The product-based music industry is dying. Fans are no longer a viable revenue source.
Branded content (professionally created content from brands) is increasing as brands increase communication with consumers through social media. Music is a great tool for brands to start a conversation with consumers.
fanatic.fm is a scalable platform enabling companies to produce branded content through music sponsorship while providing a sustainable revenue source for the music industry.
- Free music for fans.
- Fair compensation for artists.
- Emotional but measurable/scalable branding tool for brands.
- Donations for charities.
The product-based music industry is dying
Historically, the music business has been centered on “physical products” that you sell. It was all about extracting money from the fans through LPs, cassettes, and CDs. However, this business model is now dead. The reason is simple: although fans still love music more than ever, they simply do NOT want to pay for it. They are giving us a clear message that they do not want to be the revenue source that sustains the music industry.
Instead of relying on fans to purchase product, can we find other sources of revenue?
Music streaming is thriving but there is no dominant player
Instead of purchasing CDs, more and more consumers stream music online. In the United States, music downloads and streams were nearly even in terms of popularity according to NPD Group’s latest numbers, and most likely will continue to battle for supremacy. The percentage of Americans who downloaded music to a Mac or Windows computer at least once per week increased from 29 percent in March 2010 to 30 percent in August. Meanwhile, 29 percent of Americans streamed music in August at least once per week, up from 25 percent in March.
Competition is fierce in subscription-based streaming services. Companies like MOG, Spotify, eMusic, and Rhapsody are battling it out for market share, and will be joined soon by giants like Apple and Google. However, there is no dominant player in free music streaming services. Companies like imeem and MySpace Music tried to capture this space, but failed because the ad-backed streaming model simply didn’t scale.
Instead of the traditional ad-backed model, can we find another way to monetize free music streaming? …and become a dominant player among free music streaming services?
Brands become content producers
As consumers become harder to reach through traditional media, brands are increasing interaction with consumers through social media, creating Facebook pages, YouTube channels, Twitter accounts, etc. Social media is empowering consumers to become the new distributors, and the demand for “entertainment” from brands is on the rise, especially among internet savvy age groups.
Naturally, brands are allocating their advertising/branding budget to meet this change in demand.
The intersection of the music and branding industries
There is a tremendous opportunity in the growing market being created in the intersection of branded content and music sponsorship, which fanatic.fm targets as its main playing field.
Music is a great tool for brands to start a conversation with consumers
According to a recent survey conducted on marketers at leading global brands, brands are aware of the importance of music in forming emotional relationships with their consumers.
This is why companies in North America spent $1.1 billion in music sponsorship in 2010 (Source: Sponsorship.com). However, even leading brands that are aware of the importance of music in branding/marketing spend only 5% or less of the total marketing budget on music.
The main obstacles for brands when it comes to working with music are…
Shouldn’t there be a creative way to solve these problems and to connect music and branding?
Product and Strategy
Advertising-backed streaming services focus on ‘monetizing traffic’ on their destination sites. This model has limitations because traffic – the source of revenue – must compete with traffic gobblers like Yahoo, which is hard to beat. And more importantly, there is no direct association between the music and advertisers. Listeners don’t like their music interrupted by ads, and skip right through them. Some even pay to avoid them altogether with the “no-ads” option. This model cannot be attractive to brand marketers.
The key difference that fanatic.fm brings is the concept of “sponsorship”. Sponsorship is profoundly different from advertising, as Ian Kwon, co-founder of fanatic.fm, articulates:
“I’ve been a long time fan of the Premier League football team Manchester United, and I still clearly remember all the corporate sponsors that had their logos on the players’ jerseys over the last 10 years. (It was Sharp, Vodafone, AIG and Aon if I’m not mistaken.) If I were a simple consumer of the entertainment ManU provides, these sponsors would have absolutely no meaning to me. However, a fan is different. There is an emotional bond that forms with your favorite football team, your band, your singer, guitarist, and so on.”
What fanatic.fm does is let brands advance beyond product-consumer relationships and tap into the affinity that forms between musicians and their fans.
For example, if Radiohead publishes their latest album through GM’s sponsorship, GM is no longer just an advertiser to Radiohead’s fans. They are directly responsible for the free music the fans will enjoy, and they will be appreciated by these fans at a completely different level. It’s a new way for GM to maximize its branding/advertising impact.
fanatic.fm is a scalable platform enabling brands to produce branded content through music sponsorship while providing a sustainable revenue source for musicians.
These are the unique features that fanatic.fm offers…
Bands/Brands catalogue: Brands can browse musicians by genre and tags and listen to the music before they make/accept a sponsorship offer. Bands can likewise browse through potential sponsors and see the campaign creatives before they make/accept an offer.
Sponsorship request: fanatic.fm offers musicians complete control over choosing their sponsors. If they don’t want to get sponsored by a certain company for whatever reason, they have the freedom to decline the suggestion. A sponsorship is forged only when both parties (sponsors and musicians) reach mutual agreement. It is just like a friendship request on facebook.
Cost Per Music Play (CPMP): fanatic.fm brings a new revenue model for musicians and pricing structure for sponsors. Musicians can set the per-play value (CPMP) of their songs when they publish an album on fanatic.fm. For example, if a musician sets the value at $0.01 per music play, then he/she will generate $1,000 in gross revenue when the music is played 100,000 times. ($0.01 * 100,000) Sponsors can see the CPMP when they browse musicians to sponsor. Whenever fans enjoy the music along with the sponsor’s campaign exposure, this predetermined amount is paid to musicians by the sponsors. Sponsors, of course, can check the results of the sponsorship transparently, on a real-time basis.
Exclusive sponsorship: If the sponsor wants an exclusive deal and the selected musicians are available for such an agreement, then the parties can enter into an exclusive deal under a mutually agreed CPMP.
Analytics for bands and brands: Sponsors get access to a transparent and analytical report on their sponsorship. For instance, sponsors can see the result by campaign, by artist, by time, by location, by platform, etc
Fan base analytics for brands to choose which musicians to sponsor (coming soon): Understanding the fan base of the musician will be critical for sponsors’ choice of music. fanatic.fm will provide valuable data on the fan base of the musician to help sponsors’ decision process.
The revenue flow from fanatic.fm’s business model is illustrated below.
In short, artists take 67.5% of the sponsorship revenue (per play) while fanatic.fm receives 27.5%. Five percent of the sponsorship is always donated to charities that artists select (2.5% from artists plus 2.5% from fanatic.fm). Musicians have always been in the front lines helping people in need. With fanatic.fm, musicians, sponsors and fans literally unite to change the world. And this also creates a virtuous cycle with the sponsorship concept: Brands sponsor bands, bands sponsor charities, fans support this ecosystem by listening and sharing the music on fanatic.fm.
The Company and the Management Team
The company, fanatic.fm Corporation, was established in California in October 2010. The team originated and is currently based in Seoul, Korea. The development team will be kept in Seoul while the business development team will be set up in North America.
The Co-founders bring relevant experiences in the music, technology and advertising industries.
Peter Baek is responsible for product development. He is a successful serial entrepreneur in the software industry in Korea. He built the software/system for 70 leading universities in Korea as well as for dozens of Korean banks. Recently, Peter was an executive at Bugs music, the second largest Korean music streamer with more than 20 million registered users.
Ian Kwon is responsible for business development. Ian was the co-founder of Admaru, a boutique ad agency in New York focusing on ethnic markets. Admaru’s clients include McDonalds, Toyota, Verizon, Farmers Insurance, etc. Ian also worked as CSO at inmD, a social media marketing agency in Korea. inmD has represented Samsung’s global social media marketing for 3 years. Before inmD, Ian was the CFO at First Snow, a search engine startup that was acquired at $35M after 18 months in operation. Before First Snow, Ian was a business development manager at NHN, the biggest Internet company in Korea with $8 billion market cap. Ian started his career at Bain & Co. as a management consultant.
Katherine Hollinsworth and June Kinoshita share responsibility for worldwide marketing and communications. Katherine has extensive experience in marketing, public relations, policy and business consulting. She is based near Toronto, Canada. June brings more than 25 years of experience in national magazine and television journalism, building successful web communities and starting companies in the biotech sector. Together, June and Kath have published a book, popular blog and internet radio show about popular music, fandoms and social media.
Six experienced developers have joined the company. Many of them are computer science majors from leading Korean universities such as Seoul National University and KAIST.
The company also has a great combination of advisory board members:
Bruce Houghton: Mr.Houghton is the CEO of Skyline LLC, a musician booking agency. He is editor in chief of Hypebot (www.hypebot.com), an influential blog in the music industry. He also serves as visionary committee member of Midem, the biggest industry-networking conference.
Jakob Lusensky: Mr.Lusensky is the CEO of Heartbeats International (www.heartbeats.fm), a global music branding agency, headquartered in Stockholm, Sweden. His clients include Unilever, IKEA, Absolut Vodka, Oriflame, etc. He is a thought leader in the music branding field and a frequent speaker in global music/advertising conferences.
Economics: Below is the chart explaining how much artists earn online. To earn $1,160 per month (US monthly minimum wage), artists need to sell 1,161 CDs in retail stores, 12,329 track downloads from iTunes, 849,817 streams from Rhapsody, and 4,549,020 plays from Spotify.
However, artists just need 171,852 plays on fanatic.fm to earn $1,161 (assumption: CPMP = $0.01). In other words, fanatic.fm provides better incentives to artists than any other music streaming site. The relationship among musicians, fans and music sites is the main reason for this result. Musicians were merely ‘content providers’ for these music sites. However today, thanks to social media and the direct relationship between musicians and their fans, musicians don’t need to be a part of the music sites to reach their fans. They already have Twitter followers and Facebook friends who are completely up to date on what their activities.
Pre-release music marketing: Before artists release singles, EPs or albums, they can upload pre-release music on fanatic.fm and attract sponsors for their official release. By doing this, artists can kill two birds with one stone: 1) start marketing their new music even before it is officially released, 2) attract financial supporters for the new music. When the music is officially released and is played with the sponsor’s contents, the musician gets a set amount per music play.
fanatic.fm will constantly deliver this message to artists and labels through various media such as Hypebot, etc.
Fans’ engagement on the potential match: Brands can ask their Facebook friends and Twitter followers which music has the best fit to their brand identity, particular marketing campaign or simply, which music they want to listen to. This can instantly generate engagement from consumers in a sophisticated/emotional way.
Account managing partner: For the first year, we will build alliances with music branding agencies who already work with potential sponsors. We’ll share 10% of the sponsorship revenue from the brand sponsors that alliance partners bring.
Publisher partner: To have predictable/stable traffic is the key for sponsors’ decision process. There are many music bloggers and music-related online media that generate incredible traffic. They can embed fanatic players on their properties and become distributors of the music and branded contents. We will share 5% of the revenue for the first year.
Contents to distribute on social network: Aside from unlimited access to free music, fanatic.fm enables fans to port all the contents on the platform to their social networks. Fans will be able to play a significant role in distributing their favorite band’s music while promoting the virtuous cycle of generating donations to the charities of their favorite band’s choice.
Furthermore, both brands and musicians will tap into their own social networks to invite their respective fans and followers to enjoy the product of their sponsorship relationship, driving further distribution of the contents.
Competitors, their strengths & weaknesses
Since fanatic.fm is creating a new way to do an already existing business, there are no direct competitors yet. However, when it becomes evident that it is on the right track, it is highly likely that fanatic.fm will attract potential competitors.
Artist-related services: Companies like Reverbnation, Bandcamp, and SoundCloud have a strong relationship with artists and may want to follow our business model. However, these platforms are suited for the music industry and difficult for commercial applications, such as sponsorship requests. For example, none of these services have ad servers or advertising platforms.
YouTube: Many people enjoy music (videos) on YouTube and they have an advertising program as well. However, YouTube is a music video site and there is not enough room for branded content to be displayed alongside the music content that is being played. Sponsors cannot (and will not be allowed to) choose specific musicians for their advertising campaign.
Subscription-based music sites cannot follow fanatic.fm’s model because it severely disrupts their current business model. If they choose to follow, they will need to re-build from the ground up.
fanatic.fm’s pending patents are very detailed. It will be difficult for followers to avoid infringement on these patents for similar business application. For example, there is a patent on CPMP (pricing structure that is essential for the business), Displaying order of multiple sponsors, etc.
Resumes of management team members
Peter Baek is a Co-Founder of fanatic.fm corporation. He is responsible for product development. He is a successful serial entrepreneur in the software industry in Korea. He built the software/system for 70 leading universities in Korea as well as for dozens of Korean banks. Recently, Peter was an executive at Bugs music, the second largest Korean music streamer with more than 20M registered users
Ian Kwon is a Co-Founder of fanatic.fm. He is responsible for business development. Ian was the co-founder of Admaru, a boutique ad agency in New York focusing on ethnic markets. Admaru’s clients include McDonalds, Toyota, Verizon, Farmers Insurance, etc. Ian also worked as CSO at inmD, a social media marketing agency in Korea. inmD has represented Samsung’s global social media marketing for 3 years. Before inmD, Ian was the CFO at First Snow, a search engine startup that was acquired at $35M in one and half year’s operation. Before First Snow, Ian was a business development manager at NHN, the biggest Internet company in Korea with $8 billion market cap. Ian started his career at Bain & Co. as a management consultant.
Katherine Hollinsworth, Chief Development Officer, shares responsibility for marketing, communications and business development. A Toronto-based policy analyst, Katherine has worked closely with Canadian businesses and local and national government in sectors ranging from music and gaming to healthcare and energy. She was an aide to a Canadian Finance Minister.
June Kinoshita, Chief Strategy Officer, shares responsibility with Katherine Hollinsworth for marketing, communications and business development. June is an award-winning journalist who was an editor at Scientific American and helped develop three Public Broadcasting Service documentary series. She co-founded the Alzheimer Research Forum and two innovative healthcare companies, N-of-One and Socialife. As the global marketing team for fanatic.fm, Katherine and June bring deep experience with music fan communities and social media.
Supporting market research