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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December 07, 2009

Some Lala Math
by David Harrell
I have no idea what plans Apple has for, though as a big fan of the service, I hope Apple keeps the current features in place, or somehow incorporates them into iTunes. (Jon Healey, Mark Mulligan, and Eliot Van Buskirk all have some thoughts.)

But I wasn't surprised about the reported reason that Lala initiated the sale:
One person with knowledge of the deal, but who was not authorized to discuss it, said that the negotiations originated when Lala executives concluded that their prospects for turning a profit in the short term were dim and initiated discussions with Eddy Cue, Appleā€™s vice president in charge of iTunes.
Lala offers a single free stream of all of the tracks in its catalog (though that one-time restriction isn't hard to circumvent.) Each time a song is streamed, Lala makes a payment to the respective record company of .6 cents, if not more. My self-released band, distributed via CD Baby and TuneCore, receives that rate, it's not inconceivable that the major label groups negotiated a higher payout.

When someone listens to a 10-track album on Lala, those streams cost Lala at least six cents. While several industry observers have noted that ad-supported streams can't be profitable at current ad rates for online advertising, Lala doesn't even run ads on its site. So the only way for it to offset the streaming fees is selling mp3 downloads or Lala's innovation, the 10-cent Web song.

Lala pays a wholesale price of 70 cents for the downloads it sells, while offering many of the them at just 89 cents. So Lala "makes" just 19 cents per mp3 sold, ignoring all transaction fees, salaries, server costs, etc.

To cover the fees paid for the free streams, Lala would need to sell one mp3 for every 32 free streams (assuming no other business costs). While a BusinessWeek article from early 2009 reported Lala's conversion rate was actually higher -- one mp3 purchased for every 14 songs streamed -- I'm not convinced that's the case. Since then, Lala has partnered with Pitchfork to provide streaming widgets on the popular music site's review pages for albums and individual tracks, which has no doubt increased the number of free listens. While an argument can be made that the greater exposure results in greater sales, I'm inclined to think it just means that more people are listening to music via Lala without having to pay for it. (Perhaps Pitchfork gives Lala a percentage of its ad revenue, but I can't imagine it'd be enough to push the streams into profitability.)

One thing that I haven't been able to confirm is the rate Lala pays labels for the purchase of a 10-cent Web song. No Lala sales have shown in my own band's account for more than the 0.6 cents streaming rate and I can't find any reference online for a payout rate for the 10-cent songs. It's possible that Lala simply keeps the entire dime from the Web song sale, and then pays the rights holders the streaming rate every time the purchaser plays the song. That would mean Lala comes out ahead when the purchaser listens to a song no more than 16 times, and loses money on the sale starting with the 17th listen.

Of course, while the Lala business model probably isn't profitable on a stand alone basis, that might not be a problem for Apple. Even at a loss, maintaining the service makes sense if it results in increased sales of the very profitable iPod and iPhone.

related: The Latest from Lala: The Return of the Dime Store, The New Dime Store, Part 2


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