In 1997 when 80’s prog-rock band Marillion scheduled a European tour to support its new album, keyboardist Mark Kelly posted an Internet message stating that the band would not tour the United States due to a lack of record company support. Fans of the band worldwide joined forces to raise over $60,000 to underwrite it, and the band undertook its largest North American tour since 1991. Since then, Marillion has been able to tour and record several more times all based on direct fan support. As a result, such passionate, wholesale support has allowed Marillion to step outside of the conventional music industry and find their own path.

The thing that made the difference in the Marillion story was the Internet. The saga represents one of the first modern examples of “crowdfunding” via the Net, and illustrates the bottom-up strategy where the fan/customer is the new driver of music markets.

Several music services have now emerged that are taking this idea into new territories. In this article I’ll try to shed some light on a few of them. But don’t think things end here. These offerings are fluid and dynamic, and will probably look quite different in just a few months than they do today.

Crowdfunding is related to Crowdsourcing.  Crowdsourcing is taking a job traditionally performed by a designated agent (usually an employee; or, say, a record label) and outsourcing it to an undefined, generally large group of people in the form of an open call.

Crowdfunding grows out of crowdsourcing and occurs for any variety of purposes, from disaster relief to citizen journalism, and from political campaigns to artists seeking support from fans.

Crowdfunding can replace the need for specialized grant applications or other more formal and traditional fundraising techniques with that of a more casual, yet powerful, approach based on crowd participation.

The Internet, of course, takes the crowdfunding dynamic to a whole new level, providing new streamlined approaches to quickly imitate the co-op model for low-level and/or sudden needs (i.e. disaster relief, travel expenses, legal fees, and so on). It is for this reason that the term can be used to encompass the act of informally generating and distributing funds, usually online, by groups of people for specific social, personal, entertainment, or other purposes, a la the Marillion story.

For the music space, I like to call it “arts patronage for the masses.”

This approach is used widely among music industry artists to bypass music publishing companies and “go direct” to their fans, who are now seen as much as investors as listeners. Several music services have arisen based on the crowdfunding idea. Let’s briefly look at three: ArtistShare, Sellaband, and SlicethePie.

1. The Microfunding Option: ArtistShare (http://www.artistshare.com)

Since 2002, ArtistShare has been enabling fans to finance artist projects in exchange for access to the artist’s creative work. It was founded in by Brian Camelio, a professional musician/computer programmer, in response to the threat of digital piracy and the futility of digital rights management for music.

ArtistShare uses micropayments to allow the general public to directly finance, and in some cases, gain access to extra material from an artist. The artist determines the tiers of fan involvement and attaches a cost to each tier. With a dozen or more projects by various ArtistShare artists underway at any given time, music fans, patrons of the arts, and creative process junkies have an unprecedented window on the act of creation.

Participating artists raise funding for their recording projects through their fan base by offering special interactivity options, like the opportunity to download scores-in-process or watch a recording session. For example, an ArtistShare “Participant Offer” is similar to buying tickets to a live show, but in this case, fans are purchasing incrementally-priced packages offering a window into the artist’s work-in-progress, pre-release privileges, and in some cases, credit on the final packaging or web page.

One form of customer conversation the artist uses at ArtistShare is radio. Web-based audio files let the artist share their thoughts on the ongoing project and provide other content unavailable to the public.

Now in its sixth year, ArtistShare artists have won three Grammy awards and 9 nominations. In 2004, Maria Schneider became the first artist to win a Grammy with an album distributed exclusively over the Internet. Distributed through ArtistShare, she received four nominations for her album Concert in the Garden and won Best Large Jazz Ensemble Album. Schneider’s 2007 album, Sky Blue, was also up for a Grammy this year.

Other artists aboard the ArtistShare bandwagon include Trey Anastasio, Danilo Perez, Jim Hall, and Kate Schutt.

BTW, Founder Camelio has a patent pending on the entire concept of artists monetizing the behind-the-scenes/creative process. Hey, wasn’t Mozart doing this too Brian? Geez.

2. The Risk-Free Record Label: Sellaband (http://www.sellaband.com)

Started in late 2006 by a music-loving business major and two ex-Sony/BMG Europe execs, Sellaband allows fans (dubbed “Believers”) to invest $10 each in a band, until the goal of $50,000 is reached. The band then gets to record an album with professional producers and studios. The 5000 Believers fund the album’s recording and both parties earn money when it is released. At this moment, over 6,000 bands have uploaded tracks to Sellaband, and $1.3 million has been invested in them, according to Pim Betist, one of the site’s co-founders. 11 acts have hit the $50,000 threshold and created an album through Sellaband.

Sellaband CDs which have reached the necessary threshold are sold through a partnership with Amazon, and Amazon, the Orchard, and Heinekin Netherlands will be sponsors of Sellaband’s first concert tour in 2008. Amazon will also help more bands hit the magic $50,000 – any band that reaches $30,000 will get an automatic $1,000 investment from Amazon to help them along.

Most users of the service have been pretty happy with the results. But it does seem that the bands who have gotten to the $50,000 goal did not just sit back and hope for fans. Right from the start they went out and found Believers themselves. They tapped people who came to see them play live, people they met at parties, and fans that had added them on their MySpace or Facebook pages. It it likely that all of the bands in the top 500 followed a similar plan.

The model is more than fair to the artist and Believers (investors). Here’s how it breaks down:

•Worldwide CD album profits – 50% to the artist, 50% shared between the Believers.

•Ad revenue from the whole site – 1/3 to Sellaband, 1/3 to the artists who have recorded an album, and 1/3 to the Believers of a recorded artist.

•After 12 months the artist gets complete ownership to their masters (thus if they want to sign with a label they can take their songs with them) and Sellaband only sells the songs for an additional 12 months.

•Each Believer gets a limited edition CD for every part they invest.

By deferring the cost and talent of scouting to a crowd of music lovers, Sellaband puts powerful marketing and production tools into the hands of those with a personal interest in the music.

3. The Music Stock Market: SlicethePie (http://www.slicethepie.com)

Similar in philosophy to Sellaband.com, though more complex, SlicethePie creates a marketplace for the trading, promoting, financing, and finding of new bands.

SlicethePie twists the standard online music store model by paying users for their musical acumen. It has set itself up as a kind of financial intermediary. Users are paid a small amount for each review they write, based on how accurately each review reflects the community’s taste. In addition, users can invest in bands they think are going to make it, sharing in profits from album sales on the site.

Once registered, you can shuffle through the site’s songs by clicking the Play Next Track link in the player, or browse by Genre. When you hear a song that “has legs,” as the saying goes, another link lets you add it to your watch list. Then, if you want to invest in the band later, you’ll be able to do so at a discount (details below).

According to SlicethePie, this “turns every music fan into a record label.” The “Scout Room” allows people to review artist tracks. Scouts don’t know the identity of the artist they’re reviewing and rating. Reviews are multiplied, averaged out and the 20 best artists go on to the “Showcase”. Since Scouts act as A&R, they earn about .10/review, and can earn up to .50/review (with each listen taking about 3 minutes). If an artist is “bought out” by a record label (which has already happened at SlicethePie with the band, Gillkicker), the Scouts and others involved will benefit from this transaction.

After three weeks, the winner of the Showcase is guaranteed about $30k. The people who invest get a free copy of the completed CD, backstage access, and some co-creation opportunities to become more deeply involved in the artist’s work (though this is not required by the artist).

It’s definitely a cool alternative to the regular route of impressing (and then being beholden to) a few head guys at a label. The great thing about all of these tools and online services is that it puts the power much more squarely in the hands of the artists and the fans. It becomes much more of a meritocracy.

The common thread in all three services is that they’re helping to finance artists by getting music fans to contribute. Sellaband is essentially an online record label that takes initial publishing rights with some other traditional restraints on the copyright during the first year. Fans (AKA, ‘Believers’) take all the risk, so it’s a risk-free record label. But the downside is that the financial returns are potentially about ten times less than on SlicethePie. Sellaband is essentially an “advertising” model rather than a strict “revenue” model. Also, on Sellaband you get to see the bands and the bands’ names, which instills some emotional connection, whereas SlicethePie enforces a sort of neutrality, at least on the way in.

Other crowdfunding services include CASHmusic.org (co-founded by former Throwing Muses frontwoman, Kristen Hersh), Fundable.com, and look for more at the “grand central station” of crowdfunding – Crowdfunding.com

Conclusion: Today’s consumers are no longer passive recipients of brand messages. They’ve become active participants in co-creating the brands (and bands) they love. One more reason why you need to build community around your own product and service experience at your site. It’s a worthwhile investment toward building customers, er, Believers, who will be there for life.

Peter Spellman is Director of Career Development at Berklee College of Music, Boston and author of several business-building books for musicians. Find him at mbsolutions.com

© 2008, Music Business Solutions.

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