Michael Robertson at GigaOm:

Imagine a new hot-dog selling venture. Let’s also say there’s only one supplier to purchase hot dogs from. Instead of simply charging a fixed price for hot dogs, that supplier demands the HIGHER of the following: $1 per hot dog sold OR $2 for every customer served OR 50 percent of all revenues for anything sold in the store.In addition, the supplier requires a two-year minimum order of 300 hot dogs per day, payable all in advance. If fewer hot dogs are sold, there is no refund. If more than 300 hot dogs are sold each day, payments to the supplier are generated by calculating $2 per customer or 50 percent of total revenues, so an additional payment is due to the supplier. After the first two years, the supplier can unilaterally adjust any of the pricing terms and the shop can never switch suppliers.

What will be fascinating is if the trend of self-publishing, like what Louis C.K. did, will shift this business model.

The record labels only have a monopoly on music because in the last century there were huge barriers to entry to distributing music. Once it was recorded, you had to stamp thousands of records and CDs, get agreements to stock store shelves with the records, get radio stations to play your music, etc.

Platforms like Rdio and Spotify remove those barriers. Someone can get an album engineered cheaply1, get a digital copy, and distribute it through these platforms. There are no barriers to entry.

The “downside” is that you have to make really great music. It used to be that average music was forced on listeners by radio stations. Now you have to make something people actually want to listen to.

The point is: No, with the existing business model, Rdio and Spotify can’t be profitable. But, what they’re doing is building a platform that destroys the conventions of the last century and completely rethinks how music is distributed, not just how it’s consumed.

I just hope they can stick around long enough to see through this change.

  1. My brother-in-law is an audio engineer. You can get a relatively well-engineered album for a few grand at most. []