the way to sell music online. Politely ask people for a donation, and many will give. Who would have thought?

It shouldn’t seem surprising to anyone that cutting out the middleman allows the seller to make more money. But it does explain nicely why the RIAA is fighting as hard as they are. Imagine if all musicians sold their music like Radiohead did? There would be no need for record companies.

So if you are a record company, what are you to do? I have some ideas on that too, but that’s another post.

* Indeed, even massive lawsuits do not seem to work in the U.S. I figure the only way to stop people from downloading music is to make it a capital crime. It would only take an execution or two. Of course, any society that has got to the point where it prosecutes music downloaders like mass murderers needs to overthrow their government because such a law is fucking insane.