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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March 20, 2006

Increased Downloads at eMusic, Per-Song Label/Artist Payout Decreases
by David Harrell
Increased Downloads at eMusic, Per-Song Label/Artist Payout Decreases
In an early post on this blog, I wrote about the "royalty" rate for songs downloaded at eMusic. But unlike iTunes, which pays a set royalty per download (currently 70 cents), eMusic doesn't have a standard per-song payout rate. Instead, eMusic pays record labels (and independent artists) a set percentage of its subscriber revenues each month. Basically, a label receives a portion of that revenue share proportional to download activity of its tracks as a percentage of all subscriber downloads for the month. (I'm assuming that eMusic went with this business model because it started out with an "all you can eat" subscription plan, without any limits on the number of tracks subscribers could download each month. A set per-song royalty could have been a big money loser, having a revenue-sharing model caps the total payout at set percentage of subscription income.)

So while the idea of an eMusic "royalty" is something of a misnomer, a per-song rate is eventually worked out for each month, probably calculated by dividing the revenue share amount by the total number of downloads for the month. The resulting payout is therefore inversely correlated to the total number of tracks that eMusic subscribers download each month: Fewer subscriber downloads means more money paid out for each download, more downloads means less money paid per track. There is a limit to how low this rate can drop, however. That limit would be reached if/when ALL subscribers maxed out their downloads each month.

Back in May 2005, the first month I have sales data for, the per-song rate for eMusic downloads was 24 cents. By November 2005, the most recent month I have numbers for, that rate had dropped to 19 cents per download. Hence, my best estimate is that total download activity by active eMusic subscribers increased approximately 20% during that time. (I'm not talking about the number of subscribers, which no doubt increased as well, I'm referring to the average number of tracks that subscribers downloaded each month.) In December, eMusic president David Pakman said that the average eMusic subscriber was downloading 31 tracks for month. Given that cheapest eMusic subscription plan allows for 40 downloads a month, the per-song payout probably has room to drop some more, if average subscriber downloads approach the monthly limits.

But as someone with a couple albums distributed by eMusic, I have no complaints. Even though the current per-song payout is less than 1/3 of what we receive from iTunes, I'm confident that we'll have more sales via eMusic, perhaps enough to offset the lower "royalty rate." I think the "use it or lose it" aspect of the eMusic subscription plan makes subscribers more likely to take chances on unknown artists. (Using up 10 of your expiring downloads to check out a new artist is very different than paying $9.99 for that same album on iTunes.)

And from a subscriber standpoint, I think this model is a good thing -- it means that eMusic has no incentive to minimize download activity. That is, if eMusic paid a set royalty for each download, eMusic's profit would increase with each download "left on the table" and the company's preference might be for its subscribers to not make full use of their monthly allotment. Which is happening now with Netflix, where the associated costs of "unlimited" movie rentals is causing the company to throttle its customers to limit the number of movies they can rent each month. With eMusic, the company has every incentive for subscribers to realize the full value of their subscriptions -- the more you use your eMusic subscription, the less likely you are to cancel it.


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