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.
By contrast, the streaming services pay the music industry less in copyright fees – as little as one cent or less each time a song is played – because the ownership of songs that are streamed but not downloaded does not pass to consumers. Perhaps more important, rapidly changing technology – including the spread of satellite radio, the development of phones that double as portable jukeboxes and the advent of MP3 players capable of receiving streamed music – will increasingly give consumers their music on demand while freeing them from downloads and all the attendant hassles, Fader says.
This is the “digital jukebox” we have been hearing about – as long as you have access to he music anywhere and anytime, why bother with the download? I’d rather be able to stream whenever I want, and still get CDs for albums I like best with full artwork, production info, liner notes, etc. Downloading song by song is a pain in the ass.
- Not everyone, however, agrees. Apple’s Steve Jobs recently told Rolling Stone magazine that music ownership is an ingrained habit, one that will always prevail: “People don’t want to buy their music as a subscription. They bought 45s, then they bought LPs, they bought cassettes, they bought 8-tracks, then they bought CDs. They’re going to want to buy downloads.” Jobs, of course, is the mind behind iTunes and so could be somewhat partisan. But he may have a point because even with music it is important to remember that people – especially Americans – like to own things.
….The debate over business models ignores, in the eyes of some experts, other important steps online services will have to take if they are to survive and thrive. One of those steps will involve figuring out how to bring customers back, according to Mike McGuire, research director, media, at Gartner/G2. “It’s the same problem the Samarian grain dealer faced 4,000 years ago. How do I get that guy to come in and buy my grain again next year?” Some sites try to bring in repeat business by having their staff recommend their own favorite songs. “Give me a break,” McGuire says. “Who cares?”
The better approach, one that will most likely have to be part of a successful business model, is to create a sense of community among buyers or subscribers – not unlike the sense of community the original Napster as well as Kazaa and Morpheus have created among their users, McGuire says.
….Increasingly, the thinking goes, even teenagers will grow weary of the hassles and gratefully turn to paid services. Says McGuire: “You can compete (with the pirates) by offering music in a convenient way, providing reliable quality and making sure that (buyers) can manipulate it as they like within legal limits.”
THIS is what the RIAA should be emphasizing rather than suing customers into submission.