The Distribution Equation.

The Distribution Equation is where change in the music business is currently at it's most radical. Digital distribution and online retailing are already making an impact and their impact can only increase over time. Here's why.

In the traditional music business model, distribution was one of the most challenging elements. A record could only be distributed via physical stores. Firstly a label had to persuade stores to stock a record in the first place. Then it had to try and anticipate demand for a record- this meant manufacturing a certain number. Some were warehoused, some shipped out to stores. At this point the label was wearing a very considerable upfront cost. Furthermore, the records were essentially shipped on consignment. If they failed to sell, the stores could return them. There was an even more difficult element for the labels. Stores would usually account to them on a six-monthly basis. This created a huge cash flow problem for the labels. They would have a large amount of money tied up in stock for a considerable period with no return. Only labels with considerable financial depth (read: cash in the bank) could sustain this way of operating.

If a record was manufactured in large numbers, in anticipation of large sales, and then flopped, the label would be wearing large losses. If a record was considerably MORE successful than anticipated, the situation could be even more problematic. A label with a runaway success could find itself manufacturing more and more records to meet demand and capitalise on it's success, but with no money coming back in to pay suppliers. Many independent labels went bankrupt under the stress of a big success for these reasons. So the ideal record for a label was one which sold exactly as well as expected...a rare prospect. And small labels could only sustain the financial burden of relatively small releases. A big record could be catastrophic for them. (Of course, such was not always the case. Virgin records had huge success with Mike Oldfield's "Tubular Bells", without going bankrupt.) So a stratified record industry was inevitable.

The fundamental problem here was the PHYSICAL PRODUCT, which had to be manufactured, shipped and stored. Digital distribution eliminates all of this. If a small (or very small) label suddenly has a hugely successful hit on iTunes, the costs to it are almost non-existent. It's all profit. Shipping and storing data on demand is a totally different equation to shipping and storing physical discs. So a small label with a breakout artist (an Eminem, say, or an Arctic Monkeys) could suddenly blow up to a big label overnight. Of course, that is assuming that they don't feel the need to start shipping actual CDs to capitalise on their success. At the moment, they certainly would. At some point in the future, they won't.

CDs on demand with further open things up. I'm talking about the technology (already installed and operating in many stores) to manufacture CDs on the spot for consumers. Once this technology reaches the stage where CDs and artwork can be manufactured on the spot to a commercial standard at speed and with minimal staff involvement, consumers will embrace it big time. CD stores will have the possibility of stocking only cards with CD front and back artwork, allowing them to stock more titles with minimum inventory. And if no physical CDs are on the shelves, shoplifting would have to be difficult... And in this situation, physical CDs would have the same inventory and distribution costs as downloads- that is, virtually none.

One of the filters that has traditionally operated in the music business is CD store shelf space. If a CD was not available on the shop shelves, consumers couldn't buy it. What was available was what the labels pushed to the stores. Once CDs on shelves are an irrelevance, this level of filtering will cease to exist.

In his book "Confessions Of A Record Producer", Moses Avalon asserts that CD stores are induced to take new releases by being given "free" boxes of CDs (ie. take one box, get one free). An artist will only be paid on the "official" sales, that is , not on the "free" boxes. Obviously if physical product and shelf space is an irrelevance, this practice will cease to exist. The result will be better returns for labels and artists. Another key factor here will be accounting. With legal download services like iTunes, everything, including payments, is handled electronically. A receipt for downloading a track is sent to the customer almost immediately. So there is no reason why labels and artists could not be paid virtually immediately, that is, minute by minute. Obviously this would revolutionise cash flow.

CDBaby founder Derek Sivers was prompted to establish the company by his experiences trying to find distribution for his own CD. A distribution company told him they would only take him on if he could demonstrate that he had $30,000 in the bank to cover the possibility of unexpected demand for the CD. They needed him to have this financial depth. CDBaby itself pays artists weekly. The increasing irrelevance of financial depth in the business equation and the elimination of cash flow issues will ultimately have a profound effect on the industry. Already, the very idea of "distribution" is ceasing to be an issue.

Of course, all this still leaves the Promotion Equation.