42 Business Lessons from the Music Industry
About a year ago, I received a copy of Alan Krueger’s book, Rockonomics, in the mail.
His publisher had sent it my way — one of the many perks of hosting a modestly successful podcast. However, a pitfall of being sent many books is analysis paralysis, and at the time I must have had other learning priorities because Rockonomics found a home on my bookcase without a single page being read.
However, with the COVID-19 enforced shutdown of bookstores in my home city of Melbourne, I went rummaging through said bookcase to find such books that I might have a newfound interest in reading.
And this time, the cover, Rockonomics: What the Music Industry Can Teach Us About Economics, absolutely spoke to me. It might be because I recently launched a media company, speaking volumes about the notion that you’ve got to discover books at the right time to truly absorb them, or that when a student is ready a teacher appears.
Whatever the case, I devoured the 300-page book by Krueger — former chief economist of the US Treasury from 2009 to 2010 who, I discovered, sadly took his life in 2019 — in just two evening sittings. Being a massive music fan and entrepreneur might’ve helped.
But the book turned out to be more than just an entertaining way to pass the time whilst enduring an 8pm curfew for the next few weeks, but full of business, creativity, and some life lessons.
So what is ‘rockonomics’?
As Krueger puts it, the music industry is like the proverbial canary in the coalmine, insofar as learning how technology will disrupt and shape an industry. While other industries might wait decades for the effects to play out, in the music industry it happens almost in real-time.
It seems like just yesterday that we were rocking our iPods — the cutting edge of technology — and now they’re already a relic of the past, alongside Walkmen and 8-tracks.
“Economists can learn new insights about the economy and human behavior from studying the music industry. That’s rockonomics.”
With that, below you will find 42 of the most important learnings I took out of Rockonomics. Where useful, I’ve added my own interpretations and unique takes, to add some additional perspective.
In honor of Alan B Krueger and dedicated to anyone, everywhere, suffering from mental health issues.
1. Be Data Informed, Not Data Driven
Krueger says that “by melding first-hand observations from those on the front lines of the music business with big data on the industry as a whole, I developed a richer more reliable and more representative picture of how economic forces shaped the music industry”.
This is something I’ve long been an advocate of. Data alone isn’t enough. It can often be dirty, incomplete and/or misinterpreted. But by combining data with professional judgment and gut instincts developed over many years in a specific domain, we usually end up with a more effective compass.
2. Supply, Demand and All That Jazz
Supply and demand are one thing, but markets aren’t perfectly rational. Don’t underestimate the jazz of emotions, psychology, and social relations on consumer behavior.
You might have a functional product at the right price, but don’t forget about what Clayton Christensen called emotional and social jobs. We often don’t buy products purely for the function, otherwise, Chanel wouldn’t get away with charging thousands for its handbags.
3. Scale and Non-Substitutability are Two Ingredients to Superstardom
First, top performers are able to reach a larger audiences, and second, the sound, products sold in superstar markets must be unique with distinct features.
However, this isn’t enough — a third ingredient is fundamental in almost every permutation of success…
4. The Power of Luck, the third ingredient.
Talent and hard work alone aren’t sufficient for success.
“The unpredictable random spins of fortune that affect our lives and countless ways is particularly important in the music industry”.
5. Bowie Theory
David Bowie once quipped that “music itself is going to become like running water or electricity; you’d better be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left”.
He was right.
6. Price Discrimination is Profitable
Economists use the term price discrimination to refer to any practice used to segment customers and charge a higher price to some than to others.
Always explore tiered pricing for your products. Bands do this by offering more expensive front-row tickets as well as VIP packages and meet-and-greets. Similarly, Taylor Swift releases her album to her hardcore, paying fans several weeks before it goes live on Spotify.
7. Control Your Costs
Successful bands and businesses have to monitor and minimise their costs to maximize their profits.
This isn’t news to any business manager, but something that perhaps isn’t practiced all that well. In today’s age, you can eliminate or mitigate costs by outsourcing and automating much of what an expensive full-time equivalent once did.
8. Pain and Creativity
“You have to get to that broken place of your heart to write songs.” — Lady Gaga
9. Power Laws and the Pareto Principle
“Your ability to create Superstars in music as amplified by power laws. The popularity of the top of former is a multiple of the second most popular performer which in turn is a multiple of the third most popular performer, and soul on.”
10. The Long Tail
In his bestselling book, The Long Tail, Chris Anderson predicted that the internet would lead to greater opportunity for those in the long tail of sales, because more producers will be able to find niche markets.
However, Krueger informs us that this has yet to materialize in the music business. “Instead the middle has dropped out of music as more consumers gravitate to the smaller number of superstocks.”
11. Record Labels are like VC Funds — You’ve Got To Place Many Bets
Only 1 or 2 out of every 10 albums actually pays off for a record label. This is no different to investments in startups.
12. Free Content with Paid Up-Sells
“The Wall Street Journal the New York Times Bloomberg and The Economist all increasingly rely on live events for revenue. News is available from countess online sources often for free. Soon newspapers and magazines could be loss leaders for live conferences and lectures.”
13. Work with Undiscovered Talent
Startup Rehegoo works with undiscovered musicians to improve market and stream their music. Seek untapped opportunities to differentiate yourself in crowded marketplaces.
14. People Aren’t Motivated Purely By Self-Interest
Economic theory suggests that people are motivated purely by self-interest. However, Radiohead’s pay-what-you-want experiment provided real world evidence that considerations of fairness can motivate human behaviour.
“You can count on some people to be generous and others to be greedy.”
15. “Coin is the time of your life” — Carl Sandburg
As Seneca said, we are frugal with our money but careless with our time, but time, unlike money, can’t be earned back after you’ve spent it. Spend it wisely.
16. Freemium and in-app upgrades in the music industry.
“Chance The Rapper releases his albums for free and makes money touring and selling merchandise. He has the distinction of being the first artist to win a Grammy without selling physical properties as music.
This is kind of like Epic giving away its Fortnite videogame for free, but making money from in-app purchases. It’s one way to get to scale by removing the friction associated with cost.
17. The Power of Persistence
“Even to be a moderately successful musician takes a huge amount of repetitive effort and a lot of luck.”
This echoes former US President, Calvin Coolidge, who once said that “Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb”.
18. The Source of Creativity A
Steve Liesman says that creativity comes from walking his dog. “All of the songs I’ve written have basically come from walking my dog.”
19. The Source of Creativity B
The ability to take unrelated things and put them together leads to innovation.
20. Outsourcing in the Music Industry
As music is becoming more complicated, artists are reaching out to others to contribute when their expertise needed. “In this regard, music reflects the trends of wards outsourcing that is affected the rest of the economy.”
21. You’re Only as Strong as Your Weakest Link
“A band — especially in the early stages — is only as strong as its weakest link” — Cliff Burnstein, Q Prime (manager of bands like Metallica and Def Leppard)
22. Profit Seeking Can Destroy Creativity
Constantly trying to generate the income required can kill a band’s creativity and chemistry. Bernstein tries to find a balance between touring and writing and studio time, in order to generate enough revenue to keep a band going while maintaining the creativity and chemistry that got them to where they are in the first place.
23. The 1 Percent in Music
“The top 1% of artists increase their percentage of total concert revenue from 26% to 60% in 2017. The top 1% are now taking more revenue than the bottom 99% combined.”
24. Cumulative Advantage and the Snowballing Effect
Cumulative advantage refers to the snowballing effect that comes with gaining a small edge over your rival at the very beginning. Quality isn’t enough — social network transmission and getting off to a good start is critical. Jacob Collier says that “the first set of comments posted any one of my YouTube videos can affect whether it goes viral or not”.
The same goes with a Pitchfork review which can make or break a new band.
This echoes what Malcolm Gladwell put forward in his book, David and Goliath, in which he found that hockey players born in the first half of the year disproportionately made it to the NHL than their second-half peers, because they were initially more physically developed, and therefore picked, to pee-wee hockey A-teams as kids.
25. The Paradox of Choice in Music and our Social Networks
“The number of musical choices facing individuals has greatly expanded with the advent of streaming services which is likely to lead us to rely even more on our social networks for clues in selecting songs and artists.”
26. Watch Out For Survivorship Bias
We never hear about the chance meetings that didn’t occur.
There are numerous musicians who are just as talented and hard-working as the superstars, but never got signed.
You might heed the lessons and teachings of those who made it, but chances are thousands of others tried the exact same thing and didn’t make it, but of course, you won’t read about them in Spin or Inc magazines.
27. Beware of Luck and Complacency
Only 22% of the 490 bands to produce the top 10 songs from 1960 to 2017 managed to do it again.
So if you get some early success in whatever endeavor you’re on, don’t rest on your laurels. Lightning rarely strikes twice, and as Rudy Sarzo, bassist for Quiet Riot put it, getting to the top is hard, staying there is almost impossible.
28. You Only Have So Much Control, Take Your Chances
“Events, historical and cultural, create an opportunity — special songs fall on your lap and a window for impact, communication, success, and the expansion of your vision opens… it may close as quickly or never return.” — Bruce Springsteen
Another poet by the name of Marshall Mathers also said something similar in a little song called Lose Yourself.
29. On Taking Ownership and Equality of Opportunity
On average we found that a twin who completed for more years of education than his or her sibling and about 60% higher wages.
30. Myriad Ways to Satisfy Supply and Demand
Some bands choose to increase ticket prices for their shows.
Others choose to play more shows to satisfy demand while keeping ticket prices affordable and consistent, and thus destroying the secondary scalper market (ie. Garth Brooks).
While others opt for tiered pricing and VIP packages (ie. Metallica and Taylor Swift).
There are many ways to price your product.
31. Buying Tickets From Scalpers
“If you buy tickets on the secondary market you can get the best deals by waiting until the latest possible moment to purchase your ticket.”
Remember this next time tickets to see your favorite artist sell out online.
32. Artists and Their Labels
Unsuccessful artists often complain about their record label. Musicians frequently complained that the label failed to better promote their work.
One record executive said that “we managed to get your record on the air and in all of the stores… what else do you want? We can’t force people to buy your records”.
33. Technology Always Wins, But…
“Technology always wins but what if you can make a better product than piracy?” — Daniel Ek, Spotify founder
34. How Spotify Works with Talent
Streaming services such as Spotify share 65% to 70% of their revenue in royalties for rights holders. This includes production, composition, and publishing.
35. Copyright is Messy
“Only one thing is impossible for God: To find any sense in any copyright law on the planet.” — Mark Twain
36. Copyright and Creativity / Taxes and Innovation
Professors gear Giorcelli and Moser found that the number of operas produced increased by 150% in states that became covered by copyright protection compared to states that did not.
However, “to be creative in whatever we are pursuing, Roots co-frontman, Questlove, advises we should unfocus and refuse to keep things out, participate in a collaborative environment, make a point of hanging out with people from different disciplines and engage in critical thinking”.
This list is not easily incentivized by copyright protection.
37. Incentivising Creativity
“Creativity is hard to incentivize for science and music. The best insight economics has to offer is a simple one; if there are more people looking to make a new discovery the more likely it is that a new discovery will be found.
38. The Home Bias for Music is Dissipating
“40% of the home bias preference for domestic music has dissipated since 2004. Another consequential finding is that the mixes of music that people listen to in different countries are growing closer together.”
39. Murky Waters Have All The Fish
This Chinese saying reminds us that when things seem murky and opaque, we should be wary of corruption.
40. Music Makes Us Happier
No great insight here other than try listening to more music when you’re feeling down. It’s also been shown to improve our perception of activities we would otherwise some of us may not be all that fond of — such as cleaning, or going for a run.
41. Men Form Their Adult Taste in Music Between 13 to 16 Years of Age
This research from Seth Stephens-Davidowitz echoes what author David Meerman Scott and I discussed in an episode of the Future Squared podcast. We no longer have the rites of passage into adulthood that we might’ve had in our tribes.
Nowadays, we find identity and a pathway into adulthood through music. For Meerman it was discovering The Grateful Dead, for me it was Iron Maiden.
For women, it’s 11 to 14 — well, women tend to mature faster so this makes sense!
42. Superstar Economies
Elizabeth Billington was a leading opera singer in her day. She was highly constrained in reaching live audience because the number of persons who could be reached by a human voice was strictly limited.
But she was helped by the advent of the phonograph which meant her voice — and her bank account — could travel far and wide without her physically being there.
Prior to this, cover artists would sing her songs in regional areas, but the phonograph quelled demand for imitations, which meant that Billington could capture more dollars.
She was indeed the first Superstar, and Superstar Economies are indeed winner take all.