Thoughts and discussion on the future of internet music services.
Tuesday, February 21, 2006
Alternative business models from INDICARE
An article on alternative business models in the digital content industry. In addition to a quick overview of the stakeholders in the DRM world, the article explores the very provocative notion of a marketplace in which "paying is essentially voting." In this model, though their may be a minimum, there is no limit as to what level the user can "vote," and the amount of money taken in for that content raises it's rank relative to other content available in the market. This is rooted in the idea that the desire for fans of the content to see it's popularity rise will give them incentive to pay more, much like text message voting where there is a cost per vote, but multiple votes are allowed (and certainly received).
Though I am not, nor am I ever likely to be, a text voter, I can identify with this concept. Have you ever loved an album so much that you wished you could buy it again? I certainly have. I've gone as far as to buy (not burn) copies for friends and family, expanding not only the reach of the content, but the gross revenue as well.
This idea also interests me for two other reasons:
1) One of its tenants is directly opposed to my ideas regarding dynamic pricing. The supply/demand aspect is removed, meaning the minimum sale price does not change regardless of the number or average level of "votes." Though they are different approaches, there is a parallel in that both serve to present the content as desirable. The key difference is that the "voting" model does not exclude those who aren't willing or able to absorb the higher sale price, either for financial reasons or simply because they aren't influenced by the tastes of others. This would certainly promote the content's reach. Minimizing exclusivity (ie, keeping the minimum price low) does not affect price-sensitive consumers as the supply/demand approach would, and does still make the content appear desirable. The question is whether exclusivity (price increase over time as popularity increases) would have a powerful enough effect from a perception point of view to drive additional sales at a higher price to make up for the lost sales of the price-sensitive consumers. Though most marketers would probably say that such desirability is advantageous to drive margins, there are plenty of low-margin retailers out there who do just fine by relying on volume.
This leads nicely into the second reason this idea interests me:
2) Intent. Another idea of this model is that if money is extracted by the content owner, the rank declines. So the "votes" expire when the "ballots" are moved from the marketplace to the content owner's pocket. There is no doubt that larger music companies track cash-flow, short-term revenue, profitability and the like very closely. They most likely would not be comfortable allowing "votes" to accumulate for too long, knowing that money, from a strictly financial perspective, is more valuable in their bank account than in their marketplace account. The spreadsheet in which such a content owner would attempt to calculate how much to extract and when would certainly make Excel crash on an under-rammed system. But the unknown, unsigned artist, though probably already in debt, is more likely to be a slave to his or her creation and not the bottom line. Those artists would only extract what they need to survive, and if possible, extract nothing. To me, this aspect is the most intriguing.
In addition, the voting experience and excitement of watching your candidate win is certainly a marketable element of this model. I could see this working at a site like MySpace that already supports a sizable community with a wide variety of smaller artists. Despite the popularity of the model, I would expect larger content owners to resist participation, probably up until the point where some other spreadsheet convinces them that the opportunity is too large to ignore.
MP3Tunes.com is a service that I wish I'd know existed when I answered the BBC questions a few weeks ago. It allows you to store copies of all your mp3's on their hardware, sync to other devices, and is compatible with iTunes. $40 a year.
Amazon is entering the digital music market. Though they will surely use a fixed price model, hopefully they will apply their highly lauded recommendation technology at the album and track level. Clearly, this will be a strictly retail experience with no community aspect at all.
It will be interesting to see what becomes of this pre-loaded device project. Though I refuse to admit that the album format is dying (mainly because I still think in terms of albums), one of the major upsides of the digital music market has been its ability to satisfy the pent-up demand for single songs. It seems like it would difficult for even the savviest of marketers/product development people to populate an mp3 player with enough consistently targeted music to make the overall product attractive. In addition, I would hate to think that my personal music taste is bland enough to be satisfied by the calculated formulation of such an offering.
Joanna Glasner of Wired: Commentary on the Digital Music Biz
Commentary on the current business model employed by most online music sites. Although I would agree that Joanna is NOT the target market of these sites, that does not diminish the significance of her position. She describes herself as "business-model sensitive," but I would suggest her behavior mirrors the theoretical economic (wo)man. She is acting in her own self-interst, based on her tastes and preferences with regard to the product offering at hand in conjuction with her understanding/perception of the market. The current model seems to limit this thought proccess by offering only static pricing. Either the track is worth 99 cents or it's not. But what about 81 cents? Or 42 cents? The assumption that all tracks on earth are worth the same is not only asinine, it limits growth.
This gives me another idea about the user experience on the ideal site. A price threshold system that allows users to assign their value to tracks or albums. If the price, dictated by demand and the content owner's desire to sell more, dips to their threshold, the track or album is automaticaly purchased (or a notification is sent, depending on user preference).
This Q&A session with notable execs from the music download world was a great concept, but their answers were, not all that surprisingly, somewhat disappointing. Often the issue/query was skirted in favor of highly political responses, but in their defense, none of these people can afford to say anything that may hurt the people they represent.
Anyway, I thought it would be amusing to give my own answers. Luckily, I don't have to worry about affecting my company's stock price, so I can be quite a bit more real than the original participants.
Q1. Will the price of tracks or albums be reduced with the more cost-effective digital distribution method? You don't have to manufacture the CD, package it, send it to the distributor/wholesaler, and finally the shops.
Yes and no, but physical packaging has nothing to do with it. It is impossible for the price of all tracks to stay the same over time. No one wants to pay the same price for a 12-second hip-hop interlude as they do for a hit song, or even a pretty good song. Once content owners get more creative with the provision of exclusive content and limit the number of downloads, prices for such could potentially be higher than your average download (though this may not work until the file-sharing world shrinkage has run its course). So basically, pricing will more accurately reflect the value the consumers place on the product.
Q2. Do you believe people who are buying CDs legally and copying that music to an iPod should be punished - as they are, in fact, breaking the law?
I think if you buy a CD legally, you should be able to rip those tracks to your hard drive and transfer them to any device(s) you like for personal use. I also think that the sharing of such files across non-public channels, such as burning a CD for a friend or moving files from your hard drive to their iPod is no different than making them a tape. As noted, in the UK, copying a CD is currently not legal, but I don't really see how that law can be enforced. I guess the bottom line for me is that law has nothing to do with right and wrong, or even right, wrong, and gray area. Sadly, I don't think law will (can?) ever be sufficiently realistic and enforcable to resolve this, so technology (DRM) will be the final word on the matter.
Q3. Why should I buy music over the net when it's lower quality, more expensive and harder to move around than a CD?
Convenience, selection, community aspect, recommendation functionality... I agree with Mr. Kennedy on this one. If you don't see the value, keep buying CDs (or vinyl).
Q4. I think there is something wrong in asking people to pay for music they have already bought. You can move a CD from one player to another, and you should be able to do the same with downloaded music as long as it is still for your use. What plans does this industry have to ensure customers are not ripped off?
I think it's interesting that the term "this industry" was used. Though all of the original participants play a role, they all have very different interests. You can lump IFPI and BPI together, but they have totally different interests than HMV. Even Napster and HMV aren't that similar because if (when?) HMV Digital fails, they still sell music the old-fashioned way, while Napster does not have a chain of retail stores to fall back on. Anyway, since the terms and conditions of download sites state the constraints (though they may be in the fine print), buyers don't really have that much to complain about. But as in previous questions, the keys are personal preference (short term) and techonology (long term).
Q5. Given that every single digital rights management (DRM)-protected song on the music download networks is still very easily found on any file-sharing network, what has DRM achieved other than alienating legitimate, legal, paying customers?
Basically, this is a business and secondary distribution of a product reduces the market size, so limiting such distribution into a secondary market is advantageous for content providers. This is the same concept as you buying a book then lending to a friend. Your friend now no longer needs to purchase the book. Unfortunately for Random House, et al, preventing this is virtually impossible, but in the world of digital music, it is at least plausible (still not easy or we wouldn't be having this conversation). Theoretically, if there had been no file sharing networks, there now would be no DRM, and the internet-free sharing of music as described in my answer to question 2 would be tolerated. So above all, DRM has given these execs the ability to tell their artists, shareholders, etc. that they are doing their best to keep the market as large as possible and therefore keep revenue as high as possible. This does little for the consumer. So the answer is that there really is no good answer, and just like every other issue in every other market, the cost gets passed to the consumer. But in this case, the cost is not in dollars, but is risk...risk of losing that for which you've already paid.
Q6. I don't expect to be using my iPod in 20 years time. But I do expect to be able to listen to the digital music I buy today in 2026 without having to re-purchase it. Can online music providers guarantee that my collection will be safe in 20 years if I buy from them?
No. Not only should you back up your collection (at least once), if you are downloading music today, you may want to send an analog signal out of your computer (or stereo) and record to a component burner to remove the DRM code from your files. It will be painful, but the only way to make sure you will have control over your music. Is this illegal? Yes. So I guess it doesn't really answer the question from an idustry perspective. My crystal ball tells me that iPods will still be in the market in 20 years, but they will also be a phone, pda, etc. Maybe Apple or Google or someone will start offering free storage for music collections so the unpredictable nature of the home computer hard drive and iPod will not be a factor (Google Grid anyone?) My advice is that you shouldn't expect the industry to protect your investment for you. They are better off if it is destroyed. Which leads me to the most likely answer the industry will come up with: warranty/insurance offering. Not sure exactly how that would work, but it will probably show up eventually. Maybe replacement service will become a standard feature of sites, but since margins are already thin (or non-existant), this may result in a price increase.
Q7. Most people in my age group (15) still download all of their music illegally. What action would you take to try to persuade this particular group to buy music?
This is the toughest one for me. I remember what is was like to be 15, and I'm pretty sure the only thing that would get me paying for something I could get for free is if all my friends were doing it, or more importantly, if all the people I wanted to be my friends were doing it. Makes me wonder if maybe law suits really are the only answer.
Q8. Have you ever "stolen" music?
Only indirectly. I've never stolen any traditional music format (CD, LP, cassette, etc.), unless you count "borrowing" some of my brothers music for extended periods of time without permission. I've also never engaged in file sharing, but I have been given music obtained via file sharing, as well as music copied from CDs (both legally purchased and borrowed from libraries). I've always wanted to re-frame this question, so I think I will do so now. My version of the questions is "What is the monetary value of the music you've obtained for which you have not paid relative to the overall amount of money you've spent on music in your lifetime?" You could take it a step further and bring the same comparison to the label or artist level. I've spent an INORDINATE amount of money on music in my life, both recorded and live. If I've bought 10 CDs and 6 concert tickets for the same band, do I feel badly about getting a few MP3s that I don't have from a friend of mine. Negative. I'd also like to offer an anology that anyone who is actually in the business of dealing with music downloads would be wise to avoid: File sharing is a lot like drug dealing (but without the money). It's really the people who are offering free files that should be dealt the legal blow, not the kid trolling the virtual streets, trying to score some Korn. I wouldn't go so far as to call the strong desire to download music a disease, but that doesn't mean that the problem can be solved by punishing the "addicts."
eMusic is looking to steal away some marketshare from iTunes by launching a new ad campaign across TV, print, web and even outdoor. There are more details here. Content will include artists such as "Ray Charles, Tom Waits, Coldplay, Johnny Cash, Pixies, and Jerry Garcia."
