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.

My personal website has links to my LinkedIn and Google+ pages and you can send e-mail to david [at] thelayaways [dot] com.

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 21, 2011

Some Details (and Questions) About Apple's iTunes Match Service
by David Harrell
iTunes Match image
A Chicago label is getting some attention for opting out of Apple's iTunes Match service. Numero's Ken Shipley also shared some financial details about iTunes Match in a comment to a recent Hypebot post on Numero's decision. Based on that information, we can make some assumptions about how the service will work:

1. Apple Is Reaching Out to Indie Labels
We know that all four major label groups are on board with iTunes Match, but it appears that Apple is contacting at least some indie labels directly to convince them to include their catalogs in the matching service.

2. A Match Is Enough
I had wondered if payments to labels might be based on the number of times a track was played. But the way Shipley describes it, if a track is contained in an iTunes library, that constitutes a "match," and a payment to the label.

3. The Per-Track Payouts Are Small (and Variable)
This was a given, of course. At $24.99 a year, there's simply not a lot of cash to share with labels. Shipley gives a figure of .0035 cents per match for a 5,000 track library, of which .0006 cents would be shared with the publisher of the song. However, I'm wondering if he meant .35 cents instead of .0035. Apple will share 70% of the $24.99 annual subscription fee, or $17.50 with labels. If you multiply 5,000 by .35 cents, it equals $17.50. Assuming that the payout is the larger figure, it'd still require 200 matches to equal the 70 cents that Apple pays for a 99-cent iTunes download. Though if the payout is based on the size of an individual user's iTunes library, the per-track amount will vary. Apple says it will support libraries of up to 25,000 tracks. If you divide $17.50 by that number, the per-match rate would be .07 cents.

4. Avoiding the "S" and "D" Words
At this point, no one seems to know for certain if matched tracks will be streamed by Apple to a device or if a match simply allows a subscriber to download the track. I thought the language on Apple's site suggested streaming, though I've read that it's a download, as Apple is worried that streaming would result in a huge bandwidth/data problem if iPhone users streamed their music collections all day.

According to Shipley's comments, Apple is avoiding both the "streaming" and "downloading" words because they don't want to be liable for current streaming rates or mechanical royalties.

We'll learn more details over the summer, but for now, here are a couple of unanswered questions:

1. A One-Time or Annual Payment?
Will a label receive a payment every year, as long as the track remains in a user's iTunes library? Given that subscribers pay the $24.99 maintenance fee each year, it seems more likely that it's an ongoing payment.

2. Is a Match Based Solely on Metadata?
While Apple has been lauded for coming up with a model that results in a revenue stream for music that might have been obtained illegally, that's a negative in Shipley's view. Whatever the quality/bit rate of the file on your hard drive, iTunes Match will upgrade it to 256k AAC file. Yet if the match is based solely on a music file's metadata, you don't even have to obtain the actual track -- you could simply change a file's metadata in iTunes or another program. It'd be a pain, but that with a few clicks and a bit of typing you could match any track in the iTunes catalog.

If you work for a label and can confirm any of the above, or have other details you're willing to share, please leave a comment or shoot me an e-mail. Thanks!

related: Some Quick Thoughts On iTunes Match


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June 16, 2011

A Few Thoughts On Pandora
by David Harrell
Pandora internet radio banner
Pandora has a lot going for it: It's the best-known name/brand in Internet radio and it has more than 90 million registered users, with 30 millions "active" users. Yet as noted in this WSJ piece, the newly-public company has yet to turn a profit. Like all Internet radio stations, it pays out a very large percentage of its revenue to music publishers and labels.

Also, unlike competitors such as, Pandora has an additional expense, that associated with building and maintaining the "Music Genome Project," which classifies individual songs based on up to 450 criteria. A song's "DNA," as determined by Pandora's team of musicians and musicologists, along with listener feedback, is used to program individual Pandora stations.

So here's the big question: Does Pandora's Music Genome-based programming give it a competitive advantage? That is, does it result in a better listener experience than with Internet stations like, where "similar" artists are determined by listener overlap (listeners of artist A also like artist B), as opposed to song qualities?

For me, the answer is a definite "no." I've tried Pandora multiple times and have never been impressed with the playlists. One example: when I played a U2 station, the next three artists it served up were Pearl Jam, Coldplay, and...the Goo Goo Dolls?! Coldplay makes some sense, but someone is going to have to explain to me how the music DNA of U2 suggests that the Goo Goo Dolls are one of the three most similar artists. (It's also apparent that, in addition to song DNA, Pandora uses a popularity component in its programming algorithm. If I create a station for my own band, it primarily serves up equally obscure artists. To be fair, I could easily hear why most of these artists were considered similar, based on the songwriting and arrangements. And I can completely understand the reason for including a popularity component -- while I'm open minded when it comes to music, you don't necessarily want to listen exclusively to acts you've never heard of before!)

I'm not saying the Pandora listener experience is a bad one, I just haven't found it superior to or Slacker. The size of the company's user base and the business relationships it has established (deals with many car manufacturers) might well give it an ongoing advantage over its competitors. But in my opinion, music programming isn't a major differentiator for Pandora.

related: Prospectus for Pandora, Pandora's Seventy Percent, Some Quick Thoughts on the Quirk Presentation


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June 07, 2011

Some Quick Thoughts On iTunes Match
by David Harrell
iTunes Match image
My question from last week was answered -- by matching any song on a hard drive that's available in the iTunes store, iTunes Match is a game changer. Assuming that Google and Amazon don't add a similar feature, Apple's service will launch with a major advantage over its competitors. However, as Amazon was quick to Tweet yesterday, it appears that iTunes Match won't allow you to download tracks, only stream them. Update: I might be wrong about downloading vs. streaming. I've read several reports that indicate that the iTunes Match/iCloud service will only allow downloading of files to devices, as opposed to true streaming. (And I haven't used the beta version of iTunes in the Cloud yet.) If so, it seems somewhat illogical, as the big advantage of scanning and matching is that it eliminates the need to upload digital music files. To then turn around and require a download to listen to them makes little sense to me. The Apple site is vague, though "all the music iTunes matches plays back at 256-Kbps iTunes Plus quality" seems to imply streaming.

Will iTunes Match legitimize/monetize pirated digital music files? At the very least, it introduces a new revenue stream for labels that didn't exist before, allowing them to reap additional revenue for purchased digital tracks, as well as songs ripped from CDs, downloaded as free legal mp3s, or acquired via P2P sharing. How much revenue? The service will cost users $24.99 a year and Apple will share 70% of that amount, $17.50, with labels and publishers. As of late 2010, Apple claimed 160 million iTunes users worldwide. If 10% of those users signed up for iTunes Match, that'd translate into $280 million a year for labels and publishers. That's a lot of money, but it doesn't begin to offset the declines in recorded music sales over the past decade. (Maybe Apple will be able to convert more than 10% of its iTunes user base. Netflix, for example, has 20 million subscribers who are paying substantially more for that service.)

How will Apple divide that money and pay it out? It could be based on an individual user's streaming activity, where either a set amount is paid for each song stream or a variable per-stream amount, based on the total number of streams during the month. That is, if a user only streamed one song in a month, the label and publisher for that release would receive the full amount. But it seems like any user-based accounting system would be a bookkeeping nightmare for Apple. My guess is that the subscription fees will be divvied up based on total subscriber behavior, with label and publishers receiving a portion of the iTunes Match subscription fee proportionate to the total activity of each track.

One final thought: Steve Jobs has long pooh-poohed the idea of music subscriptions, but maybe Apple is taking some baby steps toward a full-blown subscription service. As described, iTunes Match is essentially a music streaming service that's limited to a maximum of 25,000 tracks stored your iTunes library. At some point, it'd seem logical to allow users to stream the full iTunes catalog (18 million songs) for an additional fee.

related: Apple's iCloud Will Scan, But How Much Will It Match?


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June 02, 2011

Apple's iCloud Will Scan, But How Much Will It Match?
by David Harrell
In the clouds image by José Picardo via Flickr

The news that Apple's iCloud will launch with a "scan and match" feature suggests that the service has a major advantage over the offerings from Amazon and Google, both of which requires users to upload their digital music files to the cloud. The size of that advantage, however, remains to be determined: Will the deals Apple reached with the four major label groups allow it to give users access to online versions of all of the music files on their hard drives, or just the digital tracks purchased from the iTunes store and other digital music retailers? If it's the former, it'd be an advantage that would pretty much force Amazon and Google to reach similar deals with the label groups. If the latter, the Apple edge would be considerably smaller, as purchased tracks represent a small portion of most digital music collections.

I have to think the issue was a sticking point in Apple's negotiations with the labels. While it's likely that the majority of the digital tracks in most music collections were ripped from their owners' CDs (that's the case for mine, at least), I'm sure the position of the labels was that they didn't want Apple giving consumers access to music tracks acquired from P2P networks. We'll find out next week what kind of agreement Apple was able to reach...


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June 01, 2011

Amazon MP3's $3.2 Million Customer Acquisition Experiment
by David Harrell mp3 banner

Apple's seamless integration of software, hardware, and content (iTunes and the iTunes store, iPods and iPhones, and iTunes downloads) is often cited as the reason for its continued dominance of the digital music market. Yet this advantage is more one of perception that reality -- you can easily configure your settings with Amazon MP3 and eMusic to have downloads automatically appear in your iTunes library. I'd even argue that purchase process with Amazon MP3 is faster and more streamlined than with iTunes.

But a large percentage of digital music purchasers probably don't realize that Amazon MP3 and other digital retailers are viable alternatives to the iTunes store. (Some might not even know that you can play content purchased elsewhere in iTunes and on iPods!) Last week's 99-cent special for the new Lady Gaga album was an obvious attempt to reach those consumers.

Amazon MP3 moved approximately 440,000 digital albums at that loss leader price, which, according to Billboard's Glenn Peoples, cost Amazon about $3.2 million, as it paid the full wholesale price on each of those albums to Interscope/Universal Music Group. The question is, how many of those purchasers were first-time Amazon MP3 customers? After you've made your first purchase, any subsequent purchases are much easier, as you've already created and configured your account. Assuming that enough of last week's sales were to first time customers, I predict we'll see several more 99-cent album deals over the summer for other big-name releases.


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

    <a href="">Joy To The World by The Layaways</a>

    "This is a sweet treat, deliciously musical without being overbaked for mass media consumption." -- Hyperbolium

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    "The Layaways make fine indie pop. Hushed vocals interweave with understated buzzing guitars. The whole LP is a revelation from the start." -- Lost Music

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