One of the most anticipated album releases in the past five years has taken an economic route few expected: Radiohead is releasing their new album In Rainbows on their own site. Price? It's the honor system -- pay what you want to pay. The band isn't going through a record industry label for the release; it isn't even using iTunes.

TIME magazine noted the event and the industry reaction:

Few suspected the band members had the ambition (or the server capacity) to put an album out on their own. The final decision was apparently made just a few weeks ago, and, when informed of the news on Sunday, several record executives admitted that, despite the rumors, they were stunned. "This feels like yet another death knell," emailed an A&R executive at a major European label. "If the best band in the world doesn't want a part of us, I'm not sure what's left for this business."

Will purchasers be "honorable" or will they take advantage of the "flexible pricing?" There isn't a lot of data on this type of white-collar crime, but there is some. Several years ago an MIT economist who quit his job as a defense analyst and became a bagel delivery man in Washington, DC, used the same "honor based" pricing model and kept detailed records (the link is to "What the Bagel Man Saw," a great article in the NY Times). His friends told him he would go broke, but their forecast was unduly pessimistic. For the record:

[The bagel man] knows, for instance, that in the past eight years he has delivered 1,375,103 bagels, of which 1,255,483 were eaten. (He has also delivered 648,341 doughnuts, of which 608,438 were eaten.)

Across the many micro trends in voluntary payment levels observed in the data from these nearly 2 million "sales" (great weather correlated with high payments and bad weather with lots of stealing; small companies pay more and big companies less; law firms and telecom companies were among the worst payers; ...), the bagel man collected an average of 89% of the suggested price.

Will the same pattern hold for Radiohead? Times Select just failed -- people won't pay for access to journalism; Radiohead's economic experiment will provide some insight into how much people will pay for access to music. This is a topic of intense interest and discussion at this Freakonomics Forum. Direct contracting between the artist and the purchasing public has significant implications for the disintermediated.

UPDATE: "The Day the Music (Industry) Died" -- the London Times reports that after waiting four years, the biggest surprise wasn't that Radiohead had finished their next album, but something else:

what really rocked the fanbase – and heightened the air of gloom enveloping the global record industry – was the news that In Rainbows could be preordered and downloaded perfectly legally for as little as 1p at Radio-head.com.

Currently out of contract and thus entitled to dispose of their recordings as they see fit, one of the most popular bands in the world had decided to let the fans decide how much their latest album was worth. An MP3 file of In Rainbows would have no price tag. Honesty boxes, it seemed, were the new rock’n’roll.

And the new rock'n'roll business model is looking pretty different from the old. For one, CD's are not always the most desired merchandise:

[one American band] decided to stop selling their CDs at gigs after they discovered that by offering their CDs for $10 they were cannibalising sales of their $20 T-shirts. The truth now is that a rudimentary cotton garment with a band logo stamped across it that has probably been manufactured for pennies in a Third World sweatshop costs about twice as much as an album recorded in a state-of-the-art western studio.

This isn't just an American phenomenon:

Album sales are currently in freefall all over the world. The 10% drop in the UK over the past year is dwarfed by a 15% slide in the US, 25% in France and a whopping 35% in Canada. The bankruptcy this summer of the CD retail chain Fopp, HMV’s announcement that its profits halved in the first six months of this year and Richard Branson’s recent decision to dump the Virgin Megastores – which have reportedly lost him more than £50m in 2007 – are only the most visible signs of a crisis that has rocked the music industry on its axis.

But sales aren't falling because fans of music have found another passion. Demand for live music -- and hence the price of concert tickets -- is not falling: 20,000 tickets to the first Spice Girls concert this December sold out in 38 seconds (1 million registered to buy tickets), it was reported, and the entire Madonna catalog of music could be purchased for less than half the $320 it cost for the best seats at her London concert. It looks like music fans may actually be spending more each year on their music passion, just not on CDs and, therefore, not through record labels.

Did anyone see this coming? For one, the guitarist/economist for the band Anthrax, nearly 15 years ago, when he said that their album was just "the menu; our concert is the meal." Even the Beatles' manager, in the 1960's, said albums are really just concert mementos. Now like tee-shirts, only cheaper.

If the bagel man's experience is any guide, the answer to the question "will music fans pay a fair price for music if there isn't the threat of a law suit for an illegal download" is "yes" about 89% of the time. This looks like pretty good odds to everyone but the record labels.

UPDATE 2: More here and here. More on rock'n'roll's new business model.

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