Shore Fire Media is excited to share this year's first monthly newsletter from Premier Music Group, the leading music strategy agency launched in 2017 by Downtown Music co-founders Josh Deutsch and Terence Lam, which recently acquired Randall Poster's Search Party.

This month's newsletter delves into the dynamic business model behind Bandcamp, the success of their Bandcamp Friday initiative, and wages a future in which the traditional relationship between artists, labels and distributors will possibly become less relevant.

We hope that you will find it as informative as we do.

Music IQ is Premier’s weekly intelligence report at the intersection of music, culture and advertising.

Listen to the latest edition of Premier Essentials, our monthly playlist, here.

Get in touch: alicia@premiermusicgroup.com

Bandcamp: A Music Company Finding Success in the Pandemic through an Artist-First Business Model

Bandcamp generated significant love from the artist community in 2020 with its Bandcamp Fridays initiative.

2020 was a year in which the entire music industry has been challenged to reformulate their business strategies. The pandemic requires brands to discover new ways to connect with their audiences, diversify their revenue streams and demonstrate their core values. One music platform has found a surprisingly large amount of success through a simple, decade-old model. Unlike other platforms emerging in 2020, its focus is not on social bite-sized video or AI algorithms; rather, its focus is on developing loyalty and legitimacy with indie artists and fan communities. This platform is the Internet music company Bandcamp.

According to a recent Digital Music News report, Bandcamp has sold five million digital albums, two million tracks, one million vinyl albums, 600,000 CDs, 300,000 cassettes, and 250,000 t-shirts this past year. In addition, 40% of purchasers paid more for their item than the artist listed asking price. Overall, sales are up 122% in the last 30 days, compared to the same period last year. In addition to revenue growth, Bandcamp has succeeded in generating substantial goodwill with the public through their artist-friendly initiatives such as “Bandcamp Friday.” Today in Music IQ, we’re going to examine Bandcamp’s business model, brand philosophy and recent strategies then hypothesize about their potential future.

Founded in 2008 by Oddpost co-founder Ethan Diamond and programmers Shawn Grunberger, Joe Holt and Neal Tucker, Bandcamp is a digital marketplace where artists and labels can sell music and merchandise directly to consumers. Taking after Radiohead’s landmark decision to make their 2007 album In Rainbows “pay as you want”, artists on Bandcamp can set their own prices and offer fans the option to pay more. Fans are then able to download their purchases once or limitlessly stream their music on Bandcamp’s application or website. Uploading music to Bandcamp is free and the company takes a 15% cut of sales made from their website (in addition to processing fees), which drops to 10% once an artist sales surpass $5000. Bandcamp is less of a streaming service and more of a virtual merch table (venues also take percentage of sales sold on-premise). In an interview with NPR, CEO Ethan Diamond shares that half of Bandcamp’s sales are physical goods yet it has no warehouses or delivery services. The company allows artists to take orders for physical items that they can fulfill however they choose. So purely in terms of infrastructure, a more comparable online service would be Etsy, where craftsmakers can also easily set up an online shop and sell their products directly to customers. It’s also notable that Bandcamp has been a mostly remote workplace since its inception, which seems so feasible now during the pandemic, but it truly makes them pioneers in the work-from-home space.

This business model distinguishes Bandcamp from their modern competitors like Spotify or Apple Music, which are distribution services that generate revenue from subscriptions and ads then calculate payout to labels and artists based on the “pro-rata” system. The “pro-rata” system takes all revenue generated from users and puts it in one pot then multiplies it by the percentage of total platform streams each artist receives. This system is controversial because critics argue that it largely favors major labels and artists who accumulate the highest streams. Critics also assert that this system encourages artists to make shorter songs for repeatable spins and find ways to game the system. For some fans, it’s disappointing that a large percentage of their monthly subscription is used to pay superstar artists rather than the indie artists that make up the majority of their listening. Despite everyone paying the same subscription fee, the fans who listen to more than the average of 25 hours of content become more valuable than those who do not.

A proposed alternative to this system has been the “user-centric” model, in which a user’s subscription fee is proportionally distributed specifically to the artists they listen to, rather than contributing to the overall pot. A notable adopter of this system has been Deezer, which instated a pilot program at the beginning of 2020. Alexander Holland, Deezer’s Chief Content and Strategy, describes the main benefits of a user-centric in an interview with Musically:

“I would consider it more fair if my money goes to the artists that I love, rather than running through a black box… It also leads in our view to better allocation of the money across the spectrum of artists and genres… and it might create almost a pension fund. Even artists that in the short term might lose, in the long term might get this money back as their audience grows older, and their frontline catalogue becomes back catalogue. [user-centric] also creates a closer connection between the artist and the fan if the fan knows that his money goes to the artists he listens to.”

A group of Finnish music researchers published a study in 2017 analyzing the differences in payouts between the pro-rata and user-centric models and came to this conclusion:

The pro rata favours artists and tracks, which get the biggest amount of played streams regardless if they are created by a large number of users with few plays or a smaller number of users who have played them repeatedly. The user centric model favours artists with smaller number of streams, especially when the overall stream count is smaller. However, it should be emphasized that the positive financial effect is not automatic in all user centric cases but the result may as well be the opposite. The results depend on the cumulative effects of both individual and user groups’ listening habits.

So although the user-centric system provides some benefits to smaller artists, those benefits are highly dependent on the volatile and unpredictable listening habits of their fanbases. A Norweigan music group also published a report that found major artists' market share changed very little (76%, pro rata vs. 75%, user-centric) and that the top 5000 artists still received the same amount of revenue. There was a small increase for artists in the middle but ultimately the redistribution in payouts were negligible. And lastly, Spotify’s Head of Economics Will Page argues that the cost of maintenance and management that would be required to ensure a proper user-centric model would cancel out the potential increased earnings.

Thus, there is no clear solution to the inequities in streaming distribution. Both pro-rata and user-centric systems have their clear pros and cons while also being very complicated. These circumstances make Bandcamp’s relatively straightforward and almost archaic business model stand out even more. Moreover, no other DSPs are selling physical items alongside digital music on one platform, providing Bandcamp a unique edge. But this parallels the tremendous differences in business philosophy between Bandcamp and its competitors.

For example, Spotify has developed its technological capabilities to maximize music discovery and social engagement. The platform's curated playlists have streamlined the discovery process and their marketing campaigns like Wrapped make it easy to share listening habits on socials. In addition, they have purchased numerous podcasting production companies in order to capture additional components of the audio market. Spotify’s focus on how listeners spend their listening time beyond music is best captured by CEO Daniel Ek’s address in his 2020 Q1 earnings call:

"When I look ahead both short- and long-term, I'm always thinking about what's Spotify's role within the larger ecosystem. And while most focus is on competition between streaming services, we continue to be focused on the billions of users that are listening to linear radio. The 20-year trend is that everything linear dies and on-demand wins. This is a trend that we suspect will be accelerated by the COVID pandemic. ... So in my mind, our competition is actually those learned and long-held user behaviors. For us, it will always be about capturing the share of time listeners spend elsewhere and prove out [sic] that their time is far better spent with us."

Spotify is a technology company whose main goal is to maximize and maintain subscriptions, whether through original content, curation or social engagement. As a result, their primary focus is on the needs of their subscribers and their audio ventures that extend beyond music (licensing music is currently a loss leader for them). This strategy may be one of the reasons why Spotify pays only fractions of a cent per stream: they need to keep subscription rates low in order to grow their subscriber base as fast as possible.

Meanwhile, Bandcamp has made their business philosophy centered around music and the artists themselves. CEO Ethan Diamond explains Bandcamp's ethos in an interview with NPR:

“I think of Bandcamp as a music company first, because I think of who we serve as first and foremost the artist. And the way to best serve artists happens to be through technology, a particular model of technology that our business is based on. But we're definitely – no question – we're different than a lot of digital businesses. I mean, the mission of the company is, I think, fairly unique. ... There's this great story – there was a New Yorker article about it – about how Prince was working on his autobiography just before he died. And he had picked a co-writer and in one of their initial meetings together he said, 'Music is healing. Write that down first.' He said that he wanted it to be the guiding principle they used in the book. And if you start with this idea that music is healing, that is obviously a power that should be in the hands of everybody who has the talent to wield it. ... And so that's what Bandcamp is. That's what I feel like we're here to build – that system. And the way you do that is by ensuring that artists are compensated fairly and transparently for their work. And that is through the direct support of their fans."

This mindset makes Bandcamp’s position in the distribution space relatively unique. While Spotify and other competitors come consistently under fire for their payout systems, Bandcamp has been heralded as the “anti-Spotify” by some publications for their artist-first mindset and initiatives.

One of these initiatives, Bandcamp Friday, has been a resounding success in the midst of the pandemic. Bandcamp Friday began as a one-off at the end of March to help artists supplement lost income through Bandcamp waiving its revenue share from all sales made. According to an update written by Ethan Diamond, fans purchased 800,000 items (versus 47,000 on a typical Friday, 15x the amount) and earned artists over $4.3 million in one day. Seeing this enthusiasm, Bandcamp extended Bandcamp Friday into a three month series taking place on every first Friday and in three days earned artists $20 million. It also donated 100% of its share of sales to NAACP Legal Defense Fund on Juneteenth. Then in July, Bandcamp Friday was extended until the end of 2020. And as of December 15th, Bandcamp announced that the program will continue until March 2021 and has sold $145 million of goods since last March.

Bandcamp Friday underscores how demonstrating a strong set of values through meaningful initiatives can elevate brands above their competitors. In previous Music IQs, we have explored companies that have established significant audience loyalty through taking strong political positions on contentious issues. This includes Patagonia’s ongoing environmental policies and Spotify’s “Play Your Part” voting campaign. All these initiatives succeed because they take definite stances, make significant contributions to relevant organizations and provide educational resources to their communities at large. Through their substance and breadth, they feel like legitimate gestures of goodwill rather than mere public relations strategies (much stronger than the typical “We’re All In This Together” ad). And in this case, Bandcamp has proven their commitment to supporting artists in an unparalleled way compared to other distribution services. Through forgoing millions of dollars, Bandcamp has taken the undisputed position that they prioritize the artist community above profit. This move is especially potent in the context of our currently fragile economic situation, where many businesses (especially marketplace ones like Bandcamp that depend on consumer disposable income) are choosing between benefiting their organizations or supporting vulnerable communities and employees. In addition, Bandcamp’s position is made more compelling against the backdrop of public discontent towards streaming services and tech corporations in general. In the past decade, public opinion towards Silicon Valley has soured: big tech companies like Facebook, Google and Spotify have all been challenged by widespread accusations of fostering unfair competition. As a result, Bandcamp Friday is a well executed program at precisely the right time, making Bandcamp one of the few digital music companies that are perceived as giving back back rather than hoarding wealth and power.

But of course, this initiative also provides the company ample business benefits that extend beyond pure goodwill. It has earned Bandcamp large amounts of positive publicity, marketing exposure and social engagement across all platforms. As described in the LA Times piece linked above, many artists (especially underground) are now completely transitioning to Bandcamp full time and bringing their fans with them. One example is the NY underground hip-hop scene affiliated with rapper Earl Sweatshirt. This exciting collection of musicians (such as MIKE, Piink Sifu, Maxo and Navy Blue) have been credited with ushering a new generation of rap music and are notably releasing new music on Bandcamp months before any streaming platforms. Bandcamp Friday also provides an incentive for new customers to become familiar with the product and check out its other features such as its editorial platform. Moreover, people who purchase goods during this program leave with the emotional gratification that they’re directly supporting their favorite artists and those in need. This feeling encourages word-of-mouth recommendations and makes the use of Bandcamp’s product a personal expression of one’s values. This invaluable aspect of brand identity can not be purchased like adspots; it must be earned through substantial action and well-crafted strategy. It provides an intangible yet significant advantage in building a loyal customer base and increasing market share.

And like a cherry on top, Bandcamp made another gesture that further cements its credibility amongst hardcore music lovers. In December, Bandcamp’s editorial director J. Edward Keys penned a feature announcing that it will not be doing “end-of-year” lists anymore, arguing:

“When you assign something as hard-coded as numerical rankings to works of art, you start moving out of the realm of subjectivity, and into the realm of codifying taste. But that approach is doomed to failure, because creating objective metrics is not the goal of the critic. What’s interesting about criticism isn’t the Final Judgment—it’s not the numerical score or number of stars. What’s interesting about criticism is the argument. But, if all you’re arguing about is whether or not something deserved to be 17 instead of 27, you’re not really arguing about the substance of the art at that point—you’re arguing about numbers.”

For some fans, the endless arguing on online forums and soc