How Phish make millions from music

The Internet has impacted many industries and the music industry in particular has been fundamentally and permanently re-invented. Digital distribution means that the marginal cost of a song has fallen to almost zero and that an industry built around the sale of CDs or even LPs has gone through immense pain. At the top of the pile, value has shifted from the big four labels (as they were in early 2000) to Apple. Meanwhile the tools for recording and producing high quality music are available to almost anyone: a global market is in reach of any musician. Yet music remains an experiential good – a song must be heard to be valued, and music remains driven by songs that we hear and good times we share. So as much as there is very definitely a long tail in place, the breakout hits still dominate the earnings in what physicists refer to as a ‘Power law’: the top 10 artists make multitudes more than the next 100, and so on.

So how does a band make money when each song they painstakingly compose, rehearse, record and produce competes with over 15 Thousand new songs created each day? When to get radio play a new song must force a popular favourite to be played less often, which means a new song must be good enough to warrant creating new memories over recalling the old?

There’s a band that started in 1983, have never made the top of anything in album sales, and most people have never heard of. That band made over $120M in the last four years, and their story is worth telling as an example of what it takes to be very successful entrepreneurs before, during and after the complete upheaval of your industry. That band is Phish. You’re probably hearing about them here for the first time, 883 songs after they started 30 years ago.

The band members each started playing music around 5 years old and practically dedicated their lives to it. By University, each was a highly skilled musician and they joined forces to form Phish. They started slowly, largely skipping class to practice, and playing their own kind of music to bars in Vermont; spending the 10,000 hours to become perfectionists at what they loved. Audiences were tiny but grew steadily, and by the time the first label showed any interest in them they were already profitable from their live gigs alone. 5 hard years of bootstrapping allowed them to hone their art and justify their independence. Without the allure of an advance and a record deal, they focussed on audience interaction and built a very loyal following. They also built a business based on ticket sales, not album sales. With no label even showing interest, they built their own organisation to manage their shows, sell tickets and merchandise.

Their fan base taped early shows and shared those tapes with friends, who then attended the next shows. This ‘piracy’ was encouraged by Phish: it was cheap marketing and also created a secondary market for memorabilia amongst fans. Importantly, growth was steady and predictable – to the point that there manager could predict how many tickets they’d sell in a town based on how many times they’d played there before. By 1989, just 5 years old they were unknown but selling out shows that they sold themselves. In 1990 they did over 130 different shows around the country: clear proof of a huge work ethic that included practising the set for hours until they played live, after which the live set was a celebration…and so Phish developed the ability to enthral fans through live music – their most valuable asset.

So when file-sharing destroyed the music industry, Phish continued to make money from their primary business –selling access to live music not recorded music. They took advantage of digital downloads and streaming by bundling digital downloads of live performances with ticket sales. So if you love the concert then you relive the experience through downloads the next day (and share them prolifically without retribution). Those that can’t attend shows live can pay to stream the performance from Phish’s website.

What very interesting is analysis into Phish’s fan base: A typical big act has many fans in many cities and produces the same show to each group of fans. Phish plays to many of the same fans in its shows – in other words, people regularly fly from city to city just to watch them play again. In business terms we’d say that Phish have a very high share of their customer’s wallets.

Phish called it quits in 2004, but in 2009 they surprised everyone by announcing their return. They trimmed down their support team, mended broken relationships and got back to wowing crowds with a performance that is different every time they play. Since 2009 they have made over $120M in ticket sales. A close friend of mine saw them live in Madison Square in NY on 30th December and was upset not to be able to get a ticket for the New Years Eve show the next night, to the point that he will see them again in New York this year.

What are the lessons we can draw from Phish? Aside from their talent and dedication (which speak right to the 10,000 hours concept), Phish have made their value the uniqueness of their live performances – something that isn’t commoditized by a digital download. They also started slowly and revenue grew very predictably, which means they could plan, build their own managerial and support infrastructure, and be profitable long before a label came knocking. Lastly, they’ve taken 30 years to build their passion and talents into a following that is very strong. It’s very hard to see that Phish would ever be short of money, so long as they can carry on doing what they love and improvising as much on the business end as they have with their live shows. Each new live performance adds to the collection of good times their fans have had at prior ones, and makes it harder for their fans to feel more for anyone else, or spend their entertainment money anywhere else.