If the recording industry had it to do all over again, would it have ever swapped analog for digital? Given the changes that have ensued since music was encoded in bits and propagated on the Internet, the answer is uncertain. CD sales have plummeted, record stores have closed. The Recording Industry Association of America has managed to shut down peer-to-peer sites like the original Napster and has successfully sued a handful of people accused of privacy. But neither the musicians nor the record label executives seem particularly happy.

If this situation seems to beg for a new business model, John Buckman is happy to oblige. The entrepreneur was inspired by the difficulties his wife, electronic musician Jan Hanford Buckman, encountered with a conventional record label. In 2003, he opened the virtual doors on Magnatune, a self-funded company that distributes music on the Internet. But not just any music. Buckman’s non-intuitive idea was to apply a Creative Commons license to the entire Magnatune catalog. These licenses allow musicians, as well as other creators of intellectual property, to make works available free-of-charge under certain, specified circumstances. As such, Creative Commons has helped take the open source movement beyond source code.

As with other open source projects, Creative Commons brings up a variety of ethical and practical questions: should people creating intellectual property be able to charge for their work? Should others be able to profit from the IP that others create? Magnatune’s tagline, “⁠We are not evil,⁠”⁠ neatly summarizes Buckman’s thoughts on the subject. He believes that for musicians, the ethical questions must be seen within the context of a recording industry that sues its customers and preys on its musicians. Buckman’s answer is a music distribution system that eliminates the lawyers and evenly splits the revenues with the musicians: 50-50. The company now runs at a profit, and recording artists are submitting CDs at the rate of 400 per month. Buckman spends some of his time listening, but mostly he’s a programmer, working both on Magnatune and his other site, BookMooch.com.

While Buckman doesn’t think that Creative Commons and open source projects are fully comparable, comparisons are inevitable. Magnatune’s lesson for software developers: in an era “⁠when information wants to be free,⁠”⁠ some of best business models start by giving something away.

Buckman divides his time between Berkeley, California and London, where I spoke with him by phone.

The music industry is searching for a new business model. Are there still profits to be made?

Yes, but the profits are not necessarily in the same place. In the U.S., the music business is a $12 billion annual business, of which $8 billion is licensing and only $4 billion is consumer sales. No matter what the music industry might say about piracy, it can only affect that third of consumer sales. Licenses typically start at $10,000 and the negotiation, because lawyers are involved, is inherently expensive. As a result, a lot of potential customers are priced out of the market. Say you want music to accompany the flash animation on your website, or for a local cable television advertisement. Who is going to hire a lawyer and pay $10,000? What about someone who is only printing 1,000 CDs? At that volume, a $10,000 license is cost prohibitive.

So there’s a business in lower-cost licensing?

I first thought that maybe our lower price and “⁠not evil⁠”⁠ philosophy would help us get some of that Hollywood business?big films and TV advertising. Instead, our licensing business has entirely been in areas that never licensed music before. A typical example is a professional videographer who wants to add music to a wedding video. How does he go about doing that legally? That kind of thing has largely been our licensing business. We’ve gone from one license per week to about two licenses per day.

Our revenue is inherently on the commercial side simply because the Creative Commons licenses we use allow for free, non-commercial use. Over time, we do see potential revenue coming from, say, a filmmaker who uses our music before their film gets distribution. At that point, it’s still non-commercial use. If they do get distribution, then they come back and license the music?and we then make money.

So the key is in a Creative Commons license that allows for both kinds of uses.

Exactly right. Creative Commons comes in a couple of different flavors. About two-thirds of the music licensed under a Creative Commons license has the non-commercial restriction on it, which means people can use it as long as they don’t make money. That’s overwhelmingly the choice of musicians. It means that if you aren’t making any money off my creativity, that’s fine. But if you are, I’d like to share it. "About half of the musicians using a Creative Commons license choose the “⁠no-derivatives⁠”⁠ option, disallowing remixes and film use. Some people are okay with remixes of their music or seeing their music appear in videos; other people aren’t. Having that flexibility allows people to choose which rights they want to give away. With Magnatune, we use the same Creative Commons license for all our music, allowing derivative works (i.e. remixes and films) but disallowing money-making that doesn't give the creator a share."

The big advantage of a Creative Commons license is that companies who use music can do so without having to write up a contract. For example, Last.FM features Creative Commons music on special channels and to special audiences and they are able to make sure your music is part of that. Another example is the audio re-mix site CC Mixter. With a CC license, your music can be included. These are all business development opportunities that probably no one would have bothered to call you about.

Does the Magnatune catalog reflect the fragmentation of listening habits?

Not fragmentation as much as how many people have interests that go beyond the top three genres. In America, adult contemporary is the top genre, along with country and then ROR?radio-oriented rock, which is everything from classic to adult rock.

What exactly is qualifies as “adult contemporary”?

It’s Celine Dion.

Oh.

Those three genres are dividing up roughly 80 percent of sales. That leaves huge genres on the table like electronic, new age, and folk, not to mention alternative rock. If you are interested in that kind of music, there probably aren’t any standard retail channels to turn to. I can name 10 genres that everyone knows about, yet you pretty much can’t get in stores. So people turn to the Internet. For example, a number of the artists on our roster are really, really big names in classical music. But classical now represents just two percent of global record sales.

Is this all amplified by the changing business model for the recording business? Are record labels going after only what can instantly turn a profit and ignoring everything else?

Yes is the short answer. It’s kind of a death spiral. The record labels kept signing abusive deals with bands. The bands began assuming they would never see royalties and fought back by demanding huge advances. The labels have fought back in turn. Since most albums lose money, the few that do are used to recoup the lost money from all those that don’t. That’s the death spiral: the labels see huge megahits as the only way out. So the idea of aggregating lots of smaller successful products doesn’t work for the majors, at least for now.

You mentioned the Internet as the alternative distributor. What does the landscape look like?

iTunes has over 90 percent market share; the next three are trying to get what remains. Those are Napster, Microsoft, and Amazon. Who wants to get sandwiched by companies with those resources? So the rest of us are cooperating to try to legitimize some alternative models. Services like ours, Amie Street, Audio Lunchbox, and CD Baby are all trying to make some noise and say: you don’t have to go with “⁠the big evil.”

Is the CD dead?

Not quite, but young people generally no longer enjoy building music libraries one album at a time. That’s pretty much something for people over 30. If you talk to people between 15 and 25, their collection was built either through BitTorrent to get the complete works of a “⁠Band X,⁠”⁠ or getting a pile of MP3s from friends using some iPod sharing program. When you’ve got a 120 GB iPod, it doesn’t even make sense to build the collection an album at a time. This is not something that the current generation sees as necessary. Just give me 20 gigs worth of stuff and I’ll put it on a USB key and pass it to somebody else.

What that means for us is that people like going to Magnatune and listening to music, but they are not that interested in picking one album to buy. I keep asking people how they choose what to buy, and some of the answers are pretty horrifying. “⁠Well, I listen while I’m working, and if I hear something I like, I might write it on a piece of paper. Then when I’m thinking about buying, I’ll winnow it down to one or two albums, listen to the sample tracks, and then maybe decide to make a purchase.⁠”⁠ That’s a lot of steps and a lot of time. Very few people are going to do that, which speaks to why personalized Internet radio services Last.fm and Pandora are so successful. They get rid of that whole workflow.

That means we are no longer, if we ever were, in the business of selling albums. We are now a music provider. We have to figure out how people want to consume our music and if they want to pay for it. A few weeks ago, we launched an “⁠all-you-can-eat⁠”⁠ set of memberships that seems to be faring a lot better than the “⁠sell-one-album-at-a-time⁠”⁠ model. There are two offerings: $9/month for all you can stream; $18/month for all you can download. These membership offerings have resulted in a 2.5 fold increase in revenue and that’s taken us well into profitability. What’s changed is that people are giving us a lot more money but they are getting a lot more. So instead of buying one album for $8, they are buying the whole 600 album catalog at a $200/year rate.

Are you concerned that people will eventually download the catalog and then drop off?

Sure. I have to make sure that I keep them continually interested. But I’ve been studying user patterns and we find that when people have access to everything, they tend to download just the things they really love and they know they can get everything else at any time. They don’t feel like there’s a rush. We found that around three percent of users suck everything down right away.

We also offer a free service with about eight seconds of advertising at the end of each song. At the end of the third song, there’s a one minute commercial. That makes it slightly more distracting. We’ll tinker with that.

Are the commercials strictly for you or are you getting outside revenue?

“Commercial⁠”⁠ is probably the wrong word. It’s a sexy female voice telling you what you just heard. Some people probably find having a woman talking to them regularly to be a value-added feature!

So there’s no revenue stream for the free model except to drive people to the pay model.

These days, the radio business is not a great space to be in. Unless you’ve got massive Google-scale quantity, selling audio advertising isn’t worth the effort. If you’re in a smaller radio space, advertisers don’t even want to talk to you.

If people in their teens and twenties aren’t buying albums, who are your customers?

About 60 percent of our audience is over 35.

Does that make it a dead end business?

I don’t think so: I’ve got 30 years to go before that audience starts to die. Bu there is there is nothing wrong with going with a graying customer base, especially if no one else is going after it. Also, a graying customer base has paying jobs and a long history of paying for music, and is probably worried about RIAA [Recording Industry Association of America] lawsuits. Whereas someone 18 probably isn’t so much worried about RIAA lawsuits and doesn’t have a paying job and doesn’t worry about piracy.

There’s also the fact that when you are 40 or 58, the music that you like is not readily available via normal outlets. You can’t turn on a radio station that plays new bands that sound like Led Zeppelin. You have to go hunt for that music. Or say you are one of those people who liked New Age when it was still around. Now it’s gone, there are no New Age radio stations, and unless there’s an incense-filled store nearby, you need to look online. You might Google “⁠New Age⁠”⁠ and discover a label or website featuring music that you really like. Surprisingly, that’s a very common occurrence. Something similar is happening with 30-somethings who were into heavy metal in their teens, and now all they can find is heavy metal rap, which they don’t like. How do they find the stuff they do like?

You’ve said that your initial idea for Magnatune spun out of your wife’s unhappy experience with traditional record labels. Do you think of Magnatune as an alternative label?

The original motivation was to see what kind of business model might support interesting “⁠second tier⁠”⁠ music genres. I always thought that I would have to be a label simply because I had to have artist relationships if I wanted to be able legally to try this business model. Otherwise, I’d have to ask the record label every time I had a new idea.

How do people find you?

People find us because our “⁠We Are Not Evil⁠”⁠ philosophy has led massive numbers of people to blog us. We currently have something like 450,000 in-bound Google links as of today. If you Google “⁠Magnatune⁠”⁠ right now, the top links are going to be Linux Journal, Creative Commons, but also USA Today.

What’s your percentage of Japanese subscribership?

It’s around eight percent. That happened because many Japanese people are interested in western genres. For example, progressive rock has always done well in Japan. So has classical renaissance, and medieval music. We’re really strong on medieval, probably because I play the Renaissance lute and so I know that genre. It’s been a lot harder to find Japanese artists in Magnatune because our contracts are in English. We were also helped by Joi Ito, the incoming CEO of Creative Commons, who brought me over for a conference.

Does do venture capitalists understand what you are doing?

I don’t think it’s interesting to venture backing because they are looking for $100 million businesses. We’re not on that scale, and I don’t know anyone in the Creative Commons field that is. I just read that the price Yahoo! paid for Flickr was between $15-25 million. That’s not a whole lot?and Flickr is heavily Creative Commons oriented.

How does the Creative Commons model compare with open source?

There are some obvious similarities, but there’s also a big difference: open source code improves as more people work on it. The same can’t be said for music or video or photographs. You might license something under GPL [the GNU Public License] with the hopes that people will put more effort into it. The software will improve: they’ll benefit and so will you. That’s a motivator for open source. There are other benefits to CC, but not this one.

Is there any other intertwining of cultures, so to speak, with the open source community?

There is massive intertwining of cultures, largely because open source software developers needing music can now find it via Creative Commons. In addition, open sourcers see the impact they have had in their field, and want to what see what else is possible. And the possibilities are exciting. To take just one example, consider the Microsoft lab application Photosynth, which figures out how millions of photographs are related and stitches them together. That’s a wonderful thing. It exists by virtue of Flickr because how else are you going to find several thousand pictures of Notre Dame that are labeled as such and has a license that allows you to reuse them?

Some of the most interesting applications of late resulted from “⁠crowd sourcing⁠”?a massive number of people bring labor to an idea that you could never pay for. The only way YouTube, Flickr, and Wikipedia work is if there is a licensing scheme that allows sharing, aggregation and reuse. While the individuals putting work into it don’t make money, the work that emerges is really interesting.

But people do have to make a living.

If you look at the Magnatune universe, people have licensed the music to try all sorts of business ideas. If any of them work, some money comes back to us and to the musicians. That’s the Creative Commons hybrid business model, and it works pretty well.