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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May 27, 2009

Less Digital Breakage for eMusic in Europe?
by David Harrell

Some more Q1 2009 eMusic downloads showed up in our CD Baby account yesterday. But instead of the 30.5 cent rate I wrote about last week, we received either 17.8 or 19.7 cents per track for this second batch of downloads.

CD Baby just confirmed that these smaller payouts were for our non-U.S. eMusic sales. After accounting for CD Baby's 9% commission, eMusic paid out the following rates for Q1 2009:

33.5 cents -- U.S.
19.6 cents -- France and Denmark
21.6 cents -- U.K.

This isn't, however, an apples-to-apples comparison. For the U.S., eMusic doesn't withhold mechanical royalties from its payouts to labels and self-released artists. That is, the 33.5 cent payout includes the mechanical royalty for each download, and labels are responsible for paying the music publishers/composers of each track. (My band hasn't recorded any non-original material, so I skip this step.) But outside of the U.S., eMusic makes a separate payment to Buma/Stemra for the mechanical royalty for each download.

I'm not sure what statutory mechanical royalty rates are outside of the U.S., but assuming they are similar to the current 9.1 cent base rate in the U.S., adding that amount to the label payout amount gets you fairly close to the U.S. payout rate. (I'm hoping the mechanical portion for our non-U.S. eMusic sales will eventually make its way to me via BMI.)

There is, though, another element to consider: eMusic subscription prices are more expensive outside of the U.S. This comparison is a couple years old, but it's probably safe to say there's still a premium for subscribers outside the U.S. And -- as explained in last week's post -- digital breakage by subscribers boosts the per-track amount eMusic pays to labels for each download.

So if the payout rates are fairly similar, despite the differences in subscription prices, the best explanation I can think of, assuming the same revenue sharing percentage, is that -- on average -- non-U.S. eMusic subscribers are less likely to let their downloads expire.

related: eMusic's Per-Song Payout for Q1 2009, More On eMusic Payouts

tags: digital music eMusic digital breakage mechanical royalties

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May 21, 2009

Single Song Downloads Coming to CD Baby
by David Harrell

CD Baby is working on a site redesign, scheduled to go live in July. New features will include single-song downloads and variable song pricing. From a CD Baby message board post:

One of the main improvements we're absolutely thrilled about is the addition of single song downloads on cdbaby.com. Just like with full album pricing, you'll be able to charge whatever you want for individual song downloads (and each track can be priced differently!)

Oh, and if you'd like to offer some tracks for free as a promotional tool, go for it!

I'm looking forward to these new features. While self-released artists can obviously do whatever they want with their pricing for direct-sold downloads, there's little ongoing flexibility for content sold in digital stores. Although it won't affect the tracks sold by CD Baby's digital distribution partners (iTunes, eMusic, Amazon MP3, etc.) the new pricing flexibility will allow artists to try things like one-day, Amazon MP3-style sales within the CD Baby store.

No word yet on how CD Baby will handle credit card transaction fees for a single-song download. Currently, CD Baby charges a 9% commission for its direct-sold album downloads (the same percentage it takes from sales via iTunes and other digital stores), but doesn't charge artists a separate transaction fee.

tags: digital music CD Baby

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May 20, 2009

eMusic's Per-Song Payout for Q1 2009
by David Harrell

Our eMusic sales for the first quarter of 2009 just showed up in our CD Baby account. After CD Baby's 9% cut, we received 30.5 cents for each download, which translates into a 33.5 cent payout from eMusic, a little less than half of what Apple pays out for a 99-cent iTunes download.

As I've written before, eMusic is an interesting twist on the health club business model. On the surface, because eMusic simply shares 60% of all of its post-expense subscription revenue with the labels and self-released artists in its catalog, it should be somewhat indifferent to the download activity of its subscribers. But the health club model comes into play when it comes to label/artist compensation: The fewer tracks that subscribers download each month (there's no rollover feature), the more labels and artists receive for each individual download.

Given current subscription rates, I'd guess that the average customer "breakage" is around 50%. If every subscriber used every allotted download, the per-track payout would probably drop to less than 20 cents a track. At that level, a fair number of labels would no doubt pull their material from the eMusic catalog, so eMusic is -- indirectly -- very dependent on the health club habits of its subscribers.

related: More On eMusic Payouts

tags: digital music eMusic digital breakage iTunes

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May 19, 2009

Breaking Down the New $5 Napster Subscription
by David Harrell

I'm curious to find out if Napster has negotiated any changes in how it compensates labels for downloads and streams for its new $5 a month subscription, which offers unlimited streaming and five mp3 downloads each month. If not, it's hard to see how Napster can make any money from the subscription revenues alone.

My assumption has always been that both Napster and Rhapsody were using the health club business model for their subscription services. Because both services pay record labels a fee for each streamed song (around one cent), they lose money on customers who stream a lot of music each month and make money on those who don't. For example, the basic Rhapsody subscription fee is $12.99 a month. Ignoring all other costs, customers who stream fewer than 1,299 tracks a month are profitable, while Rhapsody loses money on the "gym rats" who stream more than that number each month. In reality, due to other costs, the breakeven number is no doubt considerable smaller.

But if the monthly subscription fee is only $5 -- and you're tossing in five mp3 downloads -- that number gets even smaller. Even without the mp3 downloads, subscribers would cross the profitable/unprofitable line at 500 song streams a month, which works out to just 17 songs a day.

My band hasn't sold many downloads via Napster, but for the few that we have, I've seen a payout range from 61 to 94 cents. (I'm assuming the latter number is for non-US sales.) But even if you assume a standard wholesale price of just 60 cent for Napster downloads, which is a dime less than the iTunes wholesale price on 99-cent downloads, the cost of five downloads a month would eat up $3 of the $5 subscription fee. After that, less than 10 streams a day would account for the remaining $2.

Napster is, however, now owned by Best Buy, a retailer that is very familiar with the idea of "loss leader" products. Perhaps it's worth losing money on some subscriptions to get more customers -- so to speak -- in the store. It's also true that the biggest consumers of music tend to be the biggest purchasers of music, so perhaps these loss-leader subscribers will make up for it by buying more mp3s than they receive with their subscriptions. There's also the customer inertia aspect -- there's no rollover provision for the mp3s so Napster isn't on the hook for unused mp3 downloads. And maybe the $5 monthly fee is small enough that inactive subscribers are less likely to get around to cancelling their subscriptions.

Still, it's a bold pricing strategy and despite the previous lack of broad appeal for subscription music services, I won't be surprised if Napster picks up a considerable number of new subscribers. As Jon Healy noted in this post for the L.A. Times technology blog:

Napster's new price is so low, it could change the way people evaluate a subscription-music service. Instead of wondering whether it's worth paying a monthly fee for something with no residual value (i.e., the tethered downloads and the online jukebox), would-be subscribers simply have to decide whether it's worth buying five MP3s a month from Napster in exchange for access to that jukebox.

tags: digital music Napster Best Buy BBY music subscriptions

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May 15, 2009

Amazon.com Reverses the Digital Payout Percentages
by David Harrell

What percentage of the retail price should the creators of digital content receive?

The standard payout for digital music downloads -- the 70% rate established by Apple's iTunes store, Amazon MP3, and others -- is quite generous, relative to the standard royalties for physical music releases. (How much of that 70% ends up in the pockets of musicians is, of course, another question. For self-released artists, almost all of it, for those artists signed to standard recording contracts, substantially less.)

However, for its new program that allows bloggers to add their content to the Kindle, Amazon has reversed the percentages -- bloggers get 30% while Amazon keeps 70%. More details from Amazon are here.

I suppose you could make the argument that this is a new business, that Amazon has startup costs, etc. (Kind of like the "new technologies" clause that's standard for major label recording contracts, where the royalty rate is lower for new distribution methods...) And relative to standard author royalties, perhaps 30% is actually generous.

Still, it's disheartening that Amazon -- which obviously has a monopoly for providing Kindle content -- has opted for a payout structure for digital content that doesn't transfer the majority of revenues to content creators.

tags: digital music Amazon.com AMZN Kindle iTunes

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May 14, 2009

Some Site Housekeeping, No Lala.com Outside the U.S.
by David Harrell

I'm trying to spruce up the site with some small -- but long overdue -- design and usability improvements:

Post titles are no longer bold, but are in a larger type size and link directly to the permalink URL for each. I've added a byline, which seem a little silly, as I'm currently the only one writing for this blog. It's not an ego thing, though -- I'm simply trying to boost my own Google presence. And there's a "share" button at the end of each post, which should make it easier to Digg them, post them elsewhere, etc.

Also, I received an e-mail from a reader in France, letting me know that the Lala.com widgets in the right-hand column aren't working for him. The Wikipedia entry for Lala makes reference to international access being blocked in 2008, as do several reader comments to this TechCrunch post, though I can't find any details at Lala.com about non-U.S. access.

Last.fm seems to be available just about everywhere, though you can't use it to embed single songs or albums. So I'm considering other options for embedding music -- please let me know if you have any suggestions!

tags: digital music Lala.com

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May 11, 2009

Monday Odds and Ends: Competing with iTunes
by David Harrell

From Friday's Wall Street Journal -- New Ways to Buy Bach Online:

Technology entrepreneur Pierre Schwob thinks Bach and Beethoven haven't been given their due in the digital age.

Classical Archives, a new digital store focused exclusively on classical music, is Mr. Schwob's answer to mass-market digital retailers with "a complete lack of understanding of how classical music should be offered," down to the way they often categorize recordings. "It's basically a lack of respect when you say Bach is an 'artist,' not a composer," Mr. Schwob says.

For example, when online shoppers type "Beethoven" into iTunes, the top results they get back include a rock medley by the Trans-Siberian Orchestra, an uncredited recording of "Für Elise" and individual movements culled from greatest hits collections. It's not that the music seller is skimping on the composer -- customers can find complete works by browsing deeper in the iTunes classical section -- it's just that his oeuvre doesn't fit neatly on the virtual shelves with that of Miley Cyrus and the Black Eyed Peas.

I'm all for innovation in the digital music retail space -- and I hate to sound completely cynical -- but the huge challenge in competing with iTunes is that Apple can simply co-opt any major improvements that another digital retailer makes. That is, without patent protection or the use of technology that can't be replicated, if a better way to organize a classical digital store gains traction with consumers, Apple can offer something similar in the iTunes store. (Ditto, as I've written before, for music subscription services.) Sound quality, as mentioned in the article, is a potential differentiator, but that's another area where Apple can change if it proves necessary.

There is one place, however, where I think iTunes might be vulnerable, especially for a niche music genre with extremely dedicated fans, but I'm saving that for a later post. Strictly from a retailing standpoint, I think Amazon.com, which already has huge customer base for music, is best positioned to compete with Apple in the long term.

My other thought here is that from a marketing/branding perspective, it seems like Apple has the done the impossible with the iPod and the iTunes store: It dominates the market yet retains the hipness/cool factor normally not associated with market leaders. Maybe that's simply a testament to the quality and usability of the products, but it seems like Apple is a unique situation -- I can't think of another case where the market leader appears immune from "David vs. Goliath" marketing campaigns from smaller players.

Speaking of Amazon MP3: From Paid Content: Amazon Powers Track Sales For ABC's New 'Music Lounge.'

And he's not referring specifically to music, but Seth Godin says something that I've learned all too well over the past few months:

Free by itself is no longer enough to guarantee much of anything.

tags: digital music Classical Archives Apple iTunes AAPL ABC Music Lounge Amazon MP3 free music

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May 07, 2009

Last.fm vs. SoundExchange
by David Harrell

No, as far as I know, Last.fm isn't tangling with SoundExchange, the nonprofit agency that collects performance royalties for sound recordings for Internet radio play (as well as digital cable and satellite radio).

But in a comment to yesterday's post on Last.fm's Q1 2009 royalties, David Rose asked how the radio royalties we've received from Last.fm compare to those we've received from SoundExchange.

Short answer: I don't know.

Here's why: SoundExchange doesn't log every single song played on every single Internet station -- it uses a sampling method to assess overall Internet play for artists and tracks. So far, despite regular airplay on Internet stations like SomaFM (and a fair amount of terrestrial/internet college radio play over the past few months -- our recent album "The Space Between" made the top 30 airplay charts for more than a dozen stations), we haven't been picked up by any of SoundExchange's sampling surveys.

When we are, we'll have to make a choice about collecting radio royalties from Last.fm. When you sign up for Last.fm's artist royalty program, you have to indicate if you're collecting Internet radio royalties via SoundExchange in the U.S. or PPL in the U.K. If you are, Last.fm doesn't pay them directly. If not, you can opt to receive them. (This royalty is completely separate from the fees paid for "on demand" streams -- SoundExchange only collects for non-interactive plays, you can still receive on demand royalties from Last.fm even if you're receiving Internet radio royalties from SoundExchange.)

If we show up in SoundExchange (I assume it will happen eventually), we'll have to decide: Are we better off having ALL of our Last.fm radio plays counted (and paid for by Last.fm), or relying on SoundExchange's sampling surveys to capture our Last.fm radio plays, along with those from other stations/sites?

According to the SoundExchange website (can't link directly to the page -- the site is, unfortunately, built in Flash), in 2009, commercial stations must pay 0.18 cents per listener for each performance of a track. That's more than the .04995 cents we received directly from Last.fm for free radio plays, but less than the 0.4 cents we received for the few "premium radio" of our songs in the first quarter. (I haven't stayed on top of the Internet performance royalty debate, so if anyone has more details on the current SoundExchange royalty rates and/or where they're going, please let me know.)

So far, the dollar amount is small enough that the "direct from Last.fm vs. signing up with SoundExchange" decision is an academic one. My guess is that our total Last.fm royalties for 2009 will be less than $100, so we're unlikely to miss out on much with either approach. I can't helping thinking, however, that at our level, 100% of our Last.fm plays will put more in our pockets than an unknown percentage of our total Internet plays.

One last thing -- I just found the following information on the SoundExchange website:

…your membership in SoundExchange does not in any way limit your ability to enter into direct (i.e., nonstatutory) licenses of any sound recordings that you own, whether with webcasters or other potential statutory licensees. SoundExchange simply requires that SRCOs notify it of any direct licenses entered into with statutory licensees or digital music service providers so that it can ensure that payments received from services that hold direct licenses to certain recordings are calculated correctly and allocated properly.

However, there's nothing on the Last.fm website regarding direct payments for SoundExchange members and I doubt Last.fm would want the headache of sorting out payments that way.

related: Last.fm Royalties for Q4 2008

tags: digital music Last.fm SoundExchange streaming music royalties

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May 06, 2009

Last.fm Royalties for Q1 2009
by David Harrell

Last.fm royalty reports for the first quarter of 2009 are out. Here's what my band received for the various streaming and radio options for our songs on Last.fm:

Free on demand: 0.5 cents per stream

Premium on demand: no royalties received

Premium radio: 0.4 cents per play

Free radio: .04995 cents per play

The per-play payout rate for free on-demand streams was unchanged from the previous quarter. Our payout for free radio decreased slightly from Q4 2008, when we received .057 cents per play. And the premium rate increased significantly from Q3 2008, the last time we had premium radio plays. For that quarter, we received 1/10th of a cent for each play and we received four times that amount for Q1 2009. According the FAQ section for the Last.fm artist royalty program, the per-play payout rates for each type of play are variable, based on ad revenue. And for the two premium options, the payout is the greater of a set minimum or a percentage of ad revenue:

- If your track is played on our free radio service you will accrue a 10% of the Share of Last.fm's Net Revenue (see the definition of "Share" and "Net Revenue" in the terms and conditions) from the free radio service.

- If your track is played on our personalised premium radio service, you will accrue the greater of either 10% of the Share of Last.fm's Net Revenue from the personalised radio service, or US $0.0005 for each complete transmission on the personalised radio service.

- If your track is played on our free on-demand service, you will accrue 30% of the Share of Last.fm’s Net Revenue from the on-demand radio service.

- If your track is played on our premium on-demand service, you will accrue the greater of either 30% of the Share of Last.fm's Net Revenue from the premium on-demand service, or US $0.005 for each complete transmission on the prepaid or subscription on-demand service.

While the change in the premium radio is large enough to assume a substantial change in ad revenue, given the relatively small number of free radio plays we received, the change of .007 cents in the payout rate for those plays might just be the result of rounding.

One thing that surprises me is that the payout for free on demand rate has remained static for the past three quarters. It's supposedly variable, but I'm wondering if Last.fm has opted to pay a flat 0.5 cents per play until ad revenue increases or stabilizes. I don't know what the payout rates are for major label material, but assuming they are similar to those for the smaller labels and artists opting into the royalty program, Last.fm has a strong incentive to keep the on-demand rates high enough to ensure ongoing participation by the major labels.

related: Last.fm Royalties for Q4 2008, Last.fm Artist Royalty Details

tags: digital music Last.fm streaming music royalties

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May 01, 2009

Friday Odds and Ends
by David Harrell

My apologies for the two weeks of radio silence. It's been super busy at work and I gave two seminars on Monday for the Chicago Federation of Musicians on "New Technologies: Promoting and Distributing Your Music." My co-panelist was from the Chicago Symphony Orchestra and he shared some interesting details about the CSO's decision to start its Resound label. They turned down the opportunity to re-sign with Deutsch Grammophon after realizing they could make much more money selling half as much on their own.

But for me, the highlight of the seminars was one of the attendees at the evening session. He had to be at least 75 and he was talking about his eMusic statements -- and explaining why he recently switched from one digital distributor to another to avoid paying a commission on his digital sales!

A couple items from when I was out:

Bandzoogle hit the $1 million mark in artist sales of music and merchandise.

And Jeremy at Fingertips posted a great essay on the idea of music as water. One thing I like about it is that he parses the usual free music arguments by acknowledging that some music is meant to be free, but not all:

There is an overabundance of music being written and recorded in the 21st century that has no value to anyone but the person or people making it and (perhaps) their families and friends. It's misleading and distracting to pretend that music recorded on a laptop by your cousin's roommate's ex-girlfriend and her new boyfriend, when they were drunk, can and should be governed by the same economics as music produced by Neko Case or Radiohead or Grizzly Bear or (name the biggest hottest buzz band of the moment).

There is, therefore, a lot of music available today that really can and should and has to be free, if precisely because it doesn't have value to a wider audience. But this does not lead to the idea that all music can or should or has to be free. Marginal production costs be damned; human beings have, since the dawn of currency itself, understood that to own something of value requires a commensurate payment. To pretend that technological trickery has changed that basic relationship is to believe in flying cars.

Have a great weekend -- back to regular posting next week!

tags: digital music free music

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THE LAYAWAYS

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

"This is a sweet treat, deliciously musical without being overbaked for mass media consumption." -- Hyperbolium

"Perfect listening to accompany whatever holiday preparations you may be making today." -- Bag of Songs

O Christmas Tree - free mp3 lyrics and song details
Away In A Manger - free mp3

Download from eMusic, iTunes, Amazon MP3, 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

Where The Conversation Ends - free mp3
January - free mp3
Keep It To Yourself - free mp3

Download from eMusic, iTunes, Amazon MP3, or CD Baby, stream it at Last.fm or 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

"Catchy Guided by Voices-like rockers who lay it on sweetly and sincerely, just like Lionel Richie." -- WRUV Radio

Silence - free mp3 lyrics and song details
The Long Night - free mp3

Download from eMusic, Amazon MP3, or iTunes, stream it 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, stream it at Last.fm, Napster, or Rhapsody.

More Layaways downloads:

the layaways website