Frank Hecker

In two previous posts about my current use of eMusic I discussed my musical jobs to be done and how I might now supplement eMusic with other services in order to optimize the use of my more limited number of eMusic downloads. One of the things I noted is my need to audition music prior to downloading it, which naturally leads to the question: Should eMusic create a streaming service to complement its current download offering? As I discuss below, I think it should, but only in a way that is consistent with eMusic’s current value proposition and business model.

Before getting into my own proposal I should address two possible answers to this question that reflect conventional wisdom. The first is simply to assert that streaming is the future way music will be delivered to listeners, and that services like eMusic that offer downloads are ultimately doomed. One sees this attitude reflected in the hype around Spotify, for example, as embodied in comments from Bob Lefsetz and others.

On the other hand, streaming services face a variety of obstacles both from a consumer point of view and from an industry point of view. As a listener my concern with relying solely on a streaming service is twofold: First, I’ll want to listen to music in contexts where there’s no network through which to stream. This concern can be addressed to some degree by offline caching of tracks; this is essentially what Spotify offers as part of its premium service.

However note that for various reasons such offline use is typically implemented using a DRM scheme that expires tracks if your subscription ends. (Spotify is no exception in this regard.) This restricts portability (you can use only approved devices) and doesn’t address a second concern: That I’ll lose access to my favorite music due to the actions of the service, the labels, or others with a legal interest in the music. Recall the recent controversy over Amazon deleting copies of 1984 and Animal Farm from users’ Kindles: what a DRM-based content service giveth, a DRM-based content service can taketh away.

From a music industry point of view the problem with streaming services is that they don’t yet have a viable business model. Even Spotify, the great hope for streaming, has people predicting its imminent death, with its founder begging the music industry to change its ways in order to help make Spotify and similar services sustainable for the long-term. This concern is well-founded; details on Spotify’s business model are hard to come by, but a reasonable analysis concludes that royalties and licensing costs for Spotify are extremely high, and that it’s able to survive for now only through special deals with labels.

My conclusion is therefore that traditional streaming services remain unattractive from both my own perspective (which may be shared by others) and a business perspective. My own concerns can be addressed by the possibility of getting DRM-free downloads, and the financial concerns might be addressable by a business model that eliminates either free-to-consumer streaming (requiring that all customers have a paid subscription) or all you can eat streaming (putting a cap on total number of streams per subscriber per month) or both. As it happens, eMusic subscribers are already required to pay a monthly fee and also have a cap on their use of the service; what they don’t have is access to streaming via eMusic.

This brings us back to the question we started with: Should eMusic add streaming? The second snap answer is that eMusic is by its nature a download service, that eMusic users don’t need or want a streaming service, and that eMusic couldn’t make a success of such a service.

Regarding the first objection: As I stated in my previous posts, I personally need a low-cost way to preview music for my permanent collection, and streaming services offer the most convenient way at present for me to do that. However the lack of such a service at eMusic means that I now have to use a minimum of two services. This is inconvenient for me and in the long run at least is bad for eMusic, since it takes subscribers like me away from the site and lessens our loyalty to the service. I suspect my experience is representative of many eMusic users.

As for the second objection, some might point to the present incarnation of Napster, which at first glance seems to be offering the same thing as a hypothetical eMusic+streaming service: a paid subscription service offering a combination of streaming and MP3 downloads. Yet Napster is seen as gasping in the face of competition from Spotify. Why should an eMusic+streaming service be any more successful?

The answer is that eMusic would not be trying to compete directly against Spotify. Rather it would simply be trying to better serve the existing eMusic subscriber base and offer a more attractive value to prospective subscribers, while doing so in a manner that is consistent with eMusic’s business model. Thus streaming in the context of eMusic would not be positioned as a primary service; instead it would be positioned (at least initially) simply as a way for subscribers to try out releases before they download them—an extension of the current Listen to this album function on every eMusic album page that plays 30-second samples of tracks.

(In the longer term eMusic could also offer standalone streaming, most notably in the form of an app for mobile devices such as the iPhone; this would allow eMusic subscribers to also audition releases in their cars and on the go, again without having to switch to a non-eMusic service. It may be better for eMusic to wait on this until it can offer the complete eMusic experience in a mobile context, including over the air downloads; however for business reasons, including existing eMusic contracts with wireless carriers, that may not be possible for quite some time.)

In order to minimize the impact on its existing cost structure and business model, eMusic could and (in my opinion should) put fixed limits on the number of tracks a subscriber could stream per month. For example, we can imagine an eMusic Basic plan that would offer 24 download credits (the same as today) along with the ability to stream up to 100-200 additional tracks (or 10-20 albums) on demand. How big could this limit be? It’s very hard to tell. Royalty arrangements for on-demand streaming are fairly complicated, with separate royalty streams going to labels and to songwriters and publishers (mechanical royalties). In some cases these royalties are paid on a per-track basis, and in some cases they are calculated as a percentage of revenue. (This discussion thread gives a good feel for the confusion occasioned by streaming royalty arrangements even among people involved in the music industry.)

I’ll leave it to others to figure out exactly what level of streaming service eMusic could offer profitably, and at what price point. Streaming capability could be offered as an extra cost option to the current plans, or bundled into future versions of the standard eMusic subscription plans (for example, as part of some future round of price increases). The important part is not the exact pricing, it’s offering a service that is well-integrated into the current eMusic offering, financially sustainable for eMusic, and perceived as a good value by its customers.

In this regard the division between downloads vs. on-demand streaming vs. automated streaming (Internet radio) is an artificial one from the point of view of customers. At heart eMusic is not a download service per se; it is a music service that delivers a particular type of experience to a particular type of customer. The first paragraph of the eMusic story says nothing about MP3 downloads; it talks about a more immersive, authentic music experience, better prices than mass market digital music retailers, the most musical context, subscription-based pricing that rewards discovery, and other aspects that eMusic thinks are key value propositions for the service. If adding a streaming component (or for that matter an Internet radio component) would enhance those aspects then eMusic should seriously consider investing in such improvements.

In the end there are two general ways forward for digital music services. The first is exemplified by Spotify today and by (the original) Napster in the past: attempts to remake the music industry through high-profile, potentially high-reward, and (to one degree or another) high-risk business strategies. The problem is that in a fundamental sense the music industry doesn’t want to be remade: There are multiple actors with their own interests, an attachment to traditional ways of operating, and both legal precedent and political clout to back them up; even with general consensus that the industry is in crisis the collective action problem is daunting. In the long term the structure of the industry may indeed change as new genres and industry players emerge, but this may take 10-15 years or more (as I’ve previously argued). In the meantime services like Spotify may achieve some measure of success, but it’s equally likely that they’ll just crash and burn as they run out of cash.

The second approach is the one that I think is most suited to eMusic: To work within the realities of the music business as it exists today and then to do what one can to serve customers best within those constraints, aiming for consistent profitability and growing the customer base organically (being patient for growth but impatient for profits, as Clayton Christensen puts it). To use a sports analogy it’s like hitting for singles in baseball instead of swinging for the fences, or having a consistent ground game in football vs. throwing the long bomb.

It’s an unexciting strategy to be sure, but then eMusic at present is an unexciting company. With the collapse of the rumored acquisition of eMusic by Amazon eMusic’s owner Dimensional Associates lost any immediate prospects for selling eMusic at an attractive valuation. Now with eMusic’s subscriber base relatively stagnant and the company’s image damaged by the Sony PR debacle, eMusic’s only hope in my opinion is to execute well, become consistently profitable, and achieve long-term sustainability. At that point eMusic may become an attractive acquisition candidate for someone looking for a nice boring business with steady cash flow and some plausible prospects for growth.