How to run a successful record label (by giving away the music)

Excerpted from The Future of the Music Business, entertainment attorney Steve Gordon interviews Jay Frank, founder of DigSin, a unique record label that promotes free downloads for life and a “360 of the song” deal.

Jay Frank, a former VP at Country Music Television and Yahoo Music, recently launched his own record company, called DigSin. Based in Nashville, DigSin, which stands for digital single, has a very unique business model: It gives away all its music for free.

Tell us a little bit about your background and what inspired you to launch your own record label.
A couple years ago I started having this idea for a record company with a completely new model. Every time I thought about the problems the labels were having making as much money as they used to, I would say to myself, “There is a problem with the old business model,” and then I would think about a way to solve it. And I just kept doing that. And I realized DigSin is one of those things that just needed to be tried.

In regard to DigSin, you wrote in an email blast, “Part of the hook is that everyone who is on our company’s mailing list will get every single release for free for life.” How do you make money if you give away all the music on your website?
People underestimate the value of the free download. I am sure that your readers have downloaded plenty of songs for free that bands are giving away on their websites. People who are discovering new music in this way and download songs usually listen to those songs only once. Also, as you know, people are starting to actually move their discovery over to streaming on-demand services such as Spotify. That means that if they only listen to it once, the value of the song is actually not the 99 cents that one would get on iTunes. The value of the song is actually one listen, which means that is how much I would get paid on Spotify. On Spotify, we can have a whole other conversation on whether or not artists are getting paid fairly. Whether we like it or not, right now, the going rate is somewhere around 2/10 of a cent. That means that the value of the free download is not 99 cents, it’s 2/10 of a cent.

When somebody comes to the DigSin site and downloads the song for free, we’re serving advertising. That advertising money is part of the pool that’s shared with the artists on the royalty side. So by serving advertising, once we get to scale, we’re actually going to make more money than we would on Spotify.

So when I give away a free download, the funny part is I do not look at it as saying, “Geez, I am making less money.” I am actually sitting there saying, “I am making more money,” because I know that most people are going to listen to it once and I am going to make more money than that same one listen on Spotify. So my free download is actually more lucrative for me, not less.

On top of that, I get to have a relationship with the customer. When people hear my music on Spotify, I have to hope that they spend the extra time to find my website. I, on the other hand, am establishing a regular communication with people who like my label’s music. I’m able to tell people who like my label, “Go check out this other music you haven’t heard.” In addition I get analytics. I am able to see who the people who sign up on the mailing list are. Not super in-depth, but I know enough. I know if they’re male or female, I know how old they are, and I know the general area where they live. So through that I can see who responds to the free download and I can start to paint a picture of who that potential fan is. Then I can use that information to better target-market that artist to the next group of potential fans. All of a sudden the free download, which seems like it’s a liability in terms of making the label money, becomes the asset I can use to actually grow the company, and simultaneously make money.

I should add that we will also be offering T-shirts and other merch for the artist. That’s part of the revenue pool, so if you like an artist I want to be able to sell you a T-shirt.

I understand that in addition to giving music away on your site you sell the same music on other sites. Doesn’t your website cannibalize those sales?
We are doing our releases all the same way. We are selling music on iTunes; we have the music up on Spotify; we have the music up on YouTube and generating revenue from there. Every digital retailer you can think of, our music will be available on. The important part for us is, we want to make sure that when people hear about our music they are able to experience it – and in a way that we can monetize, however small that monetization may be. And the reality is, we will sell downloads.

We launched our company on a Monday. We got a lot of press, and every single article that came out about us said the same thing: that we gave away our music for free. It mentioned the artists, but it wasn’t about the artists. It was about the fact that this was something different, giving away music for free. That was Monday. Tuesday, our first single was available for sale on iTunes, and we sold copies. So the reality is that even though all the publicity was about giving it away for free, we still sold music immediately.

Now, did we sell thousands? No, we did not sell thousands. But this was a brand new artist, NNXT, who nobody had ever heard of before, who had very little fan base to speak of. So the reality is that we’re able to actually sell a little bit off of virtually no publicity. When the song actually becomes popular, even though we are giving away the song for free, we will still sell plenty on iTunes.

I look at it this way. Let us say you and I are in New York and we say, “Hey, let’s go for a beer.” We say, “Where do you want to go?” “Oh, I know that there’s a bar across the street, let’s go.” We walk across the street. We drink Bud Light for $5 a bottle. Now, two doors down there could be a bar that has a happy hour. We did not go. We could have gotten two for one. There could have been a party around the corner that some artist was throwing, and that same Bud Light could have been free. So why did we go and spend $5 when we could have gotten drinks for half price or for free somewhere else equally as convenient? And the answer can be a number of things. One, it may have been around the corner, but we may not have known about it. Maybe we preferred the atmosphere. Maybe the party around the corner, you and I said, “Oh, you know, we would like to go there, but we’re going to get hit up by this guy and I just don’t want to talk to him.” Any number of reasons could cause you to not go to where something is free. Music consumers are much the same way. Just because I’m giving it away for free, doesn’t mean everyone is going to experience it that way.

For me, it is really just one avenue. And again, going back to the main tenet, how are people consuming music? Many people are consuming music for free. I am providing them a viable legal option that I can monetize and monetize well. Plenty of other people are buying music, and we’re going to take advantage of that as well.

Well, the trick with iTunes and Spotify and the others is you’re just one out of millions of artists and tracks. How do you get people to go to your artists in those outlets?
Well, the way you do it is you make the song popular. Again, we’re using analytics extremely heavily in order to be able to better target-market our artists and make sure that they’re visible. I tell my artists all the time, “In our initial phase we’re going to take 99.9 percent of the Internet and we’re going to ignore them. We are going to focus just on 0.1 percent, but most importantly the 0.1 percent that would actually care about you.”

If we do our job right, we can go and pinpoint to say . . . with the example of NNXT, our electropop artist, not just to say that she’s an electronic artist and let us find electronic music fans. But to know, as we have seen in the early days as an example, that there is a UK artist named Neon Hitch. People who like her seem to like NNXT. That profile also seems to be 16- to 24-year-old girls. So we now can say, “All right, as part of our profile let us find 16- to 24-year-old girls who like Neon Hitch.” If we can find them and communicate with them through social networks, we have a higher likelihood of them responding positively than if we just went to electronic music fans. The more we can find details like that, and the more we can pinpoint that information and use that through all of the available tools that are out there now – through Twitter, Facebook, YouTube, now Pinterest, any of those things – we can now actually go and find these people, communicate directly with them, provide them something that enriches their life because we did the research. And they then not only enjoy the song, but they have a high likelihood of telling their friends, and through that something spreads. Going back to the quality, if the quality of the music is good enough, when we make that introduction, that introduction won’t stop with that person. That introduction will be the starting point for that person’s group of friends.

Do you do 360 deals with your artists?
We focus on what I call the 360 of the song, versus the 360 of the artist. So you have the master and publishing. With regard to the song, we are in fact promoting the song very heavily and trying to make that song extremely active. So we do participate on the publishing side of things. All of our deals are the same, which is that all of the money comes in, expenses are taken off the top, and everything that remains is a 50/50 split.

Outside of the couple of T-shirts that we license, we do not have any additional 360. So, an artist’s live touring, an artist’s endorsements, and artist’s future record deals are not on the table. The major label people have told me I’m absolutely crazy that with my deals I don’t get any back end, other than the songs. They say, “Surely you must have something where if that artist gets signed you will get points on their first two records with the major.” I said, “No.” They said, “Why not?” I said, “Because I am not greedy.” They said, “But you deserve it.” I said, “Yeah, but if I am signing the right songs, I am going to do just fine. Why should I worry?”

Usually small labels have a clause with their artist that if a major label wants to sign the artist, the label gets half of what the major label is willing to pay the artist. But you are saying that an artist is free to leave your label at any time and you won’t share in that label income?
I got one better. All of my deals that I have – I am never afraid to tell this – all of my deals are six-song deals, which are two songs firm and an option for four more songs. I actually have something written in my deal that says if before they have delivered their six songs a major label comes along and the artist wants to accept the deal that the major label has offered, at that moment my options accelerate and I either have to pick up those songs right then and there, or I lose them. So I actually have a clause that makes sure that I will not be in a position to prevent an artist from graduating to a major label. I’m in a position to make sure that just because I’m involved it will not muck up their major label deal, if that is what they choose to do.

Aside from the media buzz that you’ve already received, how are you doing? How are you doing artistically and financially?
Artistically I think I am in a fantastic spot. I feel strongly about all of my artists. I feel that they represent close to the best of what a new artist in their particular genre has to offer. If I’m able to maintain that level of quality, you may not like the electronic song, for an example, but hopefully you will recognize that for electronic music it is better than your average song, or better than your average artist. That is what I’m hoping to achieve.

Commercially, we are off to a great start as well. We are garnering interest across the web. We are getting regular write-ups on blogs. Film and TV people are starting to sniff around to see what we’re doing. And, more importantly, those iTunes sales are increasing every single week. They are not taking huge leapfrog jumps, but they are growing every single week. And the web traffic is growing every single week. So, from my perspective, the seeds are in the ground and you can see that they’re going to sprout and become beautiful plants.

But the trick is, just because I have a new model, doesn’t mean this is any different than any other record label. You have to pay attention. You have to care about the artists. You have to nurture them along. You have to continually promote them and not stop. And you have to just grow and just recognize that it will be worth it, and you need patience, time, and a lot of elbow grease.

New technologies have revolutionized the music business. While these technologies have wreaked havoc on traditional business models, they’ve also provided new opportunities for music business entrepreneurs, as well as new challenges for musicians, recording artists, songwriters, record labels and music publishers. The Future of the Music Business (Hal Leonard Books) provides a road map for success by explaining legal fundamentals including copyright law’s application to the music business, basic forms of agreement such as recording, songwriting and management contracts, PLUS the rules pertaining to digital streaming, downloading and Internet radio. This book also shows exactly how much money is generated by each of these models, and details how the money flows to the principal stakeholders: artists, record labels, songwriters and music publishers.

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