The Success of Louis C.K. is Not a Joke on Anyone

[Editor Charlie sez: This post originally appeared on March 9, 2012 but we thought it was worth a repost.]

“Pretty soon, they all want to get into the act.”
Attributed to Jimmy Durante

Why Does The Press Consistently Get it More Wrong Than Right?

I don’t know why the press continually focuses on the wrong issues when it comes to selling music and movies online—whether it’s the Bloomberg editors’ “relax and enjoy it” advice to songwriters and film makers ravaged by theft or the more recent analysis by the Financial Times of the Louis C.K. direct to fan release “Live from the Beacon Theater”.

Here’s the tip off from the FT in the opening paragraph:

“After the vigorously profane American comic Louis C.K. decided to produce and distribute his latest concert himself, he said he hoped the experiment would work “so I can have s***loads of money”. It worked. At $5 a download straight from Mr. C.K.’s website, the show, which cost $250,000 to make, grossed over $1-million over 12 days.

A few other entertainers, notably the rock band Radiohead, have tried going direct to fans, but none has been as transparent as C.K. The implications of his financial success for companies in the traditional distribution chain are significant but they depend on where they sit.”

And here is the FT’s conclusion—because you know, there are only winners and losers in a binary world:

“The likes of Netflix, Amazon and Apple’s iTunes, which play an intermediate role as content agglomerators [sic], have more reason to sweat. The website C.K. used to push his work product cost him only $32,000 and was immediately capable of handling huge volume. There will always be second-tier work products that require the benefit of a busy virtual store to sell but any entertainers or organizations with a loyal following already in place can now distribute their content seamlessly, without giving a cut to anyone, for next to nothing. For internet shopkeepers, the joke is on them.”

Not so much.

What Do We Know?

So even if you hadn’t thought about the substance of Louis C.K. as a case study, what would you know from the facts and how repeatable would this model be?

Production Cost: $250,000
Marketing Budget: Unknown
Fan base: 200,000 minimum of paying fans and counting, unknown non-paying (maybe 5x?)
Type of Program: Event based
Website budget: $32,000
The other 99%: Second tier products

Now just think about this—what conclusion can you draw from these facts?  If you have a big fan base, a carefully cultivated and large web presence (by the looks of it), and some significant seed money, you too can go direct to fan online and make millions.  That’s the reliable oversimplification we can count on from the press.

The FT’s conclusion is way off.  For “internet shopkeepers” the joke is not necessarily on them—it’s actually not on anyone.  There is a pretty simple process at work here that is ultimately the payoff for successful and entrepreneurial artists, and bless each one of that dwindling herd.  (In 1999, I wrote an extensive article on this phenomenon for record companies—Why Free Agency Matters: The Coming Changes in Artist Relations.)

What does this process require?  You never know and anyone who says they do is deluding themselves, but there are a few elements that certainly can’t hurt.  An artist who can bring all these pieces to bear—risk capital, strong brand, a rabid (if not carefully nurtured) fan base, and entrepreneurship can begin to capture all of the brand investment that has been made in that artist (usually over a period of years, sometimes many years).  And an artist who can finance a creation that has competitive production values with anything out there.

So let’s take a look at the Louis C.K. video from a business perspective—and at the outset, nothing I say should be taken in any way as a criticism of Louis C.K.’s video.  He’s done a great, great thing and I only want to commend not only the way he handled getting it to the fans, but also how he is handling “the money.”  The point is that this project is what all these projects should always be in my view–the artist’s choice.  Louis C.K. has made some very good choices in not only how he presents his show, but also how he presents himself.

He may be profane, but he’s a class act.

Skimming the Cream

Let’s see if there’s a repeatable aspect to what he has done.  This is a version of the “skimming the cream” pricing model.  That model requires a rabid fan base (or “inelastic demand”)—kind of like camping out to get an iPhone.  (Except, of course, this is one of the things that get played on the iPhone.)  Artists with large audiences have a certain group that will pay for being first with the cool new thing.  But remember, if you are dealing with a retail environment, the margin for the artist gets lower with each layer of the chain.

So are the price terms even possible in a retail environment?  Grossing up Louis C.K.’s $5 margin—assuming he actually books 100% of the retail price–will probably result in an unrealistically high retail price.

Instead of setting a high price to a select group of customers, you can also set a high margin price to fans that allows them to get a no-frills version of the work product first.  The savings to the artist in the non-traditional or direct to fan chain is essentially passed on to the fan while preserving the artist’s margin (which helps to pay for the production costs).

That first-in superfan work product could be a low cost item like a ringtone or a digital copy.  And the artist could use that work product to set up a word of mouth marketing campaign for a series of work products in a variety of configurations that appeal to segmented audiences.  The scope of these follow-on products depends on the artist—the initial release just as easily be a one-off or the set-up for a tour.  (This, frankly, is not exactly news.)  I’ll be interested to see what comes next with Louis C.K.’s Beacon Theater show.

Becoming a Free Agent

The fact that you have a large fan base using a free website to connect to an artist doesn’t mean that you know anything about those users, particularly if the free agent artist has not previously engaged in any commerce with their fans.  If your business goal as an artist is to develop a sustainable and repeatable commercial relationship with your fans, then you need the tools to know who they are, because that inelastic demand is not inelastic at just any price.

So what kind of artist would be able to command the audience and risk capital to produce a compelling video but lacks these tools?  Someone who recently decided to go it alone after having been signed to a major label or other similar situation where a corporate sponsor “owned the consumer relationship” (a vile phrase, but accurate).

This, of course, is the beauty of a “pay what you feel” model for a band that has recently left a major label environment and needs to build a large database of fan information.  If fans register and actually pay a price they choose for a new work by the artist, then that pricing behavior may be a predictor for the future because fans tell you their price sensitivity.

This does not mean that the artist has no retail partners ever—of course they do.  The artist just skims the cream themselves for a change.  And the buzz that Louis C.K. generated is one of the best entertainment earned media campaigns in recent years.  He may not have any interest in selling anything but the download version of his show, but if I’m right about the cream skimming, he’s at least got options for dealing with retailers for the rest of the price curve.  And leverage.

Another canard that I expect to read just any minute now is that the Louis C.K. video proves that artists can “compete with free”.  Not so much–it’s impossible to compete with stolen.  But if you happen to be one of those artists who has probably over a million fans, a spare $300,000 or so in seed money lying around and can project enough sales to cover your costs, you have a chance to survive.

Shifting the Risk Exposure

There is definitely a place for traditional distributors in a direct to fan model, particularly since the artist will have already incurred the capital costs in the riskiest part of the life cycle (finding an audience).  Distributors can avoid having to put their capital at risk early.  That risk avoidance and harder to make sales should be reflected in the price that distributors will pay for the downstream rights.

With audiovisual product, television and “third screen” uses will likely reach a somewhat different audience than the direct to superfan sales program.  If anything, the superfan online sales program increases word of mouth marketing for the title with the relevant audience.

However, as bit torrent-enabled televisions become a larger part of the installed base and online piracy begins to destroy the cable television business, it’s probably going to be necessary to revisit these issues.  Oh, wait—that’s censorship, let’s not worry about destroying cable.  (Cable TV is just the kind of collateral damage the consumer electronics folks don’t worry about–even though the big screen TVs and mobile phones have to connect to something besides “Fire Fart“.)

Bundle vs. Single Pricing

Louis C.K. is also getting around another phenomenon with digital retailers that I haven’t heard anyone talk about—he is selling something that looks like an album-only download.  If he were selling an audio version of his Beacon Theater show at a digital retailer–not mentioning any names–he’d probably be forced to sell each routine (or “bit”) at $0.99, from which he would net somewhere around $0.70 (breakeven at about 428,000 units compared to 60,000 at $5).  A video version would also very likely be broken into segments that each would probably sell for about $1.99 retail—from which he’d gross around $1.40 (breakeven around 214,000 compared to 60,000 at $5).  Selling between 200,000 and 400,000 units of a comedy album is a lot of records especially if the tracks are singles.  (And yes, I know that digital track equivalents would get the break even units lower, but that assumes that you would have sold all of the equivalent tracks in the first place.)

If Louis C.K. is like most artists, the reason he’s selling a video of the entire show is that he wants you to see the entire show.  So creatively and commercially, singles pricing doesn’t work so well.  That didn’t get mentioned by the Financial Times, either.  (Table pounders about artists who intentionally go into the studio to only give you one good song and charge for an album, please save your breath and try justifying piracy some other way.  “The food was terrible, and such small portions!”)

Will direct to fan sales force digital retailers to take another look at album-only pricing?  Is it “fair” to retailers?

Fair is where we end up.

Oh, and when it comes to selling records, it also helps to be awesome.  Even if you are “vigorously profane.”

See also: Music School in the Google Nation