Radiohead Cashes In

How the band's ballsy experiment may have saved the music industry. By Touré

10.23.08 5:48 AM ET

When Radiohead released In Rainbows one year ago, they let people pay whatever they thought it was worth. Now, the profit numbers have been released. Turns out Radiohead had it right.

An economic apocalypse is old news in the record business—the sky started falling years ago, and the industry’s been contracting and going gray or bald over continually depressed sales for quite some time. In 2001, $34 billion of physical music was sold, including CDs, cassettes, vinyl; everything but digital MP3s. In 2007, just over $18 billion of physical music was sold. The industry would have you believe that illegal downloading is the entirety of the problem, and obviously having millions of customers virtually stealing product is a malignant cancer for any industry. Top execs now say that the habit of paying for music has been broken for an entire generation. Forget about Gen Y, they say, they’re already lost—start thinking about Gen Z and how to get them to buy music one day. But a recent study found that nowadays more downloaders pay than steal. Illegal downloading is not the industry's biggest problem anymore and just as Wall Street swallowed time-release poison caplets called subprime mortgages and derivatives, so too did the music biz drag the knife across its own throat.

In the past artists have gotten 10 cents for every dollar made by their music—according to the Freakonomics guys, prostitutes do better. Artists should consider cutting their pimps loose and selling or giving away their music through self-generated websites.

In the 80s and 90s, millions of catalog CDs were sold to consumers who were updating their old LPs or rediscovering the great music of past generations. This boom was like a license to print money for the music industry and many thought it would last forever. This windfall covered up many of the problems in the business, especially the dearth of artist development which was needed to create the next generation of stars who could sell for decades, not minutes. Did anyone really think N’ Sync, Britney, and Xtina would last for the ages? But with so much money coming in from the likes of Marley, Miles, Stevie, Elvis, Sinatra, the Beatles, and the Stones, it was possible to throw darts at a wall. Russell Simmons once told me that one hit artist could fund ten flops. Fine, but when your approach to A&R is like gambling instead of developing, like playing craps instead of molding people like Berry Gordy did, then you don’t have a good long-term strategy. And when MTV slashes the amount of videos it plays and fewer people listen to pop radio then it becomes very difficult to create those megahits that absolve all the mistakes.

As a result, consumer confidence in the music biz has eroded. People came to expect that most albums would have one or two great songs and ten filler songs, and they became used to basically buying one or two singles for $12-$15. But in the era of iTunes, they are now able to avoid that trap by purchasing individual songs for 99 cents—massive deflation. Also, somewhere early in this decade, people decided they’d bought all the old school CDs they needed and the money printing press stopped working. With MTV no longer a major way to promote artists, and the Internet evincing a crippling deflation, the metaphoric sky had fallen.

Last year there was great curiosity about the experiment attempted by Radiohead, (what I’d call the greatest rock band of this era) when they released their album In Rainbows. It came out first as a digital download available on a pay-what-you-wish basis—on the website’s checkout page you could input whatever price you wanted in pounds, including zero—and then months later as a CD at a high, set price. Just last week, the band’s publishing company finally revealed how things panned out.

The album sold three million copies—1.25 million as a download and 1.75 million as a physical CD. (Why did more people choose to buy it later at a fixed price instead of earlier at whatever price they chose? Is that the digital download at work, older fans who can’t change their buying habits? Wouldn’t pay-what-you-wish motivate you to change your habits? And anyone who put the physical CD on a credit card and therefore paid the highest possible price, needs to start watching Suze Orman immediately.)

Three million is very impressive for any group, and definitely for Radiohead. They made more money before the album’s physical release than they did on their previous, traditionally released album Hail To the Thief (which stands for me among their best ever, certainly better than In Rainbows). Radiohead’s three previous albums sold in the low hundreds of thousands so this is an unfettered success for them, the industry, the fans, the Internet, and for the concept of variable pricing, or at least a new look at how much fans are willing to pay for music. I bought In Rainbows for eight pounds because I thought that was fair. No one has said how much the average price per unit was, but management was watching the average price each day and would’ve ended the experiment if the price had dropped too low.

Certainly every band can’t do what Radiohead did, but many groups could, and there are important lessons here about variable pricing—we don’t pay the same amount for a Honda that we pay for a BMW. Why expect us to pay for a rookie what we’d pay for Radiohead? New CDs tend to be priced between $12 and $17, but perhaps that needs to be rethought. More than that, there are lessons to be learned about properly using the Internet to sell music. The music biz has been unable to come up with a peace accord that would put all the music there is for sale on one site, so iTunes remains the monster of Internet music retailing. Now, a recent dispute about royalties may force the price per song above 99 cents and Steve Jobs says he may shutter the iTunes store. If that happens, the music biz may be looking for its own bailout package and none will be forthcoming.

Indeed, the future may be the end of the label system. In the past artists have gotten 10 cents for every dollar made by their music—according to the Freakonomics guys, prostitutes do better. Artists should consider cutting their pimps loose and selling or giving away their music through self-generated websites. The free, legal music and some blogging from the band (written and photo) would keep the site well-trafficked by fans and the curious. (Kanye already has a hot blog through which he shares music, photos, and ideas.)

A band could border the site with hi-priced ads and also promote those things that have always been the prime revenue generators for recording artists: their tours, their merchandise, and their commercial sponsorships. That’s right, ho’s, I’m saying it: Be your own pimp.