Digital Audio Insider -- blogging the economics of digital music

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Digital Audio Insider is David Harrell's blog about the economics of music and other digital content.

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February 08, 2010

Monday Odds and Ends
by David Harrell

Amazon.com and Macmillan officially make up.

From the L.A. Times technology blog:

One could argue that publishers aren't affected by Amazon's pricing. They continue to receive 50% of the cover price for each digital copy Amazon sells, the same as physical books sold at a local bookshop. (Astute observers will correctly point out that Amazon is actually losing money on bestsellers under this arrangement.)

What irks publishers is a concern that Amazon is conditioning readers to believe that digital books are worth less, about 60% less, than the physical copy. Such a steep price cut could have a dramatic impact on the book business in the future, when digital sales become a bigger portion of overall industry revenue. (They currently account for less than 5% of retail book sales.)

While I'm on my e-book tangent, I'd just add that there's a factor that has been ignored in the digital vs. physical pricing debate for books: Loss of resale value. As I noted a couple of years ago, even if you don't plan to sell your CDs, the option to do so has real economic value. And the loss of that value is something that deserves consideration in the pricing of digital goods.

Finally, it's off topic, but definitely worth a listen: I enjoyed Terry Teachout's "Pops: A Life of Louis Armstrong." Christopher Lydon of NPR had an hour-long discussion with Teachout about the book -- click hear for the mp3.

tags: digital music digital books Amazon.com AMZN

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February 04, 2010

Digital Books vs. Digital Music
by David Harrell

I can't help thinking that some major label music executives are feeling a little envious of their publishing counterparts these days. As you've no doubt heard, book publishers were able to establish higher list prices for Apple's upcoming iBookstore while Macmillan did away with $9.99 e-book pricing at Amazon.com. While some in the music industry might be thinking "why couldn't we control pricing in the same way?" there are some major differences between the two industries, and their relative bargaining power:

When the iTunes store launched, it was the only game in town for major label content. (There might have been other digital stores at the time, but none had gained any real traction for selling major label material.)

Pirated digital music was easily available before the launch of any digital music store. Hence, a legal download store was something of a lifeline for the major labels, even if the initial pricing wasn't to their liking. As far as I know, pirated e-book content isn't yet widely traded yet, though there is a huge supply of free public-domain material.

Steve Jobs was able to dictate the initial pricing for legal digital music market, but he obviously had less leverage with digital books. And once publishers were able to dictate terms with Apple, they had the leverage to force changes at Amazon.com, which had established the original market for digital books.

Yet, as former eMusic CEO David Pakman explains, it appears that publishers are more concerned with maintaining the status quo than with finding the optimal price for digital books. While I know very little about the book industry, the idea that publishers would be able to maintain the same price for a digital book as that of a hardcover print book is simply ludicrous. Without printing and distribution costs, digital books can be as profitable as print books at a much lower price point. And if demand is indeed elastic, then publishers could maintain or even increase revenue while earning much less per unit sold.

Two final thoughts:

1. Unlike the music industry, the publishing industry doesn't have the "cherry picking" concern -- books aren't sold by the chapter, and even if they were, it seems unlikely that readers would go for a few favorite chapters from a novel the way music buyers opt for single-song downloads of their favorite tracks.

2. It remains a question of when, not if, a "Napster for digital books" arises. As Pakman observed last October, the best bet for publishers is to have a convenient legal market (with attractive prices) well established before the P2P platforms for digital books inevitably emerge.

tags: digital music digital books iTunes Apple AAPL Amazon.com AMZN

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January 27, 2010

Some Quick Thoughts About The iPad and Digital Content
by David Harrell

I don't have time to put together a coherent essay, but I did want to post some quick random thoughts about the iPad and digital content in general:

- The name -- I'm not sure what else Apple could have called it, but does it make sense to have two product names that are only one vowel apart?

- The pricing -- I've held off on the purchase of a Kindle or other e-readers, but I might jump at the $499 base model iPad.

- Differences between digital music and digital books. Back when the Kindle launched, I observed that one major difference between the iPod and the Kindle is that most consumers already own a ton of content (in the form of CDs) that could be easily transferred to the device. Whereas the only way to fill a Kindle is with new digital files, as few consumers already own hundreds of digital books. However, while free digital music is readily available, most of it isn't legal. For digital books, there are hundreds of thousands of public domain works available (via Google Books, Project Gutenberg, freebies in the Kindle store, etc.), more free content than paid, I believe.

- The digital device/digital content paradox -- consumers are happy to pay for hardware devices to consume digital content, but they don't seem as willing to purchase the content itself.

- Does a "price elasticity of demand" exist for digital books? That is, does a lower purchase price increase sales enough to offset lower per-unit margins? Amazon is pushing a $9.99 or lower price for digital books, while publishers and Apple have settled on $12.99 or $14.99 for most best-selling books for the Apple iBookstore. The revenue split is similar to that for digital music -- publishers get 70% and Apple keeps 30%.

- Just as with the iPod and iPhone, it won't bother Apple if you never buy content via the iTunes store, there's a decent profit built into the price of the device.

- In the end, we're left with the same Malthusian equation: there is simply far more digital content available (much of it free) than there are hours/consumers to take it all in. Some content providers will reach new audiences and make new sales because of the iPad, but it will never be a rising tide that lifts all boats.

tags: digital music digital books Apple AAPL iPad iPod iTunes Amazon

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January 26, 2010

Tuesday Odds and Ends
by David Harrell

Glenn from Billboard notes that most of the current top-downloaded labels at eMusic are WMG or Sony affiliates. The major lable dominance began over the summer, soon after the Sony back catalog was first added to the eMusic catalog.

Derek Sivers interviews Seth Godin:

...I want to challenge the notion of "great music." Sure, some music that's great is great for the ages and it's okay that's it's not being heard, but so much of what people call great art (whether it's a book or a song or a way of doing customer service) isn't actually great, it's merely "very good." Very good music is unheard every day, because very good music is not in short supply. There's a huge surplus of it.

I'm not equating "great" with "commercial." I have no doubt that there's great art that doesn't sell. But most musicians you and I know are TRYING to be commercial, if commercial means successful, heard, lots of stuff sold, lots of people at the concerts. And in the rush to be successful, sometimes great gets pushed out the window. I've sampled hundreds of songs on CDBaby and I can say that almost all of it is very good. And virtually none of it is great, if we define great to mean music I need to buy, to give away, to talk about to everyone I know.

A post at Analog Industries on how laborious the re-mixing process was prior to DAW (digital audio workstations) sparked some good comments about the ease of vs. the results of the creative process.

The Future of Music Coalition breaks down the Nation/Ticketmaster merger.

And the New Yorker's James Surowiecki on why bundling of content continues to makes sense for cable operators. Bob Lefsetz argues that music labels need to bundle as well.

tags: digital music eMusic

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January 20, 2010

Tuesday Odds and Ends
by David Harrell

Last year I noted, with some dismay, that the revenue share that Amazon.com was offering bloggers for making their content available for the Kindle was the exact opposite of that established for digital music. While labels (and self-released musicians) receive approximately 70% of the price of digital music downloads in the iTunes store and Amazon MP3, Amazon was only passing 30% along to bloggers for Kindle purchases. But according to this press release, Amazon will now offer self-published authors 70% of the retail price for Kindle books, minus a small delivery fee based on the size of the digital file.

On a related note, I was surprised that this recent WSJ piece on the end of the slush pile (unsolicited manuscripts) at publishing houses didn't mention the idea of self-published authors starting a career via digital books. That is, gaining attention and reviews for self-published ebooks and then signing a contract for traditional print books, the same way some musicians signed record contracts after successful DIY releases. Authors have, of course, long had the "vanity press" option of printing their own books, but it's an expensive proposition. Not so with digital books. Widespread adoption of the Kindle and other digital readers could create opportunities for authors analogous to those that already exists for musicians.

And when reading Atlantic's James Fallows's list of reasons for going to the "cloud" with his e-mail archive, it struck me that many of them also apply to storing a digital music collection.

tags: digital music Amazon AMZN Kindle iTunes eMusic

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January 19, 2010

WMG vs. Sony Pricing in the eMusic Catalog
by David Harrell

I'll be writing more about the addition of WMG material to the eMusic catalog, but here are a couple quick thoughts:

With the caveat that these observations are based on some quick browsing, not an in-depth study, it appears that the "album only" pricing and download options are invoked less frequently with WMG material than with Sony material. For example, older Aerosmith releases are only available as full-albums, and you'll pay 12 downloads for an album with just nine tracks. And even on many Sony releases that don't require a full album download, cherry picking is prevented by making the most popular tracks unavailable as individual downloads. If want an mp3 of Journey's "Don't Stop Believin'," you'll need to download an entire album. But with WMG releases such as Van Halen's 1984, these restrictions aren't applied. The nine-track album can be had for just nine downloads and you can cherry pick your favorite tracks from it.

However, while the eMusic pricing for WMG material is often more subscriber friendly than that of Sony material, the catalogs of individual artists are often less complete. The Van Halen albums available from eMusic include the band's debut and 1984, which I'm guessing are the most popular albums of the David Lee Roth version of the band. Yet DLR-era albums such as Van Halen II, Women and Children First, and Fair Warning aren't available. Nor are any of the "Van Hagar" albums, which were also released by WMG, available.

According to a Digital Music News piece from last week (archived, but posted here), the decisions about album availability were made -- as I suspected -- by WMG, not eMusic. The question is why WMG opted to include the most popular albums from some of its artists in the eMusic catalog while holding back on others. Could it be that WMG wants to see how availability within eMusic affects the more-lucrative sales in the iTunes store and other digital channels before adding an artist's entire catalog to the subscription service?

tags: digital music eMusic WMG Warner Music Group Sony iTunes

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December 30, 2009

eMusic's Per-Song Payout for Q3 2009
by David Harrell

The first full-quarter label/artist payout from eMusic after the introduction of the Sony catalog (and the restructuring of its subscription plans) was just about the same as the one for the previous quarter: for the third quarter of 2009, we received 34.2 cents for individual song downloads, a modest increase from the 33.4 cent payout for the second quarter.

Given that eMusic raised its prices (by lowering the number of downloads subscribers receive) there was some speculation that the new rates would lead to significantly increased payouts to labels/artists. Though eMusic stated that introduction of the Sony back catalog wasn't the sole reason for changing its subscription plans, it seems likely that the Sony addition played a huge role in the decision.

The business model eMusic is less straightforward than those of the other digital music stores/services. Rather than paying a set wholesale price for digital songs, eMusic has a revenue sharing agreement, where -- after certain expenses and deductions -- 60% of its subscriber income is passed on to the labels in its catalog. How that 60% translates into a per-track amount is dependent on the download activity of eMusic subscribers: When subscribers don't use all of their allotted downloads, the per-track amount is higher. This "digital breakage" has kept the per-track amount high, relative to the nominal per-track rates built into the subscription prices. Indeed, there have been times when the per-song download payout for my own music in the eMusic catalog has exceeded the per-song amount I pay for my monthly subscription.

Back in June, I speculated that the reason for change in the subscription plans might have been to preserve the current payout levels, as opposed to significantly increasing them. If -- after the Sony material was added to the catalog -- subscribers became less likely to let their downloads expire, then the previous per-song payouts would have decreased.

Based on the payout for the third quarter, it appears that the overall digital breakage by eMusic subscribers has declined -- if it had remained the same, it seems likely that the increase in the per-track payout would have been much larger. However, because the overhaul of the subscription plans coincided with the introduction of the Sony material, it's tough to say if that decrease was because of the availability of the Sony catalog, or the fact that with fewer downloads, subscribers were simply more likely to use them all. (Maybe it's a combination of the two factors.)

There was one other change in the payouts we received: While in all previous quarters, CD Baby just reported the total number of downloads per each individual track, for the third quarter, downloads were reported as single songs or full albums. Perhaps this change was due to eMusic's introduction of "album pricing." Only two of our albums were downloaded in full. The payout for the 10-track album was reported, before CD Baby's 9% commission, as $3.42, which is 10X the per-song rate for the individual song downloads. Yet our 12-track album paid out at $3.76, which works out to slightly less, 31.3 cents, on a per-track basis. If anyone from eMusic or CD Baby is reading and can provide any insight, please leave a comment or shoot me an e-mail.

related: eMusic's Per-Song Payout for Q2 2009, Sony and eMusic: Why the Per-Track Label Payout Might Not Change

tags: digital music Sony eMusic

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December 28, 2009

Lala Suspends CD Trading
by David Harrell

Not sure when this happened, but Lala.com (now owned by Apple) has officially suspended its CD trading operations:

For some time now, Lala's focus has been on digital music, creating a new way to listen to and buy music online. Pursuing this vision has meant that we have not been able to give our compact disc trading service the full focus and attention that it needs to continue to flourish. Because of this, we've now made the decision to close our trading service. We recognize the work that has gone into creating your "have" and "want" lists, and are making your lists available for you to download below. You may choose to keep these for your own records, or to upload them to another trading website.

We've worked with Swaptree.com to ensure that they are ready to support Lala members who are looking for other CD trading opportunities. In addition to trading CDs, Swaptree also offers trading of books, DVDs and video games. There is no charge to trade on Swaptree -- you only pay for postage. And to welcome transitioning Lala members, Swaptree will pay for the postage on your first two trades. Download your want and have lists below, and go to swaptree.com/lala to get started.

Thank you very much for for your continued support of Lala as the site has changed and evolved over the years. We have greatly appreciated your business, and have personally enjoyed trading CDs with many of you! We wish you the best in your future trading endeavors, and hope that you continue to enjoy the other features Lala has to offer.

Sincerely,
the Lala crew

UPDATE: It looks like the plug was pulled back on December 4th.

related: Lala.com Owes Me Sixty Cents

tags: digital music Lala Apple AAPL CD trading

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December 17, 2009

From Delivery to Availability: Amazon MP3 the Fastest Digital Music Retailer
by David Harrell

If you'll indulge me one last time, I'll start with a plug for our new holiday album: "Maybe Next Year" by the Layaways is now available at eMusic. If you're a subscriber, please check it out here. (Those downloads expire every month, so you have to use them on something...) But that's it -- you won't see any more self-promotional posts in the near future, I promise!

With eMusic, the new album is now available in all of the stores it was delivered to on November 25th. The only thing we're still waiting for is Amazon.com's "on demand" CD option. With the caveat that this wasn't a controlled test -- just a single digital album -- here's how long it took the digital stores to make the delivered album available for sale:

Amazon MP3: one day
Lala.com days: two days
Napster: two days
Rhapsody: five days
Amie Street: six days
iTunes: seven days
eMusic: 20 days
Amazon on demand CD-Rs: still waiting

I should note here that TuneCore gives the option of specifying a future release date, so it's possible, in theory, for self-released albums to go live on the same date in all of the digital stores. However, given how close we were cutting it with a holiday album, I opted for an "immediate" release, which meant that the album was likely to trickle out, as opposed to having a uniform release date. It also appears that eMusic generally makes new material available in large batches on Tuesdays, the day that new releases have traditionally go on sale in record stores. That policy might have held up the release of the album by several days.

Overall, I'm somewhat amazed by how little time it took for a self-released album to go live. As best as I can remember, with our previous albums, the lag times from delivery to availability were all longer, perhaps indicating that the digital stores have become a more efficient in processing new material. My apologies if I'm sounding like a complete digital music store fanboy here. But as someone who once self released albums on cassette (we couldn't afford CDs or vinyl!) and placed them on consignment with local stores, having my music available worldwide in a matter of days is still somewhat surreal.

Distribution, of course, doesn't guaranteed sales, as a few anonymous comments noted in my earlier post about TuneCore. The "long tail" is getting longer every day, and some music available in iTunes, eMusic, etc. won't sell enough to offset the costs of getting it there. That's something I'll address in an upcoming post.

tags: digital music TuneCore iTunes eMusic Amazon MP3 Napster Rhapsody Lala Amie Street

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December 07, 2009

Some Lala Math
by David Harrell

I have no idea what plans Apple has for Lala.com, though as a big fan of the service, I hope Apple keeps the current features in place, or somehow incorporates them into iTunes. (Jon Healey, Mark Mulligan, and Eliot Van Buskirk all have some thoughts.)

But I wasn't surprised about the reported reason that Lala initiated the sale:

One person with knowledge of the deal, but who was not authorized to discuss it, said that the negotiations originated when Lala executives concluded that their prospects for turning a profit in the short term were dim and initiated discussions with Eddy Cue, Apple’s vice president in charge of iTunes.

Lala offers a single free stream of all of the tracks in its catalog (though that one-time restriction isn't hard to circumvent.) Each time a song is streamed, Lala makes a payment to the respective record company of .6 cents, if not more. My self-released band, distributed via CD Baby and TuneCore, receives that rate, it's not inconceivable that the major label groups negotiated a higher payout.

When someone listens to a 10-track album on Lala, those streams cost Lala at least six cents. While several industry observers have noted that ad-supported streams can't be profitable at current ad rates for online advertising, Lala doesn't even run ads on its site. So the only way for it to offset the streaming fees is selling mp3 downloads or Lala's innovation, the 10-cent Web song.

Lala pays a wholesale price of 70 cents for the downloads it sells, while offering many of the them at just 89 cents. So Lala "makes" just 19 cents per mp3 sold, ignoring all transaction fees, salaries, server costs, etc.

To cover the fees paid for the free streams, Lala would need to sell one mp3 for every 32 free streams (assuming no other business costs). While a BusinessWeek article from early 2009 reported Lala's conversion rate was actually higher -- one mp3 purchased for every 14 songs streamed -- I'm not convinced that's the case. Since then, Lala has partnered with Pitchfork to provide streaming widgets on the popular music site's review pages for albums and individual tracks, which has no doubt increased the number of free listens. While an argument can be made that the greater exposure results in greater sales, I'm inclined to think it just means that more people are listening to music via Lala without having to pay for it. (Perhaps Pitchfork gives Lala a percentage of its ad revenue, but I can't imagine it'd be enough to push the streams into profitability.)

One thing that I haven't been able to confirm is the rate Lala pays labels for the purchase of a 10-cent Web song. No Lala sales have shown in my own band's account for more than the 0.6 cents streaming rate and I can't find any reference online for a payout rate for the 10-cent songs. It's possible that Lala simply keeps the entire dime from the Web song sale, and then pays the rights holders the streaming rate every time the purchaser plays the song. That would mean Lala comes out ahead when the purchaser listens to a song no more than 16 times, and loses money on the sale starting with the 17th listen.

Of course, while the Lala business model probably isn't profitable on a stand alone basis, that might not be a problem for Apple. Even at a loss, maintaining the service makes sense if it results in increased sales of the very profitable iPod and iPhone.

related: The Latest from Lala: The Return of the Dime Store, The New Dime Store, Part 2

tags: digital music Lala Apple AAPL iTunes

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THE LAYAWAYS

Out Now -- "Maybe Next Year" -- The New Holiday Album:

O Christmas Tree - free mp3
Away In A Manger - free mp3

Download from eMusic, iTunes, Amazon MP3, Napster, Rhapsody, Lala.com, Amie Street, or Bandcamp. Listen to free streams at Last.fm.

"...about as melodic and hooky as indie pop can get." -- Absolute Powerpop

"Their laid-back, '60s era sounds are absolutely delightening." -- 3hive

"...melodic, garage-influenced shoegaze." -- RCRD LBL

Keep It to Yourself - free mp3
All Around the World - free mp3
Come Back Home - free mp3

Download from eMusic, iTunes, Amazon MP3, or CD Baby, listen to free streams at Last.fm, Lala.com, and Napster.

"The Layaways make fine indie pop. Hushed vocals interweave with understated buzzing guitars. The whole LP is a revelation from the start." -- Lost Music

"A wonderfully crafted recording built around tasteful songwriting and musicianship..." -- PopMatters

Silence - free mp3
The Long Night - free mp3

Download from eMusic, Amazon MP3, or iTunes, listen to free streams at Last.fm, Napster, or Rhapsody.

"These are songs that you want to take home with you, curl up with, hold them close -- and pray that they are still with you when you wake up." -- The Big Takeover

Let Me In - free mp3
Ocean Blue - free mp3

Download from eMusic, Amazon MP3, or iTunes, listen to free streams at Last.fm, Napster, or Rhapsody.

More Layaways downloads: