1.) I doubt that the decision was “arbitrary” since the data on the “Distribution of Price Paid Among Downloaders” (see comScore source) is not uniform. Furthermore, the data does not fit a discretized Pareto distribution as one might expect if pricing decisions were based on income. Personally, I like comScore’s explanation:

“a significant percentage (12 percent) were willing to pay between $8-$12, or approximately the cost to download a typical album via iTunes,…”

Therefore, it seems that customers did not actively attempt to cut out the middlemen; they just followed the lead of Steve Jobs (who is actively attempting to cut out the middlemen).

2.) The model looks like it works well for bands with Radiohead’s level of popularity. Of course, Radiohead became popular through radio play. My guess is that bands of the future will need to obtain a high level of popularity via free tracks before transitioning to Radiohead’s model.

3.) Marc Andreessen touched on this by asking:

“If you’re a mogul, the key question has to be, what would the founders of my industry have done in this situation? Really, what would they have done? Thomas Edison, Darryl Zanuck, Jack Warner, Irving Thalberg, Adolph Zukor, David Selznick, Louis Mayer, David Sarnoff, Bill Paley, Walt Disney…”

I think there are many possible solutions, but trying to reintroduce scarcity into the distribution system via mechanisms like DRM is not the answer. As for the future of movies, here are some thoughts:

(a) Patronage – worked well for the arts prior to the introduction of recording technology (e.g. “Thank You for Smoking” by the Paypal Mafia).

(b) Product placement – being incorporated into more and more films (e.g. “Harold & Kumar Go to White Castle”).

(c) Charge participants – maybe actor/actress is no longer a paying job, maybe it is a purchasable title (e.g. “Flyboys” as a David Ellison vehicle).

(d) Digg/Zivity – the largest remaining risk in film production is market risk. Eliminating films like “The Postman” before production is critical. Maybe one could start a Digg for scripts where the Diggers can purchase votes for $1 a piece. Then, they could Digg away at scripts. At the end of the year, one or more of the best scripts could be produced with the proceeds from the cash collected via the voting mechanism.

I am sure there are many better ideas, but denying that the future is here is not one of them.

Sources:
http://www.comscore.com/press/release.asp?press=1883
http://blog.pmarca.com/2007/11/suicide-by-stri.html
http://www.nytimes.com/2005/04/19/movies/19rich.html?pagewanted=print&position=
http://valleywag.com/tech/hollywood/ellison-vehicle-is-one-of-2006s-biggest-bombs-224339.php

1. Do you really believe that the elimination of the middlemen factored into the customer’s evaluation of the value of the music? I personally doubt that the average customer calculated the costs eliminated by the removal of the middlemen and adjusted the price accordingly. It would be interesting if somebody conducted a survey of these customers and tracked the methods they used to decide what to pay. I’d guess most decisions were arbitrary and were likely based upon the customer’s personal financial situation more than anything else.

2. The question is how new acts and independents can survive with this model or a similar one. It’s possible that over the long-term Radiohead might even come out ahead with this model but they are an extremely popular band who for years took advantage of the marketing power of the record labels. I just don’t see how new acts or independents are going to make something like this work because they don’t have the fan bases that label-promoted bands like Radiohead have built up.

3. I’m not sure this will work in today’s market, which is considerably different than the early days of recorded music, but I do think that the music industry will need to diversify its revenue streams and that includes a greater emphasis on live performances for top artists. But your answer skirts the real question. Let’s think about content in the abstract, not just about music content. If I cannot profit at all because people want my content but aren’t willing to pay for it (in some fashion) or the amount of profit that I can make is mimimal or does not justify the risks associated with its production, what happens? Take motion pictures, for instance. In an unlikely but hypothetical worst-case piracy scenario, it would not make financial sense for studios to produce movies. It would not be that the public didn’t want entertainment; it would simply be that the public’s actions cannibalized the business model that made their production possible. At the end of the day, there needs to be a balance. If we want content producers to keep producing, it’s in our best interests to make sure that they have a compelling financial incentive to do so.

So, in response to the questions:

1.) Cutting out the middlemen lowered the price that a Radiohead customer was willing to pay for Radiohead’s music. The loss of the middlemen did not entice non-customers into becoming customers. This makes sense since the loss of the middlemen did not make Radiohead’s music more valuable, it simply made it less expensive.

2.) I would say that Radiohead did OK in this experiment.

3.) Traditionally, before the anomalous time of recorded music scarcity, musicians made money from performances. Most musicians will achieve economic viability by going “back to the future”.

Sources:
http://www.comscore.com/press/release.asp?press=1883
http://wjcohen.home.mindspring.com/insideclips/radiohead.htm