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.

My personal website has links to my LinkedIn and Google+ pages and you can send e-mail to david [at] thelayaways [dot] com.

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October 23, 2007

The Economics of Free
by David Harrell
This is somewhat off-topic, but Nick Carr at Rough Type has a great post about the recent move by the NY Times to allow free access to its columnists and most of its archive.

While the decision makes economic sense today, Carr refers to some studies that show the previous strategy of premium online content was a better strategy at the time:
If the print and online editions were complements -- the demand for which rise or fall in tandem -- then a newspaper's online pricing strategy would be pretty much a no-brainer: it would give away the online edition in order to expand print readership and harvest an added source of ad revenues. But the fact that the two products are substitutes complicates the strategy. If you rush to set the price of the web edition at zero too early, before online ad sales reach a certain level, you may sacrifice revenues from print sales and ads without making them up through online ad sales.
I'm not sure how analogous this is to music, as newspaper content is rather ephemeral and it's possible to control it to some extent. That is, you don't have people sharing it on peer-to-peer networks.

Still, I think there's a relevant point here for music --- that free makes sense when there's some other working compensation system in place. I suppose that ad-supported music is one possibility, though I personally don't see the appeal of that model...

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October 19, 2007

Snocapped
by David Harrell
CD Baby president Derek Sivers has posted his full account of why the company split ties with Snocap:
Every company meeting revolved around Snocap. Every employee had to be trained in the endless FAQ about Snocap. For the last 8 months, the CD Baby office has felt like a Snocap office. All we were doing, all day long, was dealing with Snocap issues.

Then the sales reports came in. $12,000 total sales for the 8 months they'd been active. Since we keep a 9% cut, that's $1080 for us, total. Ouch.
Read more here.

related: A Split from CD Baby for Snocap, More CD Baby and Snocap

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Amazon.com vs. iTunes
by David Harrell
When doing some research for the fourth installment of my long-neglected Digital Pricing Conundrum series, I did a little comparison of the top sellers in Apple's iTunes store and Amazon.com's new mp3 store.

A few quick tidbits:

Despite differing catalogs (no Warner Music Group and Sony BMG titles yet for Amazon), four of the top five best-selling songs were identical. But the similarities diminish when you look at the top 25 songs -- only nine in common for the two stores.

The top 25 songs at Apple are more current -- it looks like almost every song is from 2007. Over Amazon, you'll see more older material in the top 25: "American Pie" by Don McClean, "Bitter Sweet Symphony" by the Verve, "What A Wonderful World" by Louie Armstrong, two George Harrison tracks, and the seasonal "Monster Mash" by Bobby "Boris" Pickett.

There's a similar pattern for the album charts, with only two pre-2007 releases in the top 25 at iTunes -- George Harrison's "All Things Must Pass" at #14 and a Santana collection at #20. But at Amazon you'll see Pink Floyd's "The Wall" in the number five spot, Radiohead's "OK Computer" (unavailable in iTunes) at #7, and two more catalog albums in the top 25. And in the 26 - 100 spots, you'll see much more older material at Amazon.com.

Amazon.com also provides a chart of its best-selling mp3 artists, with Pink Floyd currently holding down the top spot and plenty of other acts with no recent releases in the top 50, including the Beach Boys at #9!

So is the average Amazon.com mp3 customer older than the typical iTunes customer? Probably, but the limited catalog at Amazon.com might account as much, or more, for the relatively high chart positions for older material at Amazon. That is, if new material from Warner Music Group and Sony BMG was available as mp3s from Amazon.com, it could squeeze some of those older releases out of the top 25.

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October 16, 2007

Tuesday Odds and Ends
by David Harrell
From the New Yorker -- how the Internet is helping to revitalize classical music:
Classical music, with its thousand-year back catalogue, has the longest tail of all. In Naxos's case, thirty to forty per cent of its digital sales in the U.S. come from albums downloaded four times a month or less. Thus, a not insignificant portion of the company's revenue comes from titles that, by Justin Timberlake standards, don’t exist.
Online Fandom has a nice collection of quotes from Swedish indie record label folks on the merits of giving music away.

And Pitchfork has some fun with its rating for this new album.

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October 15, 2007

Final Thoughts on Radiohead
by David Harrell
Maybe "backlash" is too strong of a word, but the band's noble experiment is looking a little less noble after some of the comments made by Radiohead and its management about bitrates and CD sales. (See the Financial Times and this Bit Player post).

While it's true that 160k exceeds the standard iTunes quality, it seems that some fans were treating the download as a substitute for the purchase of a CD and paid CD prices (or even a little extra). If the 160k decision was made to preserve CD sales, which seems likely, then the failure to disclose the bitrate before thousands of people paid for it (with some paying more for it than the 256k versions of the band's previous albums at Amazon) was a tad disingenuous.

Anyway, there is an extremely easy solution to all of this. Steve Jobs somewhat mollified early iPhone purchasers by offering an Apple store credit to those who had purchased before the price drop. Radiohead could do a world of good for its reputation by uploading some 320K mp3 files and offering purchasers of the download version of "In Rainbows" a free upgrade.

Granted, for most listeners (especially those using cheap computer speakers or listening solely on portable devices) the additional sound quality really won't matter. But it's the perception that matters here more than anything...

related: Radiohead Says 160k Is Good Enough, Pre-Ordering Radiohead, Economists, Radiohead, and Bob Mould

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October 10, 2007

Radiohead Says 160k Is Good Enough
by David Harrell
Rolling Stone has a brief interview with Radiohead guitarist Jonny Greenwood and asks him the bitrate question:
Why the variable pricing?
It's fun to make people stop for a few seconds and think about what music is worth, and that’s just an interesting question to ask people.

How would you respond to complaints about the sound quality -- that 160 isn't a high enough bitrate?
I don't know, we talked about it and we just wanted to make it a bit better than iTunes, which it is, so that's kind of good enough, really. It’s never going to be CD quality, because that's what CD does.
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October 09, 2007

Pre-Ordering Radiohead
by David Harrell

online Radiohead order

So I bought (pre-ordered, that is) the download version of the new Radiohead album on Friday. I opted for the "eMusic price," which based on my 40 downloads for $9.99 subscription rate, translates into $2.50 for a 10-track album. With the .45 pound service fee, I ended up paying $3.42 for the album.

The process was easy -- they either ironed out the server load issues or maybe the traffic had died down considerably by Friday -- and I had a confirmation e-mail in less than a minute after the transaction.

While one friend thought I was rather cheap with my self-selected price, given today's news that the album will be released as 160k mp3 files, I'm glad I didn't pay more. Given that Amazon is sellng all of Radiohead's back catalog as 256k files and 7digital offer 320k versions, 160k seems a little, uh, stingy. And then there's the Billboard report that album will be released as a retail CD as well, likely on ATO.

I certainly don't blame Radiohead for wanting to do a standard CD release for the album. Despite the large number of people signing up for the direct download (or even the pricey box set), skipping retail stores would've been leaving money on the table. Nor was there was any assertion that direct purchase would be the only way to buy the new record.

But I can't help thinking that some fans are going to view the 160k files for the download version and the retail CD (which will likely show up for $10 or less in Best Buy, etc.) as a bit of a bait-and-switch. And I have to agree with this comment to the Idolator story:
It's pretty much the perfect bitrate from their perspective: high enough that it won't be really crappy, but low enough that the music nerds will definitely shell out for the CD when it comes.
Oh, and if Radiohead does sign with ATO, there's a possibility that the album will end up on eMusic.

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October 04, 2007

Economists, Radiohead, and Bob Mould
by David Harrell
Lots of folks have lots to say about the forthcoming "name your own price" digital album download from Radiohead. I was especially interested in seeing the reaction from some of the economics blogs I read:

Marginal Revolution - Pay what you want for the new Radiohead album

Greg Mankiw's Blog - No, really, it's up to you

Freakonomics - How Much Do You Think Paul Feldman Will Pay for the New Radiohead Album?

Asymmetrical Information - Radiohead goes free

While the economists (and other commentators) are mostly referring to the Radiohead experiment as "working for tips," I don't quite agree with the analogy. The tipping description would be more appropriate if Radiohead simply posted all of the mp3 files on its website, with an adjacent "donate" button for soliciting contributions from downloaders.

They haven't done this -- you have to order the album and pay SOMETHING, even if just the modest service charge for processing the credit card. While this distinction might seem slight, I'd argue that it is an extremely important one. The online ordering process requires you to open your wallet, and -- while you're still free to make a minimal payment -- it seems like this is THE crucial step. A donation approach requires the downloader to actively make an additional decision, perhaps at a later date, to enter a credit card number, etc.

On the other hand, if you insist on the tipping description, it's really not that much of a stretch to say that ALL music is purchased that way today. That is, given that free alternatives are readily available (P2P networks, ripping CDs from friends, swamping hard drives, etc.), any decision by a music fan to purchase music in any format, downloads or physical discs, represents a conscious decision to "tip" the musician and record label. (The Economist blog makes this point as well, referring to the current system an "honour system.") Though there's much less price flexibility with a standard purchase than there is with the Radiohead model.

While musician Bob Mould won't be heading down the Radiohead path for his next album (he's signed to Anti- and Beggers Banquet), he conducted an online survey on the topic, asking readers what they'd prefer to pay for direct downloads from the artist.

I was a little surprised by the price points that Mould used for his survey -- $1 or $2 for an individual song, $10 or $20 for a full album, as well as larger amounts for subscription model to receive all of an artist's work. In a follow-up post showing the poll results, he talks about the idea of some music fans being willing to pay more for a record because they know all the money is going to the artist (only a small percentage of responders indicated a willingness to do so). Yet if you're paying the artist directly, the standard download rates ($1 a song or $10 an album) is actually putting substantially more revenue into the hands of the artist as there's no record company keeping the bulk of the money. (And my personal contention is that a digital album -- because of the lack of artwork, the loss of resale value, and lower sound quality -- is worth substantially less than a physical CD. The eMusic album price of $2.50 to $3 seems just about right to me, especially if the majority of that amount goes directly to the artist. Though maybe I'm just exceptionally cheap!)

However, Mould's idea of higher music prices in certain cases makes more sense in the context of something that economist Tyler Cowen wrote in Good and Plenty and posted last week on Marginal Revolution. It was an observation that I don't think I've seen before about downloading and music sales:
In the past most people didn't much like or listen to most of the music they bought, or in any case most of the value came from their very favorites. A relatively small percentage of our music purchases accounted for most of our listening pleasure. So if people can sample music in advance, and know in advance what they will like, music sales will plummet. This will be a sign of market efficiency, not market failure.
Perhaps Cowen is right and people on average are just buying less music, as a smaller dollar amount now suffices for purchasing a sufficient amount of music they like. Yet if his "sampling" theory is correct, there are a couple of other possible results:
1. Music fans use the money they've saved by not making purchasing mistakes to buy a greater quantity/variety of music they actually like.

2. Music fans use the money they've saved to pay MORE for the music they really like.
Based on plummeting CD sales, if the two alternative scenarios are taking place, it's only among a minority of music buyers. Still, based on some of the amounts I've seen in blog comments over the past few days about the new Radiohead album, at least a few fans are readily paying up for the album (as are some of Jane Siberry's fans).

And maybe that's not illogical. After all, the music you really love, your personal collection of desert island discs, is a relative bargain at the standard prices. There are certainly albums and artists that I value far above the purchase price of the recorded music.

Whether a substantial number of fans are willing -- in practice, not theory -- to pay a premium price for an individual song or album is the unanswered question. It seems like the biggest fans are already "paying more" to artists via the purchase of tickets to live shows, merchandise, and a willingness to re-purchase music again and again in re-mastered and enhanced formats. Is also asking for (or expecting) a premium price from these buyers going too far? (BTW, just to be clear, I don't mean to suggest that Bob Mould expects a premium price from his audience.)

Anyway, in his Freakonomics post, Steven Levitt put out the call for someone to get him in contact with Radiohead to possibly analyze the actual sales data. I hope someone does -- it'd be fascinating to see his take on the real numbers.

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October 02, 2007

More CD Baby and Snocap
by David Harrell
The CD Baby artists posting to this CD Baby forum message about the end of the Snocap partnership haven't sold much (if any) music via Snocap. And CD Baby president Derek Sivers chimed in with this:
I'll give a public and detailed account soon. For now, just know that the ending of the relationship between CD Baby and Snocap was our idea, and done for your benefit (as well as our sanity).
As of the end of July, the total amount of digital CD Baby sales via Snocap was just $12,145.

related: A Split from CD Baby for Snocap, $20 Million+ in Digital Sales for CD Baby Catalog

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    THE LAYAWAYS

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    album cover art from The Space Between

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