This is the essay of a keynote I presented at the CIDA / Musictank event called Building A Business On Free. My name's Guy Parsons - my profile is here, and my blog is here. You can email me directly at guy.lewis.parsons@gmail.com.

So, we want to build our businesses on "free." Let's talk about what free means, first.

First of all, there's free as in "beer" - gratis, for nothing, zero priced. Everyone likes free beer, even me, and I don't really like beer.

But there's also free as in "speech" - i.e. freedom. (more on the Gratis versus Libre distinction.)

In fact, there's 49 definitions of the word free in my dictionary, including:

exempt from external authority, interference, restriction; at liberty; clear of obstructions or obstacles; exempt or released from something specified that controls, restrains, burdens; unimpeded, as motion or movement; easy, firm, or swift; not subject to rules, set forms; ready or generous in giving; to release, as from restrictions

So in this sense, free sounds like a rather good thing to be building a business on.

But hang on a minute, what's this about "being free from restrictions"? What sort of restrictions might there be? Here's some excerpts from Wikipedia's page about a typical recording contract:

Labels typically own the copyright in the records their artists make; initial recording deals usually yield a relatively small percentage of royalties to artists; any advances or upfront money paid to a recording artist is owed back to the label; artists signed to a failed label can find themselves in limbo, unable to record for anyone but a company that is out of business (and thus cannot sell or distribute their records), and with their existing works unavailable for sale

Those are some pretty oppressive terms. If you were running a company, you'd never sign anything like that! On the other hand, most industries don't have four companies controlling the entire thing...

No wonder the industry is a bit broken and wobbly then, it's a complete oligopoly. Musicians are mostly getting shafted in the same way farmers are being shafted by Tesco and Sainsburys. When you hear that something is "killing the music industry" you have to bear in mind they probably mean "killing four companies" which I think we can all agree is much less impressive.

Here's a quote from Steve Albini:

Whenever I talk to a band who are about to sign with a major label, I always end up thinking of them in a particular context. I imagine a trench, about four feet wide and five feet deep, maybe sixty yards long, filled with runny, decaying shit. I imagine these people, some of them good friends, some of them barely acquaintances, at one end of this trench. I also imagine a faceless industry lackey at the other end holding a fountain pen and a contract waiting to be signed. Nobody can see what's printed on the contract. It's too far away, and besides, the shit stench is making everybody's eyes water. The lackey shouts to everybody that the first one to swim the trench gets to sign the contract. Everybody dives in the trench and they struggle furiously to get to the other end. Two people arrive simultaneously and begin wrestling furiously, clawing each other and dunking each other under the shit. Eventually, one of them capitulates, and there's only one contestant left. He reaches for the pen, but the Lackey says "Actually, I think you need a little more development. Swim again, please. Backstroke". And he does of course.

Yet there's still a perception in the music industry that unsigned bands are tenderfoots who aren't really big-league yet, and "getting signed" is the shiniest, nicest thing that can ever happen to a recording artist, which as I think we're starting to see ain't necessarily so.

In the industry i'm from, which is internet-based entrepeneurship, we have an analogue to this called "getting funded" - when some nice guys with money turn up and give your young business money to grow, or quite often to develop the product you're going to be selling later. But it's not a de facto good thing to get funded - if you can build your business from scratch without taking on any investment, that's obviously the ideal situation. Sometimes it's necessary to take investment to help grow, but it's kind of a necessary evil.

That said, although investors like to encourage you to make money and have say-so over certain stuff, but you probably don't give away a controlling stake in your company, and you certainly don't end up unable to sell your products just because the investment fund shuts down. That would be completely mental.

Of course, at the moment record labels don't really operate like venture capitalists. They're also a whole operations team for a band, basically running everything that isn't music-making - but in a digital era, do they provide good value, or could you do it adequately yourself?

Well, they do distribution, which is nice, apart from you can now sell directly to lots of the MP3 stores out there. Amazon will start selling your stuff once they have two copies in their warehouse, too. Labels do promotion, but it's now getting easier to do some of that yourself, not least because the web encourages "conversation-based marketing" and if your audience is going to have a conversation with someone, they'd much prefer it's your lead singer and not a PR wonk from Warner. And then there's manufacture, which is of course heading towards obsolescence in some ways, and in terms of physical product there are of course DIY routes there too.

So basically if you're going to escape the dank and sweaty clutches of conventional labeldom then you're going to have to run your band as a business and take over some of these functions yourself. Difficult, yes, but not necessarily impossible.

Interestingly the concept of "bands as businesses" or even more catchily "bands as brands" is something labels are starting to investigate - by which I mean, they're starting to demand cuts from merchandise sales, touring receipts, and so on. Of course they'd like to stick to the same kind of terms for now... but in the long term, I think this might be a good model. Bands as brands for labels to invest in holistically and equitably - more like the venture capital model I was talking about before.

Right, so we've talked a bit about "free as in speech." Let's talk about "free as in beer."

There's a ton of hype at the moment about "giving your music away for free." It's obviously something you can do. Digital music - well, un-DRM'd music anyway, which is most likely the way forward - is an odd sort of product because it's non-rival (that is, if I have a copy, that doesn't mean there's one less copy for you) and non-excludable (you can't effectively stop people sharing your music.)

Therefore, musical recordings really has more in common with something like streetlights, the kind of thing we've traditionally supported using taxation and subsidy. Some people think this is what we'll end up doing with music - it'll all be subscription based, and everyone will have to pay a license free that then allows them to listen to as much music as they want. This is a pretty terrible idea, for the obvious reason that then the music industry becomes a pie of fixed size and it's all a matter of fighting for a slice of the action. That really does sound like a trench full of shit.

But what other options are there for making money when everything's free?

Well on the web, we have this popular model called freemium. That's a mix of free and premium, and I'm sure you've come across stuff like it before - it's when the basic version is free but if you want something fancy then you've gotta shell out.

What kind of premium stuff might we be talking about in the music industry? Well, there are some obvious answers: higher-quality MP3s, a better digital package of stuff, and stuff like that. Radiohead, for instance, had a "premium" physical product - the £40 discbox - to go with the (potentially) free download of their new album. I think this is why Myspace was so popular for bands, because it gave them a popular and user-friendly platform to share their work for free, but without making it too good (only four tracks at once, only 96kbps, etc etc). Myspace - it's the antipremium!

This ties into a tangential point that we've already touched on, that physical stuff (merchandise, touring, etc) is going to be increasingly important to artists, because it's rival and excludable in a way that digital stuff isn't.

The only problem with premium stuff online - at least in terms of "the work" whether it's music or film or whatever - is that if it's copyable (like higher-quality MP3s) then it's going to become free at some point when someone shares it online. What if we could create premium experiences for listeners that aren't copyable?

One thing that isn't copyable is "the warm fuzzies." If you can reach out to your audience and get them to invest in the idea of your band and make them feel suitably rewarded then that's a really great low-cost approach. Recognise the people that pay publically, give them more previews and insider knowledge on your content, and make them your VIPs.

Either way, the most important thing to remember is that paying for your music has to be a better experience than getting it for free. This is why DRM is mostly a failure, because it makes the paid version sucky, while the free version is still fairly user-friendly. The exception is the iTunes Music Store, of course, because it generally works well, lets you impulse buy, and is pretty slick to use especially if you're using an iPod too.

Another method is to try and establish a system whereby what matters is not the contribution of an individual but that of the community as a whole - after all, you can't worry about every single person who might be listening to your music for free, but you want to make a living. So if you get really popular from your demos, rather than getting signed, you could get your 10,000 Myspace friends to donate a few quid each to enable you to record it properly. People who donated could get their names appear in the liner notes and a free copy of the album, and then at the end of the process you'd have an album owned entirely by you ready to sell to the mass-market.

Stephen King did this rather cheekily by putting chapters of his latest novel online for free, but not releasing the next part until donations had reached a certain level. Obviously he had the advantage that the costs of writing another chapter are rather less than a session in a recording studio, but you get the gist.

This kind of "micropatronage" has also been used by bloggers to allow them to concentrate on writing full-time without resorting to advertising. Of course, you could do things to hurry the process along like play living-room shows for your top 10 donors, or randomly choose sponsors to get prizes.

One problem is if you need £10k to record your masterpiece but only raise £5k, what are you going to do? This isn't something to worry you so much as it is to worry the sponsor, because what if they give their money and yet there's still no album? Apart from recording the album more cheaply (if it's good enough for the White Stripes...) you could just promise to give the money back if you don't raise enough. It's called an assurance contract and you can set one up yourself at pledgebank.

One great thing about being a small band, apart from the fact that it's more likely you'll gain rather than lose from filesharing and piracy - is that you can create a more personal relationship with your audience and create a fan community. If you've got a community, you can help build a social norm that it's right and proper to try and support you in your musical endeavours. And this is only the beginning - we've been talking about people donating money, but don't forget they might be able to donate studio time, cover art, and other stuff invaluable to a cash-strapped artist.

Let's finish up by talking about free as a marketing technique.

Earlier I talked about digital music being a "non-rival" good - that just because I've downloaded a copy, doesn't mean there's one less for everyone else. But music is actually even less rivalrous than that - it's an "anti-rival" good. An anti-rival good is one which when I have it, doesn't make things *worse* for you, it actually makes it better. For instance, the English language is an anti-rival good. I can speak English, which is better for you than if I can't, because one more person speaking your language makes your own Englishspeakingness more valuable.

Now, why is getting to the crux of why people share music. If I like Shrag, then it's actually good for me to share it. If there's one thing better than discovering great new music, it's sharing it with your friends and having them love it too. It's why when you go out clubbing the funnest songs are the ones that you and your friends are into. And of course when it comes to going to a gig, are you more likely to go the one that only you know about, or the one you and your friends have been anticipating for ages?

You being a Crimea fan generally improves my experience of a Crimea fan, and that's an important thing to remember in terms of sharing your music and understanding where your fans are coming from when they do it. Of course filesharing, for all its popularity, is actually pretty rubbish and hard to use - direct file transfers aren't great, P2P networks are pretty unreliable - so it makes sense, I think, to try and capitalise on the fact it's something listeners wanna do by making your own sites the best way to share your music. If people are going to get an MP3 of yours, wouldn't you rather it involved visiting a page with your tour dates on? Exactly.

Also, there's a ton of other content involved in making music that it would be prudent to release to your fans on a free and open basis. There are lots of different licenses you can release content under, or you can even invent your own. When I talk about "other content", one example might be the individual session tracks that make up a song - acapellas, instrumentals, that sort of thing - at a nice high bitrate, because that's going to encourage all kinds of fun sampling and mashupping and suchlike around your music, which is gonna get it into more people's ears. You can even specify a "non-commercial" license if you're worried that Kanye's gonna get rich rapping over it while you make sod all, while still letting bedroom remixers have a crack at working their "magic."

Another example - guitar tabs. Remember when the MPA sued all those guitar tabs sites and made them take them all down? Did you really think you were going to get rich off sheet music? For fuck's sake, put 'em on your website and let those crazy kids play cover versions to their friends.

Of course, this is another problem with being signed - it's no longer your music or content to give away. You sharing MP3s of your band is essentially as 'wrong' as regular listeners doing it. You can't even give away your music once your label has stopped selling it! You can only hope that your label is nice to you.

Right, let's look back on all this then, bullet point style.

The music industry is an oppressive place to do business. It's an oligopoly.

There are large organisations and labels so that retailers, radio stations and all the other stakeholders could do business easily, but the digital age makes it easier than ever for these gatekeepers to do business directly with artists.

If you want to get away with not being signed, you'll have to take on the business responsibilities that labels previously took on. These responsibilities include marketing, distribution and organisation, and it's hard to do, but easier than ever before.

If music spending diversifies away from pure record purchasing and into touring, merchandise, patronage and so on, labels will want to start investing in bands "as a whole" and start being more like VC's, although in the short-term they'll probably stick to what they know and try and assert pure ownership rights over the whole enterprise. If labels become more like investors, A&R will also look a lot more at how bands operate - how highly labels rate your manager is likely to be important.

To subvert filesharing and suchlike, the experience of paying for your music must be superior to that of stealing it, in terms of user experience (it should be easy to buy) and utility (you should get more, whether it's higher-quality content or the warm fuzzy feeling of doing the right thing.) If you want to go the extra mile, make your "free" experience better than the "stealing" experience too!

If you're a new artist you have a competitive advantage in building a community of fans, responding personally to them, building a community that supports your work morally and financially, and generally create loyalty. If you can get 10k Myspace fans without signing, then among that 10k might be the studio owner, engineer, graphic designer and who-knows-who-else that can help you make it without signing your rights away. Let your fans help you.

Here's one thing that will stay the same: trying to work out when and where music should be charged for. In 30 years of music radio, it's still a bit confusing - stations have to pay royalties when they play records, but simultaneously, pluggers are desperately trying to get their label's music on the playlist. So is music on the radio a product to consume, or a way of marketing artists? It's a mix of both. And it's that weirdo combination that will still have people arguing about business models, licensing, royalties and so on for the forseeable future.

Notes from the Q&A session that followed this presentation will be added here in the next day or two.