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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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If you enjoy this site, please consider downloading a Layaways track or album from iTunes, Amazon MP3, Bandcamp, or eMusic. CDs are available from CD Baby and Amazon.

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June 29, 2009

Customer Reactions to Amazon's On Demand CDs
by David Harrell

Amazon.com mp3 banner

When writing my previous post, I was wondering how Amazon.com would describe its "on demand" CDs -- and what the customer reaction would be. Not surprisingly, a few customers aren't fans of it. One review of the new Cheap Trick album, which is an Amazon exclusive for the next month (I believe a standard CD version will be available in July):
This is musically the best Cheap Trick album in years...and years! Some of these tunes (like "Sick Man of Europe") are up there with the best songs they have ever recorded. However, DO NOT order this CD from Amazon. I unfortunately did and failed to read the fine print... This is a CDR. The packaging is a REALLY cheap trick... super thin crappy paper that is printed and put together horribly. The booklet and tray card aren't even trimmed correctly. The disc face art is okay, but it's a CDR, not an actual replicated disc. I can't believe they are trying to pass this off as a major release at a normal CD price. I want my money back! Will this ever see a proper release on CD????
I have to think this review might not be so harsh if the price of the "on demand" CD were a littler closer to that of the Amazon MP3 version of the album. To me, a CD-R is definitely superior to digital files -- you're getting something in terms of liner notes and you're free to encode the songs in your desired file format and bit rate.

But until on demand discs become more prevalent, my guess is that some customers who are willing to pay up for the physical disc are going to perceive the premium for the CD-R version as too much. (Even though manufacturing costs make identical pricing for the mp3 and CD-R versions impossible...)

Amazon does note that it's a CD-R in the editorial description, though this information is "below the fold" and well after the product description that says "Audio CD."
This product is manufactured on demand using CD-R recordable media. Amazon.com's standard return policy will apply.
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June 18, 2009

Pandora Raises the Bar?
by David Harrell
A couple years ago, I was on the "Disintermediation 2.0: How Technologies Are Flipping the Music Business On Its Head" panel at the Future of Music Coalition's Policy Summit. In response to audience member's question about the need for indie musicians to manufacture CDs, I said that it was still necessary for promotional purposes -- that college radio stations weren't going to download your mp3s and probably didn't want a CD-R with your name written in magic marker. Pandora founder Tim Westergren, who also on the panel, was very quick to say that Pandora would be happy to add that homemade CD-R to its library.

Not anymore, however. Pandora recently revamped its music submission process and will only accept material that's already available for sale on Amazon.com as a CD, not mp3:
We're very excited to announce a brand-new process to submit your music (or your band's music) to Pandora.

You'll need:
* a CD of your music
* a unique UPC code for that CD
* your CD to be available through Amazon (must be a physical CD, not just MP3s for download)
* the legal rights to your music
* MP3 files for two of the songs from your CD
* a free Pandora account, based on a valid email address, which can be associated with your music
The Pandora FAQ page links to Amazon's Advantage program, which requires shrinkwrapped, manufactured CDs, not CD-Rs. Pandora earns a referral fee when listeners click through to buy music from Amazon, though Amazon pays referral fees for both mp3 sales and CDs. So protecting the referral earnings probably isn't the reason for requirement -- it seems likely that it's simply a hurdle that's been set for potential Pandora artists.

I can't say I blame Pandora for the move -- given the amount of self-released music out there, requiring Amazon-available CDs is one easy way to cull potential submissions to its library. If Pandora, however, is willing to accept the "on demand" CD-Rs that comes from Amazon's on-demand CreateSpace program, then it's still a relatively low hurdle to clear.

Update: I've been reviewing that Amazon Advantage guidelines and can't find the reference to manufactured audio CDs vs. CD-Rs. The current requirements for CDs are a UPC, a bar code, and shrink wrap. Previously, a "no CD-R" rule was definitely in place. So I'm wondering if Amazon dropped the requirement after the launch of the CreateSpace program.

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June 11, 2009

Thursday Odds and Ends
by David Harrell
Via Marginal Revolution, a new working paper from Harvard Business School -- It Is Okay for Artists to Make Money...No, Really, It's Okay:
How can this be? How can the best jazz artists in the world earn so little? Might this be the work of coercive commercial powers?

Possibly, at least to some extent, in the case of musicians. Big companies do have a lock on distribution. Or anyway, they have had (things are getting a lot more interesting, distributionwise, in the age of the Internet and iTunes). But the real the problem here, we suggest, is not with the operation of commerce but with its failure to operate, or with its failure to operate with adequate sophistication. Something has gone wrong with the market for jazz musicians when such musicians this good get paid this badly. Richard E. Caves, economist and author of Creative Industries: Contracts Between Art and Commerce, argues that artists get paid poorly because they will do their work anyway. An inner drive makes artists grateful for the opportunity to work, so you can get by without paying them much.
This year's Bandwidth Conference is scheduled for August 27th and 28th. The featured speakers are Jeff Price of TuneCore and Livia Tortella of Atlantic Records.

Some FAQs from eMusic about the new subscription plans and "album pricing." No details yet on how many albums will eligible for the 12-download price.

And Paid Content speculates on possible reasons for the exit of Last.fm's founders.

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June 09, 2009

Last.fm Likes Jewel Cases and Keeps Its Data to Itself
by David Harrell
I was struck by the headline of this Guardian story on Last.fm. (Via @buzzsonic.) While Last.fm might be "thinking beyond the jewel case," the site -- as I noted shortly after Last.fm's redesign in 2008 -- displays albums as if they're in them, complete with complete with a black plastic tray and the faux-sheen of the plastic over the CD insert:

jewel cases on Last.fm

There was one especially interesting tidbit in the Guardian story:
The bottom line, says Jones, is that data is kept under lock and key and doesn't get transferred to CBS, though it's no secret that the music industry does research the site's publicly accessible data.
While it might cause a user backlash, I've long thought that Last.fm could selectively sell certain information to artists, record labels, or booking agencies. My guess is that a detailed geographic breakdown of an act's Last.fm listeners could be extremely valuable when deciding on tour dates.

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June 08, 2009

New Blogging Gig
by David Harrell
Part-time gig, that is. As part of my day job responsibilities, I'll be a regular contributor to Morningstar Advisor's Markets and the Economy blog. My first post just went live: Sotomayor's Hidden Asset: Human Capital.

Given the Morningstar blog's intended audience -- financial advisors and other investment professionals -- there probably won't be much overlap with the things I write about here. But if there is, I'll be sure to link or re-post.

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June 05, 2009

More Thoughts on the Changes at eMusic
by David Harrell
eMusic banner

In an e-mail exchange with Frank Hecker, who publishes the eMusic-focused Swindleeeee blog, he noted: "This is obviously a 'bet the company' strategy for eMusic, and it will be interesting to see how it plays out."

I agree -- the addition of the Sony content will no doubt lead to some new subscribers, but I wonder how many of the current ones eMusic will lose. Though -- to be completely cynical -- from eMusic's perspective, perhaps it's better to trade those long-time subscribers (the ones who are using every single one of their allotted downloads) for new ones who pay more for the service, but use it less.

Debcha from Zed Equals Zee pretty much nailed this idea in her comment to this Pampelmoose post:
...from a financial perspective, the perfect eMusic customer is the one who signs up, pays every month, and then never downloads anything (like joining a gym and then never going). The rabid consumers of obscure indie music who max out their downloads every month are, in this context, a liability. Ironically, eMusic wouldn't be in this position of having to choose between casual and rabid consumers if they hadn't done such a good job of attracting and retaining indie music fans.
I'll clarify that comment by adding that eMusic's revenue sharing model is such that eMusic's take remains the same, whether overall usage is 0% or 100%. Subscriber activity, however, affects how eMusic's pays labels. The health club component is there, it's just one step removed -- eMusic relies on it to boost its per-track payout amount.

My other thought here is that while the long-term, active subscribers are obviously upset, a large number of current eMusic subscribers don't use all of their downloads each month. If you routinely let half of your downloads expire each month, will a decrease in your allotment really upset you enough to cancel your subscription?

Long-term, eMusic's success will depend on its ability to significantly expand its subscriber base. To do so, adding content from the other major label groups and previous indie holdouts such as Sub Pop will be key. After July, eMusic will essentially sell digital downloads for 50 cents a track, coupled with the restrictions of an ongoing subscription, where the downloads expire each month or quarter, depending on the plan.

While 50 cents a track is cheaper than the default prices at both the iTunes store and Amazon MP3, the latter store is pushing hard with the $5 album price. In addition to daily album specials from 99 cents to $3.99, Amazon MP3 offers 50 $5 albums each month, a mix of classic albums and trendy newer acts, both indie and major.

Music fans who are seeking bargain major label content will be able to choose between an eMusic catalog that includes older Sony releases, or watch for the specials at Amazon MP3. It's not an either/or choice, of course -- I buy the occasional Amazon MP3 album special but will probably maintain my eMusic subscription. Yet for these potential customers, the relative attractiveness of an eMusic subscription will depend on the depth of the major label portion of its catalog, as compared to what's currently available for $5 or less from Amazon MP3.

One thing still remains in eMusic's favor, however, in any competition with Amazon MP3 for customers -- the ability to use a subscription to cherry pick individual tracks from albums. Amazon MP3 offers similar per-track prices via its $5 album deals, but no such deals for the purchase of individual tracks.

related: Sony and eMusic: Why the Per-Track Label Payout Might Not Change, 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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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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    THE LAYAWAYS

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

    <a href="http://thelayaways.bandcamp.com/album/maybe-next-year">Joy To The World by The Layaways</a>

    "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.



    album cover art from The Space Between

    <a href="http://thelayaways.bandcamp.com/album/the-space-between">Keep It To Yourself by The Layaways</a>

    "...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.



    album cover art from We've Been Lost

    <a href="http://thelayaways.bandcamp.com/album/weve-been-lost">Silence by The Layaways</a>

    "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.



    album cover art from More Than Happy

    "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:

    download the Layaways at eMusic download the Layaways at iTunes

    the layaways website