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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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June 03, 2009

Sony and eMusic: Why the Per-Track Label Payout Might Not Change
by David Harrell
eMusic banner

I'll start with some links to other coverage of the recent eMusic news: Swindleeeee has an overview of the new prices for U.S. subscribers, as well as a proposal for the letter that eMusic CEO Danny Stein should have sent to subscribers. Jon Healey at the L.A. Times has a nice post of the evolving eMusic business model. Dave Allen at Pampelmoose calls the handling of the Sony addition to the catalog a fiasco. And the comments to the 17 dots posts about the subscription changes and an eMusic message board post make it clear that many current subscribers are livid.

As one of the "grandfathered" long-time subscribers, I'm certainly not thrilled to see my current allotment of 50 downloads for $11.99 a month reduced to 30 downloads, which works out to a 66.67% price increase. But as a self-released musician with several albums in the eMusic catalog, I'm also concerned that the price changes will result in a shift in subscribers' attitudes about how they use their monthly or quarterly download allotments. My contention has always been that the "use it or lose it" aspect of the subscription, coupled with extremely low prices, make it far more likely for subscribers to take a chance on newer or unfamiliar artists. While these price changes will -- in theory -- result in a larger per-track payout to labels (though I'm not convinced it will -- see below), I worry that "Long Tail" artists will see fewer downloads of their material, now that each download is more precious to subscribers. Indeed, here's one subscriber's take:
My favorite thing about eMusic was that I would test out albums I never heard before. I've learned about so much great music by taking a gamble and downloading albums based on short previews. With this new pricing I definitely won't be taking that gamble anymore.
There's also the "number of tracks per album" issue, which becomes more pronounced with the new prices. Because of eMusic's track-based subscription model, there's always been a wide variation in the "prices" of albums in the eMusic catalog. Classic jazz albums, for example, which have just a handful of lengthy tracks are relative bargains for subscribers, while an indie-rock album with 20+ shorter tracks is relatively expensive. The price increases won't change the percentage price difference between these albums. However, at 50 cents a track (which will be the standard price for new subscribers), the price for a 20-track album equals the default iTunes album price of $9.99, and it exceeds the $5 monthly specials that Amazon MP3 has been running as of late. The Swindleeeee letter suggests "capping" the price of albums at 12 downloads, even if they contain more tracks. Such a cap for selected albums is mentioned as part of the new pricing plan in some of the eMusic message board posts, but I can't find any official details.

The price increase was obviously a concession to Sony, though eMusic editor Yancey Strickler also noted in one message board post that the prices extended to many of the grandfathered subscribers simply weren't sustainable, with or without the addition of the Sony back catalog. Yet I'm not convinced that the per-track payout will increase by much, if at all, because of the changes in the subscription plans.

As I wrote last week, the eMusic business model is more complex than those of download stores like iTunes and Amazon MP3. Instead of a set wholesale price for each download, eMusic shares 60% of its post-expense revenue with the labels in its catalog, proportional to each label's "paid download share." For the most part, eMusic always refers to the revenue share as opposed to a per-download payment, but dividing the 60% share amount by the total number of subscriber downloads yields the per-download amount. And this is the amount that shows up my CD Baby account, minus CD Baby's 9% commission. (It's not quite that simple, as allowances are made for extra-long tracks and free downloads don't count, but that's the basic formula.)

When subscribers fail to use all of their allotted downloads, it increases the per-track payout. How much "breakage" is occurring? My estimate is quite a bit, perhaps more than 40% to 50%, as the 33.5 cents a track I received for Q1 2009 eMusic downloads of my own music exceeds the per-track rate that many subscribers currently pay.

Just to be clear, this "health club" aspect of the eMusic business model isn't just speculation on my part -- the company spells it out explicitly on its label relations page:
Like any subscription business (such as health clubs, mobile phone plans, and cable companies), our model is based on a consistently substantial percentage of subscribers downloading none or little of their paid allotment. Because these subscribers aren't downloading their full allocation of music, there is more revenue to be divided amongst labels. In other words, this "unused" revenue is part of the gross that is split among labels.
Given the new pricing structure, it's safe to assume that, going forward, eMusic subscribers will be paying an average of 45 - 50 cents per download. Yet 60% of 50 cents is only 30 cents (and that's ignoring the deductions eMusic takes before the revenue share), which is less the recent 33.5 cent payout rate I received. So the subscription changes will only result in increased payout amounts if digital breakage continues to occur.

Why do some subscribers let their downloads expire? It's probably a combination of inertia, the fact that the download period is 30-days, not a month, so the expiration date changes each month, and perhaps simply not finding enough material they want to download each month. But given the way the Rolling Stones catalog dominated the eMusic charts for the brief time it was available, it seems likely that the presence of more "name brand" artists and albums in eMusic will result in less digital breakage by subscribers. So while subscribers will have fewer downloads available, they'll be more likely to use all of them, which may be enough to offset the effect of the price increase on the final per-track payout to labels.

Without significant digital breakage, the per-download payout is bound to be less than 30 cents a track, even under the new pricing model. No doubt some breakage will continue to occur, but it seems likely that the current breakage rate will decrease significantly. Hence, it seems likely that the new subscription plans are more likely to preserve the recent payout amounts I've seen, as opposed to substantially increasing them. So that's my prediction -- higher prices but less breakage will result in a modest increase, at best, in the per-track eMusic payout. I'll update, of course, as I soon as I have any details on eMusic payments for the third quarter of 2009.

End note: One final thing to consider is that the labels in the eMusic catalog are essentially competing for market share of download activity, which then translates into the portion of the 60% of the subscription revenue they receive. While the total number of subscriber downloads each quarter affects the per-track amount, if a label's catalog accounts for 20% of download activity, it receives 20% of the revenue eMusic shares with the labels in its catalog. On the surface, labels should be somewhat indifferent the per-track amount and more concerned about the percentage of the downloads their content accounts for.

However, because U.S. labels must pay mechanical royalties to music publishers for eMusic downloads, the per-track amount does matter. Selling two eMusic downloads at 20 cents is not the same as selling one 40-cent download, as a label nets with the former 21.8 cents after paying mechanical royalties (9.1 cents x 2) and more than 30 cents for the latter!

related: eMusic's Per-Song Payout for Q1 2009, More On eMusic Payouts, Why Music Subscriptions Are Like Health Clubs, Treatment of Longer Songs by eMusic

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