Digital Audio Insider -- the economics of music and other digital content

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Digital Audio Insider is David Harrell's blog about the economics of music and other digital content. I write from the perspective of a musican who has self-released four albums with the indie rock band the Layaways.

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November 22, 2006

Is A Digital Distributor
by David Harrell
Is A Digital Distributor Retailer?
OK -- I'm not going to say "I told you so" based on the words of a single member. But as I wrote in this guest post for Moistworks a few months ago, I think is likely to become a something of digital distributor, with members trading CDs after ripping mp3s files or burning copies of the discs. While doing so is expressly forbidden by the user agreement ("fair use" copying only applies to discs you actually own), I wasn't surprised to see this comment from a member about an Online Fandom piece on the CD trading site:
I am a lala user and I very happy that I found the site. With the birth of mp3 players actually having the physical CDs are no longer necessary. I am able to upload my CDs to my computer and then post them to trade on lala.
Don't get me wrong -- I have nothing against the used CD market. My CD collection has plenty of discs I purchased used, well aware that used sales generate no income for the artist, publisher, or the label. And I fully support the right to sell or trade music you have purchased. One of my main beefs with digital downloads is that the current default iTunes album price fails to reflect that a portion of a CD's worth is derived from the fact that it has a resale value. Because you can't (legally) sell your digital downloads, this disadvantage should be factored into the price. (See this recent Medialoper post for more thoughts about digital download pricing.)

Plus, promises that 20 cents from every dollar (its fee for a trade) will make it back to artists as either a direct payment or via a fund to provide health insurance for musicians. That's a much better deal than zilch, which is what artists/labels receive from used sales, copied CD-Rs, or peer-to-peer downloads. (Though I've never believed that most "pirated" music represents a loss in revenues to labels and artists. Just because someone gives you a burned copy of disc doesn't mean you ever going to BUY the album in question...)

So if this modest royalty creates income for musicians that wouldn't have been generated otherwise, it's a good thing for all involved parties. But if is indeed morphing into a digital distributor (where you rip discs to mp3 then pass them along) with a cumbersome distribution model, its 80/20 split comes close to inverting the current iTunes royalty, where the label/artist receive 70 cents from a 99-cent download. And by creating an increasingly liquid market for used CDs, it also seems likely to cannibalize new CD sales as well, more so than the previous options of selling your discs to the local record shop or online via or eBay.

That's the unanswered question: does heavy trading among members supplant music sales (digital downloads and CDs) that would have otherwise occurred?

I don't know. members are -- as a group -- no doubt major music fans who probably already purchase more music than the average person. (The same has been said about peer-to-peer users.) So I'm reluctant to demonize them for ripping CDs before trading the discs. Especially when I've given serious consideration to backing up my entire CD collection on hard drives and then selling off the original discs.

But something here still (slightly) bothers me. All in all, seems like great business model for its founders (who'll be able to cash out by selling the company or going public in a few years) and an unmatched bargain for its members. (Even cheaper the eMusic!) Yet despite its warning that you're not "supposed" to retain copies of the discs you trade, has no way of enforcing that rule, nor much incentive to do so. It seems like the success of its business model (like YouTube's?) is based on the distribution of intellectual property, with a compensation formula that puts a relatively small portion of the revenue in the hands of the creators/owners of that property.

Update -- as Glenn noted in the comment, I really should be saying "retailer," not "distributor."

related: A Trade-In Value of Zilch, Karma Police (guest post at Moistworks)


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