Tag Archives: emusic

eMusic and accidental release syndrome

Last Sunday night I happened to be reading the eMusic message boards when I saw a new post announcing the availability on eMusic of the new album Kala from M.I.A. The original announcement was quickly followed by those ominous words familiar to all eMusic regulars: get it while you can. I followed the advice, quickly downloaded the album, and the next morning woke up to read the latest comment on the topic: And, now it’s gone. In this case it’s not really gone from eMusic completely, it’s just unavailable for download in your country (another phrase dreaded by eMusicians).

So what, right? The album was supposed to be released only to eMusic Europe and/or eMusic UK due to distribution restrictions, someone at eMusic messed up, and it got released for eMusic US before someone noticed the error and corrected it. As everyone familar with eMusic knows, it happens all the time.

Which makes me put on my tin-foil hat and wonder: is it an accident that it happens all the time, or is it somehow in eMusic’s interest that this occurs on a regular basis? I don’t necessarily mean that eMusic is deliberately making releases temporarily available in countries when and where it’s not supposed to. It might also be that this accidental release syndrome (as I’ll call it, or ARS for short) has enough benefits to eMusic that it’s not worth making the effort to absolutely prevent it from happening. (For example, by having eMusic staffers double- and triple-check each and every release before it goes live on each of the eMusic sites.)

Consider: As I previously wrote, one good way for labels to view eMusic is as a way to identify price-sensitive buyers and sell to them at prices they are willing to pay. Ideally this produces extra revenue and profits the labels would not otherwise see, because in the absence of eMusic the price-sensitive buyers would either stay out of the market or turn to P2P. (We’re of course assuming that labels aren’t losing money on each sale due to per-track fixed costs that exceed the eMusic per-track payout. If that’s not the case then labels shouldn’t be selling on eMusic.) In this sense eMusic is the digital music equivalent of Filene’s Basement.

eMusic’s chronic case of ARS no doubt pisses some subscribers off but arguably also advances the strategy of price discriminating based on price sensitivity. First, to take advantage of ARS-affected releases you have to be reading the eMusic message message boards on an regular basis—really daily or even multiple times a day. This restricts accidental release availability to a very small proportion of hard core eMusic subscribers, who are probably also the most price-sensitive of eMusic’s customers. (You know, the people who are on Connoisseur plans and obsess about finding one-track albums to use that very last download.) So task one is done: we’ve identified our price-sensitive customers.

Second, product scarcity (including artificially-induced scarcity) is well-known to be a driver of sales. (For example, it’s one of Robert Cialdini’s six weapons of influence.) I’m not really a big M.I.A. fan, but in this case reading a favorable review for Kala combined with the message board warning led me to spend some of my monthly downloads on it. (For the record, I don’t regret doing so, and even went on to download Arular, which I’d previously ignored.) As noted in the message board thread, some subscribers apparently bought booster pack downloads for the occasion—a pretty expensive proposition in eMusic terms, at $0.40-0.60 per track or $4.80-7.20 for the entire album. It’s possible that this ARS event bumped the album’s sales up across all eMusic sites, including the UK and European sites as well as the US sites, as even casual M.I.A. fans hurried to download the album before it might disappear; it may have increased sales of M.I.A.’s previous releases on eMusic as well, as in my case. So task two accomplished: getting the price-sensitive buyers to open their wallets and buy something.

(Before I go on, there’s an interesting question here: What happens to the revenues for tracks that are accidentally released in a geographical area without authorization from the label holding distribution rights in that area, including cases where the label in question may not have an existing relationship with eMusic? Perhaps eMusic sends an apology along with a check for the amount that would have been due the label, with an implicit or explicit message Hey, if you sold through eMusic here’s the sort of money you could be making? Recall also that before eMusic UK and eMusic Europe opened eMusic did in fact sell to subscribers in those areas, without necessarily having authorization to do so from the labels holding distribution rights for those areas, labels which might be different than the labels holding the rights in the US. I don’t recall ever seeing anything about how eMusic handled this; perhaps it treated all revenues as coming from US sales no matter the subscriber location?)

Given the potential for accidental release syndrome to goose eMusic sales, I’m wondering whether it would make sense for eMusic to make more use of artificial scarcity in its sales strategy. In particular, in my previously-referenced post on optimizing sales through eMusic I discussed a possible product versioning strategy in which eMusic would make new releases available only to a certain group of customers, with other customers able to download the releases some number of months later. Why not carry that to an extreme, and arrange with labels to do special n days only sales of albums that would otherwise not be released on eMusic at all? eMusic could do such sales events a few days after the release date for other channels like iTunes, and not pre-announce that they’d be occurring. That way price-insensitive customers (including at least some eMusic subscribers who are devoted fans of the artists in question) would likely go ahead and buy the release through non-eMusic channels, resulting in higher per-track payouts to the labels, while eMusic would pick up that group of price-sensitive customers who would rather not buy the album at all than pay iTunes prices for it, at a time when marketing buzz for the release would still be at its height.

If eMusic were in fact to do such n days only sales then I don’t see any harm with officially announcing them (e.g., on the eMusic home page) at the time they occur; the key is not to pre-announce them (e.g., in the coming soon… section), because then otherwise-price-insensitive customers might be tempted to wait for availability on eMusic and not pay higher prices elsewhere. Also, when announcing such a sale for a release eMusic should make it clear when the sale ends and the release will no longer be available on eMusic; this would lend urgency to the customer’s decision and make it more likely that fence-sitters will opt to download the release.

Regardless of how they happen, accidental release events (more specifically, those releases that savvy eMusic subscribers apparently believe are accidental, and thus subject to being suddenly terminated without notice) might highlight a way for labels to derive incremental sales through eMusic without committing themselves to making all releases available through eMusic all the time.

Universal goes back to the future with DRM-free music

Reading one of Bob Lefsetz’s latest letters recently I found out about Universal’s plan to offer digital music in a DRM-free format (although not through iTunes). Lefsetz takes a somewhat jaundiced view of the situation, and in particular makes the point (which I mostly agree with) that the key issue for music buyers is price, not DRM. Hypebot takes issue with his pessimism and (among other things) sees abandonment of DRM as key to enabling more experimentation in music retailing. I agree with this too, but I also remember: Haven’t we seen an experiment like this before?

Let’s hop into Doc Brown’s DeLorean (before Universal sends it to the junkyard) and travel in time back to July 9, 2002:

EMusic.com Inc., a part of Vivendi Universal Net USA (VUNet USA), and Universal Music Group (UMG), a division of Vivendi Universal, today announced the availability of approximately 1,000 UMG albums through EMusic’s downloadable music subscription service (http://www.EMusic.com), as part of a consumer trial program. EMusic will feature tracks from a cross-section of UMG’s back catalog, which spans a variety of artists and genres. …

Designed for the avid music fan, EMusic allows its 50,000+ members to download as much music as they desire for one low monthly price. Because EMusic uses the popular MP3 format, members can easily burn their music to CDs and transfer it to portable MP3 audio players, such as the SONICblue Rio, Apple iPod or Creative Nomad. …

In other words, not only did Universal previously experiment with releasing DRM-free tracks, it did so under a scheme that in terms of pricing was essentially identical to Bob Lefsetz’s oft-repeated proposal for monetizing P2P: ten dollars a month for all you can eat, unprotected MP3s (to quote from his April Fools story about Jimmy Iovine leaving Universal to go to Limewire).

Unfortunately the eMusic/Universal experiment ended fairly ignominiously, and its demise may hold some lessons regarding both Bob Lefsetz’s call for lower prices and Hypebot’s call for more experimentation. As noted in a Wired News story later in 2002 (about the major labels desire to support streaming-only services),

Even EMusic.com, which built its business selling downloads as a subscription service, is being forced to reconsider its business model after some users started downloading 2,000 tracks per month—roughly 165 albums—according to general manager Steve Grady. …

EMusic’s solution was to limit the number of tracks users can download. If it hadn’t instituted a cap, it would have lost money on the most frequent downloaders. EMusic subscribers pay $120 a year. But a subscriber who downloads 2,000 tracks a month costs the company $140 in licensing fees to music publishers, Grady said.

In practice eMusic didn’t impose a technical limit on downloading; instead it sent warning letters to customers who downloaded more than 2,000 tracks per month, and kicked at least at least some of them off the service. (Thus began the infamous 2K Club, still memorialized in some eMusic subscribers’ message board nicknames.) Eventually the unlimited download plan was discontinued when Dimensional Associates bought eMusic from Vivendi in 2003, just over a year after the Universal experiment started. Universal pulled all its releases from eMusic at that time or shortly before. (I haven’t been able to find an authoritative reference for the date.)

As implied by Steve Grady’s comments quoted above, the need to pay mechanical royalties to music publishers (amounting to 7 cents per track in Grady’s example, from 5-10 cents per track according to other sources) made it unprofitable for eMusic when (some) people took full advantage of the unlimited nature of the service. After ending the unlimited download plan eMusic in effect set a floor on the per-track prices paid by subscribers, by limiting the total number of tracks per month; initially this minimum price amounted to 25 cents per track for the lowest-price plan (40 tracks for $9.99), and has since been raised to 33 cents per track for the corresponding plan in eMusic’s current pricing (30 tracks for $9.99).

Even with these higher prices eMusic has had some troubles in its dealings with independent labels over the issue of per-track payouts, with Drag City being one of the most recent labels to defect. What does this say for the possibility of new pricing experiments in selling digital music in DRM-free formats? Larger corporations like Amazon might have more clout to demand better pricing and/or more money to treat digital music as a loss leader for other products. However I suspect that (nearly a decade after Napster) neither major labels nor independents are yet ready for a new world of ultra-low music prices, with a major sticking point presumably being per-track fixed costs in the form of mechanical royalties and other contractually-obligated payments. Until that changes I suspect that major innovations in pricing will not occur. Of course, as Bob Lefsetz continually and correctly repeats, the world is not waiting on the labels to get their act together, and in the meantime people will continue to take matters into their own hands on the P2P networks.

UPDATE: For some good commentary on Universal’s refusal to sell DRM-free tracks through Apple, see the post Dinosaurs with Jetpacks (found through Daring Fireball). The author’s premise that Universal is engaged in a grand (but doomed) scheme to hurt Apple is perfectly believable.

To my remaining readers

If anyone is still reading this blog, my apologies: I’ve been preoccupied with work and family matters and haven’t posted anything since May. In fact, things got so bad in terms of distractions that I had not one but two months in which I even neglected to use all my eMusic downloads (the horror!). I can’t promise to resume the posting frequency of certain times past, but I do have at least one or two new posts coming up in the next few days, and hope to keep additional posts coming on a semi-regular schedule.

I’m also thinking about moving the blog from my own server to wordpress.com; if I do so I should be able to keep the current domain name, and I may also be able to ensure that the feed URLs don’t change either. I’ve already imported almost all the old blog posts and comments into the wordpress.com-hosted version of the blog, but want to do some more tweaking and testing before I throw the switch.

eMusic jumps into bed with Alltel

From time to time I like to highlight eMusic-related business deals. Here’s a new one (not mentioned on the eMusic press release page): eMusic will be the featured music provider for Jump Music, a new service from Alltel Wireless that lets cellular subscribers download music from their PCs to their mobile phones. Alltel is the fifth-largest wireless provider in the US, and is rumored to be an candidate for acquisition either by private equity firms or by Verizon. (Both Verizon and Alltel use CDMA technology.) Although Alltel claims to have the largest wireless network in the US (based on geographic extent presumably, not on total number of subscribers) it’s not that well known because its main markets are in the flyover states.

Presumably Alltel picked eMusic both because it offers lots of DRM-free music (making it easy to work with MP3-capable mobile phones) and also because as number 2 behind the iTunes Store it’s willing to do deals with smaller companies (as I noted in my discussion of the Johnny Rockets deal). As Apple and AT&T prepare to roll out the iPhone it will be interesting to see what other US-based mobile operators do to match the iPhone/iTunes offering. It may be that eMusic has had similar discussions with other mobile operators—I guess we’ll see.

In any case I can amuse myself with the thought of the city slickers from eMusic visiting the quiet burb of Little Rock, Arkansas (Alltel’s headquarters) to hammer out the deal. I hope they had a chance to stop by the Bill Clinton museum and catch a glimpse of one of his saxophones.

How labels could optimize eMusic vs. non-eMusic sales

In part 2 of my series “Sympathy for the labels” (see also part 1) I discussed the concern of labels that selling through eMusic lowers overall profitability by diverting sales away from the iTunes Store and other higher-priced outlets. Note that I’m referring here to labels that are realizing at least some profit from eMusic sales. As I wrote in part 2, labels that are losing money on every track sold through eMusic, e.g., due to fixed per-track mechanical royalties, should not be selling through eMusic, period. However even if a label’s eMusic-related sales are profitable, the label might still have a legitimate concern about whether those sales are supplementing sales through other services, or displacing them.

I think the most straightforward strategy for labels to address this concern is to work with eMusic to implement some form of price discrimination:

A seller price discriminates when it charges different prices to different buyers. The ideal form of price discrimination, from the seller’s point of view, is to charge each buyer the maximum that the buyer is willing to pay.

The basic idea is that selling at a single price divides potential customers into three groups:

  • those who think the price is too high (and who therefore don’t buy at all)
  • those who are willing to pay the price (but not much more)
  • those who would be happy to pay a higher price (but end up paying the same price as everyone else)

In a single price scenario the seller (a record label in this case) makes no money at all on the first group, and makes less money on the third group than could be made in theory. The seller could increase overall revenues and profits by offering a lower (but still profitable) price to the first group, and a higher price to the third group.

However doing this is not trivial:

Every seller would price discriminate if there were not two major obstacles standing in the way. First, the seller must be able to distinguish between those buyers who are willing to pay a high price from those who are not. Second, there must be substantial difficulty for a low-price buyer to resell to those willing to buy at a high price.

In the context of eMusic the second obstacle corresponds to people buying low-priced MP3s from eMusic and then reselling them to others at higher prices (a form of arbitrage). Unless I’m missing something, this is a non-problem. If anyone is inclined to violate the eMusic subscription agreement then they’re far more likely to simply offer up their purchased music collections on P2P file sharing networks. While this adds to the labels’ general woes it doesn’t directly affect the eMusic vs. iTunes Store issue, since I’m assuming that the customers of both services are willing to pay some amount for music, no matter how small, and are not obtaining music solely via P2P networks.

I’ll therefore ignore the second obstacle and focus on the problem of distinguishing between price-sensitive and price-insensitive customers and then price discriminating on that basis.

Product versioning

One way to do this is through product versioning, i.e., offering multiple versions of the same product that differ in terms of quality or other aspects. Examples in the music industry include offering albums as CDs (including album art and liner notes) as well as in digital versions at varying levels of quality (e.g., 128Kbps MP3 vs. 192Kbps VBR MP3 vs. FLAC, etc.). Price-insensitive customers are happy to buy the higher-quality version, while others are willing to accept a lower quality product in return for a lower price. (In actual practice retailers typically offer at least three product versions at three different prices, using so-called Goldilocks pricing.)

However such versioning doesn’t directly address the eMusic vs. iTunes Store issue, since both are offering roughly equivalent products. In fact, for those releases available on both services eMusic has traditionally offered an arguably higher-quality product at a lower price, since unlike the iTunes Store it offered tracks that were playable on more devices and were free of DRM-imposed restrictions.

Before it left eMusic Tzadik used a particularly strange method of product versioning: It made albums available for downloading on eMusic but omitted tracks that were 15 minutes or longer in length. I strongly suspect that eMusic subscribers are much more interested in downloading albums than single tracks, both because independent music doesn’t tend to be singles-oriented and also because downloading complete albums reduces customers’ mental accounting costs. Tzadik’s policy thus amounted to offering a significantly inferior product on eMusic in the hopes that all but the most price-sensitive customers would go elsewhere to buy it. It’s analogous to a car manufacturer forcing low-cost car dealers to sell its cars without back seats: it might make superficial sense to someone in marketing, but customers would generally think that the manufacturer was taking them for fools.

My conclusion is that product versioning in the classic sense won’t work in the eMusic context, at least given current eMusic offerings. (However it’s possible that in the future eMusic and the labels could cooperate to offer certain premium products, as I’ll discuss in a future post.)

Release windows

Another strategy is to offer a product initially at a relatively high price, and then to later offer the same or a similar product at a lower price. (This can be thought of as a special case of product versioning, with the differentiating product aspect being time rather than quality.) This is the strategy that book publishers use with hardcover books vs. paperbacks: Price-insensitive buyers purchase the hardcover version, while price-sensitive buyers are willing to wait a few months for the paperback to come out. The delay is necessary because the differences between a hardcover and paperback book are not necessarily enough to promote proper price discrimination if they were released at the same time: Most if not all people would likely be willing to settle for the paperback version and ignore the hardcover version, since what’s most important to them is the content of the book (What happens to Harry Potter?), not the sturdiness of its covers.

In an eMusic context this strategy corresponds to labels releasing albums to CD and the iTunes Store first, and then waiting a few months before releasing to eMusic. The assumption is that the quality difference between the CD and the iTunes Store digital version is sufficient to promote price discrimination at the time of original release between very price-insensitive customers (who buy the CD) and moderately price-insensitive customers (who buy the iTunes Store digital version), and that the most price-sensitive customers will be willing to wait some time before purchasing the album at eMusic. Of course, some people won’t want to pay the iTunes Store prices and will go to P2P to get the album, but it’s not clear how many of those people would have paid in any case, even through eMusic.

One problem with this strategy is that it doesn’t take full advantage of labels’ marketing efforts at the time of the albums’ initial releases. Such campaigns are to some extent wasted on eMusic customers, especially those customers who predominantly purchase through eMusic, because they can’t buy a newly-released album through eMusic at the time when their interest in the album is at its height. By the time the album becomes available on eMusic customers may put a much lower priority on downloading it, having found lots of other albums to consider downloading in the meantime.

Similar considerations have motivated movie studios to consider reducing the window between theatrical release of movies and release on DVD. However others have claimed that it’s counter-productive to move toward shorter release windows and so-called day and date releases to multiple channels. Also, sales of movies are much more driven by marketing campaigns than sales of albums, many of which tend to sell well long after initial release.

Thus it’s likely a viable strategy for labels to have a window between availability in full-price digital music services and availability on eMusic. However as I discuss in the next section it’s also possible that labels could find a strategy that protects iTunes Store sales while not totally forgoing the possibility of realizing eMusic-related revenue starting at initial album release.

Behavior-based differential pricing

If a retailer has enough information about its customers then it can use customers’ past behavior to determine whether they appear to be price sensitive or not. Retailers can then implement pricing schemes that target particular purchasers for special treatment. For example, in the past Amazon has experimented with varying prices shown to different customers, a practice also followed by other online sellers. In one application of this strategy, a site may use targeted pricing to grow its customer base, offering special discounts to get new customers hooked while displaying higher prices to loyal customers, on the theory that they are less likely to switch to a competitor.

As the referenced articles indicate, while differential pricing may be economically efficient it is not easy to implement such schemes without running into customer concerns about fairness. The same Internet that makes online commerce possible also makes it possible for customers to compare the prices they are being offered, and to evaluate whether or not they’re being unfairly taken advantage of in particular circumstances.

In the case I’m considering the concern is about eMusic impacting labels’ sales through the iTunes Store and other services. The problem at hand is thus as follows:

  1. Use what eMusic knows about its customers to identify which are most price-sensitive.
  2. Implement a mechanism to allow labels to sell through eMusic only to the most price-sensitive customers, forcing less price-sensitive customers to go to higher-priced outlets.
  3. Do this in a way that is fair and can be justified to all eMusic customers.

In my opinion the most price-sensitive eMusic customers can be identified as follows:

  • They are long-time eMusic subscribers, having recognized early the value of the service as a low-cost way to purchase music.
  • They have signed up to the higher-priced plans (e.g., Connoisseur plans or equivalent) and/or to annual or biannual plans, in an effort to get the lowest per-track price possible.
  • They regularly max out their plans in order to not waste money on unexpired downloads, and make minimal or no use of relatively expensive booster packs.

It may be counter-intuitive that the customers spending more money at eMusic are generally the most price-sensitive, since we typically assume that big spenders don’t care about prices. However in the context of eMusic the highest-paying customers are most likely not wealthy individuals but rather people of average means who are dedicated music lovers and have an almost insatiable demand for new music. They are price-sensitive because even a small decrease in price makes a significant difference in the amount of additional music they can purchase. For example, someone on the $74.99 Connoisseur plan is downloading the equivalent of about 30 albums a month, one new album every day. A 10% decrease in price would equate to three extra albums per month for the same amount of money.

eMusic already has all the information it needs to identify price-sensitive customers according to the above criteria, since it obviously knows which plans its customers are subscribed to and how much they’re downloading. eMusic also has the ability to make particular releases available to some customers and not to others, since it has to do this already in order to implement restrictions on which releases are available in which countries. It therefore should be well within eMusic’s capability to allow labels to designate particular releases as being available only to customers previously identified as being price sensitive. The only remaining problem is to do this in a manner that is arguably fair to eMusic’s customers.

In my opinion the most fair mechanism would be based on either customers’ selected plans or on the length of (uninterrupted) time they’ve been eMusic subscribers, or both. For example, making selected new releases available only to people on Connoisseur plans could be justified as providing extra benefits to eMusic’s best customers. Similarly, making new releases available only to people who’ve been eMusic subscribers for at least six months (say) could be justified as a reward for customer loyalty. Using the third criterion above (maxing out plans and not buying booster packs) is arguably not fair, both because customers may have good reasons for not using all their downloads (vacation, sickness, etc.) and also because customers who don’t download their entire quotas and who buy booster packs are in fact contributing more to eMusic’s and the labels’ bottom lines.

Addressing concerns about selling through eMusic vs. other channels

Based on my comments above, I propose that eMusic work with its labels to allow them to designate certain albums (and associated tracks) as premium offerings that would be made available only to certain eMusic customers; these albums would typically be new releases but might also be back catalog albums that were still doing significant business at the iTunes Store and in CD format. Such releases would be made available only to eMusic customers who were currently on a Connoisseur plan or had been eMusic subscribers for at least the past six months.

(I think the ability to download premium releases should be extended to all eMusic subscribers if they stay with the service long enough, both because it’s more fair to existing customers and also because this encourages new subscribers to stick around long enough to become loyal customers and perhaps upgrade to more expensive plans. I chose the six-month window as being long enough to protect labels’ revenues and profits on new releases sold through non-eMusic channels, but short enough not to discourage new eMusic subscribers. Finally, eMusic could also extend the ability to download premium releases to other selected customers as appropriate, for example customers on older high-priced plans, customers on annual or biannual plans, and so on.)

Labels would then have the following options with regard to selling through eMusic, with pros and cons as noted:

  • Not sell through eMusic at all. This would guarantee higher payouts in all cases, but could mean forgoing incremental revenues and profits from price-sensitive customers, who might otherwise purchase music from other labels that do happen to sell through eMusic, or who might simply resort to downloading the label’s releases using P2P networks. I’d recommend this option only for labels whose cost structures are such that they cannot sell any releases profitably through eMusic.
  • Sell all releases through eMusic, without exception. This would maximize the potential revenue and profit obtained through eMusic, but might negatively impact revenue and profits through other channels with higher prices. This strategy would make the most sense for labels whose sales through the iTunes Store and other mainstream-oriented services are relatively insignificant.
  • Sell only back catalog releases through eMusic. This would alleviate the financial impact of eMusic diverting new release sales away from the iTunes Store and other outlets, but (as with not selling through eMusic at all) would mean leaving money on the table by driving away price-sensitive customers who might otherwise have purchased the new albums through eMusic at the time they were originally released. I believe this option would thus be inferior to the next one.
  • Sell all releases through eMusic, but designate new releases and certain others as premium offerings available only to certain eMusic customers (as described above). This would help preserve new release business through the iTunes Store and other services by limiting the extent to which more casual buyers could obtain new releases through eMusic (e.g., by signing up for a free trial), while still getting incremental revenue and profits on new releases from dedicated music buyers who have proven to be price-sensitive (and are therefore unlikely to buy from the iTunes Store or elsewhere).

The major downside of the fourth option is that it could hurt eMusic’s ability to attract new subscribers, since people just joining eMusic wouldn’t be able to immediately download certain new releases (including most likely those from the latest flavor of the month artists) unless they signed up to a high-priced plan. However at the same time this option might help with eMusic customer retention, since existing customers would retain their ability to get new releases at low cost only by staying with eMusic and not interrupting their subscriptions.

In the end I think this comes down to a trade-off between eMusic’s desire to grow its own business and the labels’ desire to protect theirs. As I implied in the conclusion of my first sympathy for the labels post, I believe it’s in eMusic’s long-term interest to keep labels reasonably happy, even if doing so harms its own business a bit. I believe my proposal above could help address labels’ concerns about eMusic’s negative impact on non-eMusic sales, and would arguably be better for eMusic itself than having labels using eMusic only as a back catalog outlet, or not selling through eMusic at all.

Sympathy for the labels, part 2

In my previous post I discussed the difficulties that independent labels were having in adapting to the new landscape of the music business, and whether eMusic management was being sufficiently sensitive to that fact in their dealings with labels. Beyond the emotional aspects of the indie labels’ issues with eMusic and the music business in general, there are also some serious questions as to whether the current eMusic model is an overall plus or minus for labels. There seem to be three related but distinct concerns here:

  • Selling through eMusic is not profitable, period.
  • Selling through eMusic isn’t profitable enough.
  • Selling through eMusic lowers overall profitability by diverting sales away from the iTunes Store and other higher-priced outlets.

The first concern is that dealing with eMusic is simply unprofitable; for example, on the eMusic message boards Wesley cited this as a reason for Red House Records leaving: According to a contact at Red House they felt it was time to leave because after paying the artist and songwriter royalities they were losing money on every track.

As frogkopf has noted on the eMusic message boards, this problem is primarily due to traditional music industry royalty arrangements, in particular the practice of paying fixed mechanical royalties (X cents per track):

For along time, having a fixed rate for mechanical royalties worked in favor of the record labels, since it was inflation proof – as retail prices climbed the rate stayed the same, resulting in the payouts being a smaller and smaller percentage of the overall sales. Now that the price per unit is dropping under new pricing models such as eMu’s the labels are on the losing end of the equation, and they don’t like it a bit.

I see two things happening as a result of this trend. First, many individual artists will publish their own works, perhaps using someone like CDbaby as a distributor and keep what is left over as their profit (I believe CDbaby keeps 9% off the top and forwards the rest to the artist). Second, labels will have to restructure their contracts with artists into more of a profit sharing arrangement, where each party keeps X% of the sales, after original costs (recording, etc.) are re-couped.

(Long-time eMusic customers may remember that the problem of fixed per-track royalties was also what doomed eMusic’s original all you can download unlimited subscription model.)

Unfortunately this is not a problem that can be addressed in the short term, given that labels and music publishers aren’t going to change business practices overnight. In these circumstances it’s understandable why labels with unfavorable cost structures might want to leave eMusic if those cost structures prevent them turning a profit at all, and it’s not necessarily a slight on eMusic when they do so.

The next concern is that although selling through eMusic is profitable, it’s not profitable enough according to some measure (typically as compared to selling through the iTunes Store). Such concerns could be addressed either by eMusic raising prices across the board or by eMusic instituting some sort of variable pricing scheme that would allow labels to have more control over per-track prices.

Regarding across-the-board increases, it’s worth noting that eMusic has already raised its prices over the past few years since the unlimited subscription model was abandoned. For example, the eMusic basic plan for the US, which originally offered 40 tracks at $9.99, now offers only 30 tracks at the same price. This corresponds to an effective price increase of 32 per cent (from $0.25 per track to $0.33). Users in the UK and Europe also saw a price increase when the UK- and Europe-specific services were introduced. At some point further price increases would likely tend to drive customers away from the service, as David Pakman implied with his comments on price elasticity:

It’s the basic economic concept that says, for certain goods, when you raise the price, sales will fall disproportionately, and so the increased revenue doesn’t make up for the lack of sales. And if you lower the price, sales will rise disproportionately. Music is an elastic good, and we have now seen that by raising prices, the industry in fact did not make up the revenue, and, in the end, only slowed sales.

Regarding variable pricing, it’s difficult to see how variable pricing could be introduced in the eMusic subscription model without over-complicating it. One approach would be to change the subscription from being track-based to credit-based, with most tracks requiring one credit but some counting as two or more credits against the limit. This model has been adopted by Audio Lunchbox (another service offering DRM-free music from independent labels), but I question its viability. In particular, a credit-based model imposes considerable mental accounting costs on customers trying to decide what to buy, and thus likely dampens their enthusiam for buying anything at all.

(Audio Lunchbox takes this to insane levels: For a particular album you can purchase individual tracks at a cost of 1 to 4 credits depending on the track, you can purchase a whole album for a cost in credits that’s not necessarily that the same as the sum of the credits for the individual tracks, and you can purchase an album for an a la carte price in dollars that doesn’t necessarily match the cost of the album in the equivalent number of credits. A price-conscious customer would almost need to keep a calculator near to hand in order to use the service.)

The final concern is that the low prices at eMusic are attracting customers who would otherwise have bought either CDs or higher-priced digital albums at the iTunes Store or elsewhere. This in turn allegedly reduces label revenues and profits below what they would have been in the absence of eMusic.

To use Drag City as an example (a label that joined eMusic relatively recently): I was initially introduced to Joanna Newsom‘s music on Last.fm, and then bought her debut album Milk-Eyed Mender on CD (from Amazon) because it wasn’t on eMusic. However after Drag City came on board with eMusic I then got Ys from eMusic, even though I liked Newsom well enough that I would have almost certainly bought the CD if the album hadn’t been on eMusic. So in my case Drag City did in fact paid a price for releasing to eMusic.

However there are other cases where I’ve bought albums from eMusic that I would have never bought on CD or as full-price downloads. In fact, this was the case with the Joanna Newson and the Ys Street Band EP, which costs $10.99 from Amazon, $10 direct from Drag City (in CD form), $3.99 from the iTunes Store, but less than $1 from eMusic under the plan I’m on. Given that the EP had only one new song, in my opinion even $4 at the iTunes Store was too high a price to pay.

How to move beyond such anecdotal evidence? One approach is to ignore the underlying dynamics of the market and simply conduct controlled experiments: For example, suppose a label has two albums that from past experience it expects to be of roughly equal appeal to the market. It could release album A to eMusic and hold back album B, reserving it for the iTunes Store and other services that have price points higher than eMusic, and then compare the revenue and profits for each album. If album A does better overall then releasing to eMusic is a net plus, and if album B does better then releasing to eMusic is in fact a bad deal for the label.

However this wouldn’t necessarily settle the question, since we may be comparing apples with oranges: Album A may differ from album B in ways that would affect the relative revenue and profits. In particular, the set of people interested in album A may have different buying behaviors than the set of people attracted to album B. The goal is to measure the impact on releasing to eMusic or not, all other things being equal, but it’s hard to arrange the other things so that in fact they are equal in reality.

An alternative approach is to apply what’s known about economic principles and come up with some sort of business strategy vis-a-vis releasing to eMusic that is both easy to implement and likely to be effective. I’ll defer discussion of this to my next post. This post is long enough at this point, and this particular topic is important enough to deserve a post of its own.

Sympathy for the labels, part 1

I previously commented on the Billboard article about labels’ unhappiness with eMusic, although I got some of the facts of the article wrong—an obvious reminder that I need to sleep on eMusic news before writing about it. The article was the subject of much comment on the eMusic message boards, to which I contributed in a small way. Having had some time to think since then, I’m ready now to expand my comments.

I recently expressed some scorn for the labels’ complaints, including using a rather colorful metaphor that I won’t repeat here. In fairness the labels do have real problems and at least some justification for their complaints, so I feel an obligation to show some sympathy for them and offer some constructive comment. I think there are at least three real issues that the labels are right to be concerned about:

  • Labels are struggling to adapt to a world where CD sales are dropping and digital sales are not picking up the slack, and they’d like eMusic to be sensitive to that fact.
  • Labels are at risk of leaving money on the table by putting releases out on eMusic at the same time they release on CD and to iTunes.
  • Labels don’t have any assurance that eMusic-based revenues are going to show any growth.

In this post I address the first point, postponing discussion of the second and third to subsequent posts.

The sorry state of the music industry is obviously not of eMusic’s making, but it does inform everything the labels think, do, and say. As an outsider not working in the business I can see this as simply an inevitable historical trend: The golden age of the music business began when mass distribution of recorded music became possible at all, and ended when it became cheap and easy enough for anyone to do it. During this golden age (roughly coinciding with the 20th century) record labels were able to profit greatly from their control of music distribution, but that control has now disappeared, and with it the associated profits.

The current turmoil in the music industry is simply an unavoidable consequence of this trend, which the labels can attempt to delay (e.g., through draconian enforcement actions against illegal downloaders) but ultimately cannot stop. The only suitable response is thus to make change [your] friend, as Bill Clinton once said. However those living through this period (including paying—or struggling to pay—for mortgages, health insurance, child care, etc.) can’t afford to be dispassionate, as the whole world changes around them and they struggle to adjust their business models to adapt.

Beyond the competition from P2P downloading and the decline in CD sales, I think there will also be additional pressure on CD prices due to both competition from the used CD market (revitalized by sites like LaLa) and the increasing dominance of Amazon in selling indie CDs (and perhaps now indie digital tracks) as record stores bite the dust. (In particular Amazon may end up being to indie labels what Wal-Mart is to its suppliers.) In the end I think the labels need to plan for a future in which CDs don’t sell for more than $10 and digital albums don’t sell for more than $5. This will likely require some pretty wrenching changes to the cost structures of labels that are already very lean (even starving) operations in the first place.

Customers may or may not sympathize with the indie labels’ woes, especially given that the major labels and the RIAA have done such a great job of painting record labels in general as villains eager to screw both artists and customers. But although the major labels indeed may be a den of thieves (and not afraid to say so), indie labels don’t deserve to be lumped in indiscriminately with them. And in any case eMusic itself has to work with the labels, and clearly has an interest in keeping them at least reasonably happy.

It may be hypocritical of me to say so, given the snarky comments I myself have made in the past, but David Pakman might be advised to make an extra effort to show sympathy for the labels’ plight. It’s not necessarily that he’s seemed dismissive of their problems, but his attitude as conveyed in public comments (Sure, on occasion, a few labels will come and go) seems to be that periodic label defections are just a natural phenomenon that has minimal impact on the overall eMusic business. I actually agree with Pakman on this point; given the amount of music available on the service, eMusic can easily sustain the loss of a few labels here and there. However from a PR aspect label defections constitute a drip, drip, drip of bad news that is especially undesirable for eMusic now that people are raising serious questions about its long-term viability in the face of competition from Amazon and other services.

Stories focusing on the departure of key eMusic employees are another indicator of the PR woes eMusic finds itself in. The implied subtext of such articles is that eMusic used to have people who went the extra mile for indie labels, but now eMusic is just a cold-hearted business that doesn’t care if the labels live or die. Whether this is true or not, showing some extra indie label love might help eMusic lessen the PR impact of any further label defections; this includes both supportive public comments and some actual business moves (as discussed in my follow-up posts).

Pakman blogs

David Pakman (CEO of eMusic—but you already knew that, right?) has traditionally confined his public comments to press interviews. However in the wake of reports about some labels being dissatisfied with eMusic, Pakman has chosen to bypass the press and take his case directly to eMusic customers using 17 dots, eMusic’s official unofficial blog. His points are pretty much what you’d expect: customers don’t want DRM, they do want music to be less expensive, and the music industry needs to recognize these facts and adapt to them. I’ve previously commented on these points, and will do so again, but I thought for this post it’s more interesting t o look at the why of Pakman’s post as opposed to the what.

In particular, some people have questioned Pakman’s decision to post to 17 dots as opposed to seeking some other venue; for example, in a comment on Pakman’s post ‘Bill’ wrote: … a long, involved corporate response is at least out of place in what’s generally a space reserved for music appreciation. For what it’s worth, I think 17 dots was not a bad place to post this. What were the alternatives? Let’s consider them one by one:

  • Why not publish a press release? This really isn’t a press release sort of thing. Besides, Pakman wasn’t necessariyl addressing his comments to the world at large, I think he was primarily addressing them primarily to (a subset of) eMusic customers and secondarily to others in the music industry-basically the sets of people who’d already have read the negative eMusic stories.
  • Why not talk to the press? The press deals in sound bites, and Pakman had a lot to say that couldn’t be summed up in a sound bite. Also, I’m sure he wanted to make sure his message didn’t get distorted on its way to the intended audience.
  • Why not post something on the eMusic web site? As I implied above, I think only a fraction of eMusic’s customer base (and a fairly small fraction at that) knows about or cares about negative eMusic press stories. Presumably Pakman didn’t want to run the risk of provoking disquiet among eMusic customers who’ve been blissfully downloading and likely aren’t affected by a few labels pulling out here and there.
  • Who not post something to the eMusic message board? I suspect that the number of people who are deeply interested in matters eMusic is significantly larger than the number of people reading the message boards and (especially) posting to them. (I certainly see comments on Pakman’s post from people whom I don’t recall ever seeing comment on the message boards.) I suspect that most if not all of these power users are reading 17 dots, especially given that it’s advertised on the eMusic site.

In the end I think 17 dots was probably the best venue at hand. If Pakman had already started a CEO blog he could have posted it there, but he didn’t and couldn’t. I actually think it would be nice if 17 dots could be expanded to have eMusic employees talk about more than music. However, other than noncontroversial topics like the new download manager, I think most of the topics that people might want more information on (e.g., customer support issues, complaints about price increases, and so on) are topics that eMusic isn’t comfortable with discussing in a public forum. We’ll see if Pakman’s post heralds a new era of management openness at eMusic, but I suspect it was a one-off event.

Goodbye labels?

I don’t normally do breaking news, because frankly I’m just too busy to keep track of what’s happening every day in the music business. However I’ll make an exception just this once given its potential importance: Billboard (in a story picked up by the Washington Post) is reporting that three out of eMusic’s top six 60 labels are considering pulling out of the service either wholly or partially (i.e., not offering newer releases). According to eMusic’s label page, the top six labels by downloads are Merge, Naxos, Matador, KOCH, Anti, and Fat Possum. Given its focus on low-cost offerings I think we can conclude that Naxos will not be among the defectors. Also, it’s possible that Fat Possum will be one of the defectors, since otherwise the story would have read three out of the top N where N was some number other than six. Hypebot previously named KOCH as being unhappy, so it may be a second defector. I don’t have time now to speculate which of Merge, Matador, or Anti might be the third. (OK, it’s clear now why I don’t do breaking news: because I can’t even read the breaking news articles, and make stupid mistakes like mistaking 6 for 60.)

I’ve previously made my own views clear on the labels’ complaints about eMusic pricing, so I won’t repeat my comments here. I don’t want to denigrate the label’s concerns (now he says!), but I do think they’re trying to swim against the tide somewhat. Just a big-box retailers took music CDs and made them a loss leader, I think the long-term trend is for lower prices for digital music. As Amazon apparently prepares to enter the digital music market, we’ll see if I’m right.

Two takes on Amazon’s digital music plans

Now that I’ve done a lengthy eMusic-related post I feel less guilty about doing yet another post on Amazon and its rumored plans to enter the digital music market; in particular I wanted to highlight two (relatively) recent articles on the topic.

From the pro side of the fence (i.e., someone paid to have opinions and publish them) comes an article Why Amazon is Important by Mark Mulligan of Jupiter Research. (Incidentally, Mulligan blogs a lot about digital music but has mentioned eMusic only a few times, mostly in passing.) Mulligan refers to Amazon as the sleeping giant of the digital music market and notes that

Digital music is still niche and waiting to break through to the mainstream online, let along more broadly. Amazon is perfectly placed to aid that transition. They have mainstream online reach and are a key destination for music for mainstream as well as aficionado music fans.

This is not a stunningly original insight but it is something that the mainstream media overlooks at times. Mulligan also notes that Amazon needs to sell digital music that’s playable on iPods, an obvious point, but ties this to the less obvious argument that Amazon’s best customers tend to be technologically sophisticated early adopters, and that therefore Amazon offering digital music would be a defensive move against the possibility of losing those customers to the iTunes Store as digital downloads replace CDs as the main distribution vehicle for music. Unfortunately Mulligan ends on an off note as he claims that Amazon really needs to either be DRM free or interoperable …, apparently buying into the myth that there could be such a thing as interoperable DRM. Remember, Mark, DRM is defective by design.

Now let’s turn to an intelligent amateur, Paul Lamere of Sun, who does research on improving music search and categorization and makes some Amazon predictions as part 5 of a series on the top 5 things in digital music that didn’t happen in 2006. (See also parts 1, 2, 3, and 4.) Lamere addresses some points that I and others have previously covered—the importance of using the MP3 format, Amazon’s strengths in music recommendations, the possibility of variable pricing, and so on—but also has some valuable insights I’ve not seen elsewhere, at least discussed in such detail. In particular, Lamere makes some key points about Amazon’s strengths in the area of web services and metadata that remind me of Tim O’Reilly’s argument that data is the next Intel Inside:

Amazon has a great set of web services built around their data. … Exposing their data in this fashion places Amazon at the center of the online literary ecosystem. Any startup company that wants to be in a business related to books will use Amazon’s API because it is easy, the data is of high quality and it is free. This is good for the startup, and even better for Amazon since all of those startups end up sending their customers to Amazon. Amazon is already a big part of the music ecosystem. They already have lots of data for music CDs that is available via their web APIs. They are probably the largest supplier of album art on the web. The Amazon part number—the ASIN—is used throughout the web as an unambiguous identifier for an album. Once Amazon starts to sell individual tracks, I would expect that Amazon will create an ASIN or an equivalent for each track in their database. This track-level identifier may become the primary way of identifying tracks in the music world since Amazon makes it so easy to get all of the information about an item once you have the ASIN. This could be a key enabler in the next generation of music—a ubiquitous song ID tied to deep metadata.

Lamere also has some interesting recommendations for Amazon: that it connect its own music IDs to existing MusicBrainz IDs in order to leverage community-generated metadata, that it support an open vendor-neutral standard playlist format, and that it make its 30-second clips available DRM-free to use as input to next-generation music discovery tools.

I didn’t intend to frame it this way, but in the end reading Mulligan vs. Lamere is a good contrast: competent but somewhat generic commentary vs. an interesting and (to a large degree) unique perspective. I doubt I’ll seek out Mulligan’s writings specifically, but I’ve added Lamere’s music-related posts to my NetNewsWire subscriptions.