Digital Music Services 2004

The Wharton School takes at look at the digital music biz for 2004:

Indications are strong that the companies behind the services have reason to think that profits can be made in online music. iTunes sold 20 million tracks in its first seven months of operation. Rhapsody's 250,000 subscribers paid to listen to 28 million songs in October, up from 11 million in June. Between June and November, music lovers bought 7.7 million songs online, but only 4 million single-song CDs at stores.

The future looks good, too. Jupiter Research expects online music sales to grow to $3.3 billion by 2008. Forrester Research, for its part, expects that within just four years online music will account for 33% of the music industry’s sales.

But behind the vaunted successes and the optimistic predictions lurk at least two big questions: Which online music vendors, among the nearly one dozen operating today, have found the business model that will guarantee they will be around in 2008 to share the profits? Can the for-fee services make a dent in the billions of musical tracks exchanged, at no cost, on pirate networks?

The online music business models now being used include:

* The a la carte approach, favored by the likes of iTunes. Customers can buy individual tracks for 79 cents to $1.20 or albums for $9.99 and up, and buy as few or as many tracks as they want. They can, after downloading music to their hard drives, also burn it to CDs, copy it to portable music players or, if they have the right equipment, stream it around the house by way of their existing entertainment centers.

* The subscription model. Customers pay a monthly fee and then download a specified number of songs each month. For $9.99 a month, emusic lets its customers download 40 songs and use them in whatever way the buyers want. For $14.99, customers get 65 songs.

* The streaming model, such as the one used by RealNetwork's Rhapsody. Music lovers pay a monthly fee, then listen to as many songs a month as they can stand. Downloading is extra, usually under a dollar a track.

....Wharton marketing professor Peter S. Fader says all the signs point to the eventual emergence of streaming as that model.

For the moment, though, the models based on selling tracks and albums will predominate because that is how most people have learned to obtain music online, Fader notes. Perhaps more important, downloaded music is portable. It can be burned to a CD for listening in the car. It can be put on an MP3 player for listening while jogging or flying. But, in the end, downloading is burdensome, Fader suggests. "Obtaining the songs is a nuisance. It's a pain to download them, to organize them, to back them up."

And when you come down to it, Fader adds, people really don’t care much about having physical ownership of their music. What they really care about is having access to the music they like, when and where they want it.

Given that preference, financial and technological advantages will help the streaming model win out, Fader says. For downloading services the margin of profit is usually too thin. The download services pay music labels around 79 cents per track in royalties. Another 5 cents or more per track goes to credit card companies to cover transaction costs. Add in operating costs and the 99 cents or so in per-track revenue does not leave much room for profit.

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Article Author: Eric Olsen

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