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 19, 2009

Breaking Down the New $5 Napster Subscription
by David Harrell
Napster banner

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.

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