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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May 04, 2007

Digital NARM, Part III: Subscribe Today!
by David Harrell
On Tuesday afternoon, Napster president Chris Gorog succinctly diagnosed what ails the music industry and prescribed a cure.

His basic argument: CD sales are plummeting. Digital sales aren't growing fast enough to replace lost physical revenue. The solution: Subscriptions to Napster (or Rhapsody, Yahoo Unlimited, or Zune Pass, etc.). Gorog pointed out that music subscriptions mimic everything that made the original Napster so popular with music fans, with the exception -- of course -- of the free part.

And in my conversation with Zune's marketing director Jason Reindorp (look for a Zune-related post in the next few days), he said that Microsoft sees a huge upside in subscription-type services.

Finally, while Wired's Leander Kahney doesn't think much of the subscription model, he writes that the major labels are reportedly pressing for a subscription service as part of their renegotiation with Apple for iTunes downloads because they covet "the steady, predictable revenue stream." (More here on the labels' supposed push for Apple subscriptions.)

The basic math seems to point to subscriptions, as a monthly fee of $12.99 equals $155.88 per year for each customer, a number that exceeds the annual per-capita amount spent on recorded music.

Yet on Wednesday, when the four major labels outlined their digital strategies, no one talked much about subscriptions, except in passing. Sony BMG's Thomas Hesse was jazzed about selling 71 distinct pieces of content from Justin Timberlake's latest album, while Warner Music Group's Michael Nash announced the launch of the new MVI discs.

If subscriptions are truly the cure, then why aren't the major labels more enthusiastic about them?

continue reading "Digital NARM, Part III: Subscribe Today!"

One problem, of course, is that the above math only works if EVERYONE does it. If you could flip a switch and have every music fan subscribe to one of the plans tomorrow, then subscriptions conceivably increase the total dollars spend on music.

Also, I'm not sure about how truly enamored the labels are about that "steady, predictable revenue stream." The revenue stream may be steady and predictable, but it's flowing to the subscription companies, not directly to the labels. As I understand it, a label only shares in that revenue when subscribers stream that label's content and it's only a penny or so per stream. (The subscription companies are truly based on the health club model -- an active subscriber can cost them more than the monthly subscription fee in payments to labels, but they get to keep all of the revenue received from an inactive subscriber.) I suspect the labels' current push with Apple for subscriptions is part of their overall negotiation strategy, not a huge sticking point.

In the short term, there's obviously more upside to labels by selling an expanded digital product directly to consumers, hence the greater enthusiasm for downloads, ring tones, wallpaper, etc. Any income from subscription services is welcome, but there's much less of an incentive for labels to push them directly.

On the consumer side, what will it take for music fans to embrace subscriptions on the scale necessary to make them a major part of the equation? I'm guessing it will require a truly seamless listening experience -- the ability to immediately hear what you want to hear on your computer, portable device, in the car, etc., with minimal buffering and at a reasonable sound quality. We're not quite there yet with the technology, though we are getting closer. Until that happens, music fans are unlikely to give up the idea of ownership even if what they "own" isn't appreciably different from the streaming sound file of a subscription.

Then again, music subscriptions don't have to be an all-or-nothing proposition. Consider how consumers obtain video -- the typical viewer might watch cable or satellite TV, subscribe to Netflix, and still buy the occasional DVD. There's no reason to assume that music fans will gravitate toward a single source of content. I subscribe to Yahoo's Unlimited service but still buy CDs (and pay for 40 downloads a month at eMusic) and suspect that many subscribers are using their plans to supplement their traditional music consumption, not replace it. Which sounds a whole lot like how many music fans treat P2P...


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

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