Radiohead has hired you as a consultant and wants you to advise them on their proposed release strategy for their latest album, In Rainbows. Is the band’s release strategy for the album

1

EXAMPLE OF AN EVALUATION ARGUMENT

[THE LABELS IN BRACKETS ARE MEANT TO HELP YOU UNDERSTAND THE STRUCTURE OF THE

ARGUMENT. THEY WOULD NOT APPEAR IN THE ACTUAL ESSAY.]

ARE IMMIGRANTS A SIGNIFICANT CAUSE OF CRIMES IN THE UNITED

STATES?

[Subject of the evaluation–>] Many right-wing politicians in the US have said that violent crime

was increasing because of immigration. After his election, former President Trump issued an

executive order calling on the Department of Homeland Security to publish a weekly list of

crimes committed by "aliens." Immigration and Customs Enforcement (ICE) has conducted raids

across the country, purportedly targeting immigrants who “pose a threat to public safety.”

[Overall evaluation of the subject–>] Overall, immigrants do commit crimes but are not a

significant threat to public safety [Reason (positive)–>] Compared to native-born peers, they are

less likely to be jailed and less likely to commit crimes. [Reason (positive)–>] Moreover, there is

some evidence immigrants are jailed mostly for minor or nonviolent offenses. [Reason

(negative)–>] It is true, however, that immigrants add to the overall crime rate of the

communities they live in.

Why Immigrant Crime Is Not a Large Threat

[Reason (positive)–>] On the other hand, recent immigrants are far less likely to be

incarcerated or to commit crimes than their native-born peers. [Evidence–>] According to

United States Census data, in 2010, 1.9 percent of immigrant men ages 18-40 were incarcerated

compared to 3.2 percent of native-born males the same age. The rates are the same for other

years. Data from the National Longitudinal Survey of Youth show that youth born abroad are less

likely than youth born in the United States to be criminally active. A recent study that looks at

flows of immigrants from Mexico concludes that Mexican immigration has no effect on violent or

property crime in the United States.

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[Reason (positive)–>] Finally, there is evidence that most immigrants who are jailed have not

committed serious offenses. [Evidence–>]A recent effort to link local law enforcement with

federal immigration authorities to increase the detection of immigrants who commit crimes

appears to have had no effect on crime rates. The Secure Communities program, launched in

2008, enabled the automatic transmission of fingerprints of people arrested in participating

communities to the Department of Homeland Security to verify their immigration status.

Before this program, checking the immigration status of people arrested for crimes usually

required the presence of a federal officer in a local jail. In its first four years, Secure

Communities led to the detention of over 250,000 immigrants and ultimate deportation of

200,000. However, a study that compared counties where the program was implemented with

3

those that had not found that the program made no meaningful reduction in the rates of violent

crime––homicide, rape, robbery or aggravated assault—or in the overall crime rate.

Immigrants Do Commit Crimes

[Reason (negative)–>] To be sure, immigrants are charged with crimes in the US. [Evidence–>]

The Department of Homeland Security estimates that nearly 2 million noncitizens living in the

US have committed crimes, including serious felonies such as armed robbery and murder, and

could be deported for these offenses. Overall, though, their contributions to crime in the

country are small compared to those of the native born.

Adapted from EconoFact (https://econofact.org/topics)

9-508-110

R E V : S E P T E M B E R 1 4 , 2 0 0 9

Professor Anita Elberse and Jason Bergsman (MBA 2008) (MBA Harvard) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2008, 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

A N I T A E L B E R S E

J A S O N B E R G S M A N ( M B A 2 0 0 8 )

Radiohead: Music at Your Own Price (A)

“No really, it’s up to you.” A short announcement in early October 2007 on www.radiohead.com, the website of British band Radiohead, spoke volumes about the planned release of its new album In Rainbows. The music would be available exclusively as a digital download on the band’s website, at least initially, and would allow each fan to decide how much to pay for it—a decision that fueled intense media speculation about the future of music.

Scheduled to take effect on October 10, 2007, the highly unusual plan represented a significant break from the industry standard of fixed prices for music—typically $0.99 for individual digital songs and $9.99 or more for complete albums. Was the plan, conceived by the band and its managers Chris Hufford and Bryce Edge at U.K.-based Courtyard Management, a brilliant idea, or, as some industry insiders suggested, another nail on the coffin of the dying music industry?

Radiohead

The Band

Formed by five friends attending an elite English private boarding school in 1985, Radiohead was one of the most popular and artistically significant contemporary bands of the late 20th and early 21st centuries. Named after a song by Talking Heads, a popular act at the time, Radiohead consisted of singer/guitarist Thom Yorke, bassist Colin Greenwood, keyboardist Jonny Greenwood, drummer Phil Selway, and guitarist Ed O’Brien.

Known for its brooding style, Radiohead made a splash in the U.S. market with its single Creep in April 1993, which introduced music buyers to its debut album Pablo Honey. Building on the band’s success in its home market, the United Kingdom, Radiohead’s label Capitol Records had identified the launch of Radiohead as one of the company’s key marketing priorities for 1993, releasing Creep simultaneously on MTV and modern rock radio stations. Album sales peaked in early August, before the release of two follow-on singles and a fall tour of the U.S.1 Pablo Honey went on to sell 2 million copies by 1995 in the U.K. alone.2

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508-110 Radiohead: Music at Your Own Price (A)

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The band released five more albums between 1995 and 2003, which collectively sold over 8 million copies in the U.S. (see Exhibit 1). OK Computer, Radiohead’s third album, was met with adulation from the music media internationally. It garnered the band’s first Grammy award, for Best Alternative Music Album. Influential British rock magazine Q named the album “the second best British album ever,” behind the Beatles’ Revolver,3 echoing British fans who frequently ranked it near the top of “best albums ever” lists.4 Subsequent albums also were critically acclaimed. Along the way, Radiohead accumulated a “huge following, large enough to make albums zoom to number one and devoted enough to plaster the Internet with Radiohead fan sites, blogs, song discussions, and bootleg recordings.”5

Over the years, Radiohead had established a reputation for experimenting with unconventional album release tactics. For instance, Radiohead’s third album, OK Computer, was introduced with an epic single, Paranoid Android, which had no chorus, several tempo changes, and lasted six-and-a-half minutes—much longer than the average radio-friendly pop song. The label also sent 1,000 media- industry insiders a Walkman with the album “permabonded inside” in order to “have people get to know the record in its entirety,” according to Capitol VP of Marketing Clark Staub.6 For Kid A, the fourth album, Radiohead eschewed a traditional promotional approach, foregoing a single, a conventional music video, and an accompanying U.S. tour.7 Instead, the band released a collection of 10- to 40-second Kid A music “blips,” combining images of nature, animations, and pictures of the band with audio clips, on music television channel MTV, and on the band’s website.8 Tony Wadsworth, president and chief executive officer of EMI (by then Capitol’s parent company) remarked that Radiohead “want[ed] to find other ways of doing what has to be done to get their records into as many hands as possible.” Band member Yorke asserted, “You can say we’ve earned the privilege to do things our way.”9

In 2003, with the release of Hail to the Thief, Radiohead fulfilled its contractual obligations to EMI and chose not to renew its contract. By early 2005 the band had begun to record another album, with no plans to sign a new contract with any record label.10 “I like the people at our record company, but the time is at hand when you have to ask why anyone needs one,” said Yorke around 2004, and later referred to the conventional strategy as a “decaying business model.”11

In Rainbows

Radiohead’s seventh album, In Rainbows, was the product of a two-year effort in the recording studio, with the music shaped by feedback from fans who attended concerts during a 2006 tour when many of the songs that ultimately found their way on to the album were tested. Many live versions of the 10 songs that appeared on the 42-minute In Rainbows, described by a New York Times critic as Radiohead’s “most gracefully melodic album in a decade,” were posted on the Internet by fans who had recorded them at concerts. “The first time we did All I Need [a song on In Rainbows], boom! it was up on YouTube,” Yorke said. “I think it’s fantastic.”12

The Music Industry Worldwide retail sales of recorded music were estimated to be $29 billion in 2007, down from nearly

$32 billion in 2006—a shift mostly attributed to the digitization of music production, distribution, and consumption.13 The number-one market, the United States, claimed approximately 36% of global retail sales in 2006, while Europe’s leading marketplace (and the world’s third-largest overall behind Japan), the United Kingdom, accounted for around 10%.14

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Radiohead: Music at Your Own Price (A) 508-110

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The global recorded music industry was dominated by four record companies—Universal Music Group, Sony BMG, Warner, and EMI—which together accounted for almost three-quarters of the physical and digital album sales in 2006 (see Exhibit 2 for more details).

After being “discovered” by artist and repertoire (A&R) executives of record companies, artists typically signed long-term contracts—often covering four to six albums—with those companies, which agreed to manufacture, distribute, and promote their music. Record companies also frequently played a role in the production of their artists’ music, but with the advent of digital technology, some artists had taken more control over the production process by self-producing or enlisting producers of their choice. To market a new album, record companies would traditionally select an introductory song from the album, promote it to radio stations, release an accompanying music video to MTV or its kin, and perhaps engage in in-store promotions and advertising in support of the album. The majors often spent several hundred thousand dollars to promote the singles of their artists and more than $1 million for their most promising or successful acts.

In return for artists’ creative services, record companies paid them an upfront fee plus sales-based royalties. New artists typically received an advance of $200,000 to $300,000, while established, top- selling artists could expect upfront fees exceeding $1 million. Sales-based royalty rates varied between 10% and 20% of music sales, depending on the stature of the artist. Artists received royalty payments once their advances and related overhead costs for the record company (such as expenses for recordings, video production, and radio promotion) had been fully repaid.

Table A shows a typical breakdown of the price of a physical album released by a mainstream artist associated with one of the four major record companies.

Table A Sample Breakdown of the Price of a Physical Album (CD)

Item Percentage Dollar Amount

Artist Royalties 15% $2.25 Publishing Royalties 5% $0.75 Packaging and Manufacturing 5% $0.75 Distribution 5% $0.75 Marketing and Promotion 15% $2.25 Record Company Overhead 20% $3.00 Record Company Profit 10% $1.50 Retail Overhead 20% $3.00 Retail Profit 5% $0.75 Retail Price 100% $14.25

Source: Adapted from Wired, “David Byrne's Survival Strategies for Emerging Artists—and Megastars,” December 18, 2007; casewriters’ estimates.

In 2007, U.S. “bricks-and-mortar” record stores accounted for just over 30% of all album sales—an all-time low—compared with over half of all album sales in 1998, having consistently lost share to mass retailers like Wal-Mart and Best Buy and digital retailers such as Apple’s iTunes store (see Exhibit 3). The proportion of recorded music sold through digital channels rose from 9% to 15% from 2006 to 2007 alone.

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508-110 Radiohead: Music at Your Own Price (A)

4

Introduced in 2001, iTunes had dramatically altered the way recorded music was sold and priced. Complemented by Apple’s iPod device (which had a 42% share of the market for digital music devices owned by adult Internet users),15 the iTunes music store sold music for play only on iPods and/or via iTunes software, and claimed 70% of all legal online music downloads in 2006.16 While the average retail price of a physical album was just under $15 in 2006, the iTunes store typically sold music for $9.99 for a full album or $0.99 for an individual song. The majority of sales came in the form of individual tracks: it was estimated that only about 5% of all digital music transactions involved an album sale.17 Table B captures the breakdown of the price of an album sold on iTunes.

Table B Sample Breakdown of the Price of a Digital Album Sold on Apple’s iTunes

Item Percentage Dollar Amount

Artist’s Share 14% $1.40 Record Company’s Share 56% $5.60 Apple iTunes’ Share 30% $3.00 Retail Price 100% $9.99

Source: Adapted from Wired, “David Byrne’s Survival Strategies for Emerging Artists—and Megastars,” December 18, 2007; casewriters’ estimates.

Subscription services such as Rhapsody, which offered unlimited access to millions of tracks for a $13 monthly fee, made up approximately 18% of U.S. online music revenues in 2007, compared to 82% for paid downloads.18 In addition, some artists and bands made their music available free of charge on their own sites or on social networking sites like MySpace, which boasted profile pages of more than 1.2 million rock bands.19

The proliferation of pirated digital music available for downloading on the Internet had a profound effect on the music industry. The Institute for Policy Innovation, an economic public policy organization, estimated that global piracy of recorded music cost the U.S. $12.5 billion in economic output annually.20 The extent to which illegal downloads were a substitute for legal purchases was a subject of debate, but it was estimated that music files were traded illegally worldwide at an estimated ratio of 20 illegal downloads for every track sold.21

The worsening conditions in the marketplace for recorded music had fueled experimentation among both established and new artists. For instance, in July 2007, Rock and Roll Hall of Fame member Prince, working around his record company Sony BMG and the usual retail channels, released his new album by granting the British tabloid newspaper the Mail on Sunday the exclusive rights to debut the album as a free insert in the Sunday newspaper. Nearly 3 million copies were distributed.22 Later that year, acknowledging the increasing importance of live-concert revenues, Madonna signed a groundbreaking 10-year, $120 million pact with concert giant Live Nation. The agreement provided Madonna, who had already sold more than 200 million albums over her career, with a mix of cash and Live Nation equity and gave Live Nation the rights to sell three studio albums, promote concert tours, sell merchandise, and license her name.

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Radiohead: Music at Your Own Price (A) 508-110

5

The In Rainbows Release Strategy

On September 30, 2007, Radiohead’s website announced the upcoming release of In Rainbows in a fashion unprecedented for a musical group of its magnitude. Not only would the album be available exclusively through Radiohead’s website for digital download on October 10, 2007, but consumers would have the option of setting their own price for it. No preview tracks or streams of the album were made available on the website, but between September 30 and October 10, consumers could pre-order the album for digital delivery on October 10. When consumers clicked on a question mark next to a blank price box, a message saying “It’s up to you” would display, and a subsequent screen would confirm, “No really, it’s up to you.”23 Consumers could set their own price in British pounds sterling, and a service charge of ₤0.45 (or close to $0.90) would be assessed for any download.

In contrast with the digital download experience of iTunes where users could cherry-pick individual tracks, In Rainbows would only be available in its entirety. (Radiohead refused to allow its albums to be sold on iTunes for this reason.)24 At 160 kilobits per second (kbps), the audio quality of the In Rainbows digital download was slightly better than the 128-kbps standard for iTunes downloads.25 And whereas iTunes downloads were equipped with a digital rights management (DRM) mechanism that limited the number of computers and devices on which the digital file could be played, Radiohead’s album (in the MP3 file standard) had no such restrictions.

In addition to the digital version of In Rainbows, consumers could purchase a deluxe box set version of the album for ₤40 (just over $80, including all fees), which would be shipped “on or before December 3,” according to the site.26 The box set, designed as a collector’s item, featured two compact discs (with extra tracks), a vinyl LP record, and a hardcover book of artwork.27 Purchasers of the box set also received a digital version of the album to listen to in the interim.

On October 10, British modern rock radio network Xfm would premiere In Rainbows by playing the album uninterrupted.28 Certain tracks would also be distributed to U.S. radio stations by ATO Records Group (with which Radiohead had not yet signed a formal agreement).

In Rainbows was self-produced and self-released by Radiohead. Having terminated its contract with EMI in 2003 and without a recording contract in the interim, Radiohead was free to release its music when it wanted to and precisely how it wanted to. Additionally, for the download version of the album, Radiohead itself retained all rights and worked out an arrangement with its longtime music publisher Warner/Chappell to allow for proper payment of publishing royalties. “Warner/Chappell fully supports Radiohead in their desire to find new ways to present their music to their fans and to the wider world,” said Richard Manners, managing director of Warner/Chappell Music U.K. “These new ways are iconoclastic in nature; they acknowledge the realities of a digital society and they challenge existing commercial assumptions.”29

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508-110 Radiohead: Music at Your Own Price (A)

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Exhibit 1 Radiohead’s Historical Album Sales (as of October 1, 2007)

Title Release Year

Peak Chart Position on the Billboard 200

Estimated Total Sales

Estimated First- Quarter Sales

Estimated First- Year Sales

Pablo Honey 1993 32 1,400,000 130,000 570,000 The Bends 1995 88 1,300,000 60,000 240,000 OK Computer 1997 21 2,200,000 270,000 870,000 Kid A 2000 1 1,200,000 630,000 910,000 Amnesiac 2001 2 900,000 560,000 710,000 Hail to the Thief 2003 3 1,000,000 680,000 870,000

Source: Adapted from Billboard and Nielsen SoundScan data, casewriters’ estimates.

Exhibit 2 The Worldwide Music Industry: Market Shares for Record Labels in 2006

Source: Adapted from eMarketer, “Recorded Music: Digital Falls Short,” November 2007; and Informa Telecoms & Media, “Music and Copyright,” July 18, 2007.

Exhibit 3 Top U.S. Music Retailers (Based on Unit Sales in First Quarter of 2007)

# Retailer Market Share

1 Wal-Mart 15.8% 2 Best Buy 13.8% 3 iTunes 9.8% 4 Amazon 6.7% 5 Target 6.6% — Other 47.3%

Source: Adapted from eMarketer, “Recorded Music: Digital Falls Short,” November 2007; and NPD Group, June 25, 2007.

26.5%

22.5%

16.0%

10.5%

24.5%

25.7%

21.2%

13.8%

12.8%

27.5%

Universal Music Group

Sony BMG

Warner

EMI

Other

Digital Total (Physical and Digital)

26.5%

22.5%

16.0%

10.5%

24.5%

25.7%

21.2%

13.8%

12.8%

27.5%

Universal Music Group

Sony BMG

Warner

EMI

Other

Digital Total (Physical and Digital)

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Radiohead: Music at Your Own Price (A) 508-110

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Endnotes

1 Carrie Borzillo, “MTV, Modern Rock Keys to Success for Capitol Bands,” Billboard, August 28, 1993.

2 Caitlin Moran, “A Band So Big You Never Hear Them—Radiohead,” The Times, November 10, 1995.

3 Patricia Wild, “Anticipation,” Billboard, May 13, 2000.

4 Paul Sexton, “Radiohead Won’t Play By Rules,” Billboard, September 16, 2000.

5 Jon Pareles, “With Radiohead, and Alone, a Sweet Malaise,” New York Times, July 2, 2006.

6 Paul Sexton, “Capitol, Parlophone are Confident in Radiohead,” Billboard, May 10, 1997.

7 Paul Sexton, “Radiohead Won’t Play By Rules.”

8 Charles Goldsmith, “Radiohead’s New Marketing: Videos—and Singles to Disappear Completely,” Wall Street Journal, September 18, 2000.

9 Gerald Marzorati, “The Post-Rock Band,” New York Times, October 1, 2000.

10 Lars Brandle and Jonathan Cohen, “Label-Less Radiohead Pressing on With New Album,” Billboard, August 18, 2005.

11 Josh Tryrangiel, “Rebels Without a Contract,” Time, March 19, 2007.

12 Jon Pareles, “Pay What You Want for This Article,” New York Times, December 9, 2007.

13 eMarketer November 2007 estimates, using data from the International Federation of the Phonographic Industries as benchmark source. Recorded music includes the retail value of all physical audio (CDs, cassettes, records, etc.), online audio, and mobile audio formats, but excludes revenues from ringtones and licensing.

14 International Federation of the Phonographic Industry (IFPI), May 2007 report.

15 “The End of the Music Industry as We Know It: The State of the Digital Audio Market 2008,” Forrester Research, December 19, 2007.

16 NPD Group, http://www.npd.com/, May 2007.

17 “Albums Boosted by Download Increases,” Music Week, March 1, 2008.

18 Paul Verma, “Recorded Music: Digital Falls Short,” eMarketer, November 2007.

19 “IFPI Digital Music Report 2008,” IFPI, January 24, 2008.

20 “$12.5 Billion in Economic Damage and 71,000 Jobs Lost Every Year in the U.S. Due to Recorded Music Piracy,” Institute for Policy Innovation, press release, August 21, 2007.