In a previous post I offered some pretty snarky advice for indie labels complaining about eMusic per-track payouts. For this post I ‘ll try to look at things in a more objective manner and consider why eMusic does business the way it does, and why eMusic’s approach is arguably better for labels than various alternatives. In particular I’ll address the business case for eMusic offering its new Connoisseur plans, since that was apparently one major bone of contention between eMusic and Victory Records. As Tony Brummel of Victory famously said with regard to the Connoisseur plans, I just don’t believe in what they’re doing. He may have lost his own faith in eMusic, but perhaps I can justify it to others.
First, I’ll repeat my previous point that the key concern for labels should ultimately be total revenue and profits, not necessarily per-track margins and certainly not per-track list prices. As David Pakman notes in his recent Forbes interview, eMusic’s payout to labels is not a direct function of track list prices, but rather is based on revenue sharing arrangements, which in turn are influenced by customer behavior. The more customers who don’t use up their subscription quotas, the more money labels end up getting on a per-track basis:
It doesn't come down to a wholesale price, it's a revenue share. We take all the revenue the company generates from every plan and cut it in half. Half of it gets paid out to all the labels each quarter pro rata based on the number of downloads they got. The important thing to note is if you signed up for the Connoisseur 300 plan at $75 a month and you went on vacation for a month or you just didn't use the service or you only downloaded 10 songs, we still take the $75, put it in the pot, divide it by half and pay [it] out to all the labels.
This ties back into Tony Brummel’s and others’ (mis?)perceptions about the Connoisseur plans. From a naïve point of view it might appear to be bad for labels for eMusic to allow customers to download more tracks per month at a $0.25 per track price point. Wouldn’t it be better to force customers to buy booster packs, which are much more expensive on a per-track basis (from $0.50-0.60 per track at present), and thus achieve per-track payouts closer to those of the iTunes Store?
However this analysis ignores the point that people maxing out on their monthly downloads may be reluctant to buy booster packs, given the steep incremental cost over that for subscription downloads. (This is certainly the case for me, and based on comments on the eMusic message boards it appears to be the case for others as well.) People who max out their subscription downloads may prefer to upgrade to a plan offering more downloads, and run the risk that in some months they may not download their full quota. In effect they are opting for certainty in their per-track costs (locking in a nominal $0.25 per track price) as opposed to trying to optimize things by having a less expensive plan supplemented by booster packs.
To better understand the logic underlying the introduction of the Connoiseur plans, let’s look at an example: Consider a user who is on the current eMusic Premium plan (75 tracks for $19.99, or just under $0.27 per track), regularly maxes out his quota, and finds himself adding at least one or two albums per month to his Save for Later list. (Since eMusic’s customer base has a lot of frequent music purchasers, I suspect many customers found themselves in this situation.) To satisfy his desire for more music each month he decides to upgrade to the cheapest Connoisseur plan (100 tracks for $24.99). However once he upgrades he then for whatever reason ends up downloading only 85 tracks per month on average over the next year. At the end of the year he would have paid $299.88 (12 times $24.99) for 1,020 tracks (12 times 85), or on average $0.294 per track.
In hindsight the customer would have been equally well off staying on the Premium plan and buying four 30-track booster packs (at $14.99 per pack) as necessary to account for the 10 extra tracks per month (120 extra tracks per year) that he was downloading. His average per-track price would then have also been $0.294 (12 times $19.99 plus 4 times $14.99 for a total of $299.84, divided by 1,020 tracks). He would also have had more flexibility in downloading tracks, since booster pack downloads don’t expire at the end of each month.
However this approach has two disadvantages from the customer’s point of view:
Combining a (maxed-out) subscription plan plus booster pack purchases requires a degree of forethought and rational calculation that most users are likely not willing to devote to the question of buying downloadable music. In particular, buyers incur a mental transaction cost for each buying decision they make, so in general it’s better for a retailer to minimize the number of separate buying decisions a customer has to make. (For example, this has been used as an argument against micropayment schemes.) When upgrading to the Connoisseur plan the customer in the example above needs to make only one decision, but when taking the booster pack approach he would have to make more, given that he probably wouldn’t buy all the booster packs at once.
The maxed-out plan plus booster packs approach also runs the risk that customers may end up paying more on average than if they had upgraded to the next higher plan. If the customer in the example above downloaded 90 tracks per month on average instead of 85, then over the course of a year he would have had to buy two more 30-track booster packs to account for the additional 60 tracks (five per month) he wanted to download. Doing this in turn would have raised his total cost to $329.82 ($299.84 plus 2 times $14.99) and his average per-track price to $0.305 ($329.82 divided by 12 times 90 or 1,080). This is significantly more expensive than the $0.27 per track he was originally paying under his maxed-out Premium plan. Given that people generally are more concerned with avoiding losses than pursuing gains, the customer in our example would likely opt for a plan upgrade and stability in his eMusic-related expenses as opposed to running the risk of overspending on booster packs.
The upshot is that for our example customer it makes sense (at least from a behavioral economics point of view) to upgrade to a higher-priced plan. It also makes sense (from a rational business point of view) for eMusic and its labels to offer him this option, as long as the customer doesn’t download more than 92 tracks per month (out of a quota of 100). Below that point the per-track payouts are higher than for a maxed-out Premium plan, while above that point they are lower.
However if it’s likely that lots of customers would be maxing out (or close to maxing out) the 100-track Connoisseur plan then eMusic could simply offer a high priced Connoisseur plan providing more monthly downloads, and encourage people to upgrade to that. This of course is exactly what eMusic did, offering a $49.99 plan with 200 downloads and a $74.99 plan with 300 downloads. The logic is the same as before: for customers maxing out their current plans it’s typically simpler and more attractive to upgrade to a more expensive plan than to rely on booster packs to supplement a lower-priced plan.
eMusic could make this approach more attractive from a business point of view (for both itself and the labels) by increasing the price of booster packs (which increases the incentive for customers to upgrade their plans instead) and by raising the minimum price for the higher-priced plans (to minimize the impact on profitability of extremely heavy downloaders). Again, this is exactly what happened: eMusic increased the minimum per-track prices for booster packs from $0.30 to $0.50, and set pricing for the Connoisseur plans so that the per-track price is never lower than $0.25 (vs. $0.22 under the Premium plan prior to the current one).
David Pakman did a good job of summing up this strategy in the Forbes interview:
For us, subscription business optimization is about making sure customers are never always maxing out their plans. That way, the customer feels they have some headroom and we're able to optimize the profitability of our business.
The result of this optimization is a win-win for eMusic and the labels as well as for eMusic customers (at least some of them):
eMusic and the labels realize both higher overall revenue and higher profits: higher revenue because customers are on higher-priced plans, and higher profits because per-track payouts are higher than they would be if customers were maxing out on lower-priced plans and didn’t have the option of upgrading to higher-priced plans that many of those customers in practice wouldn’t take full advantage of.
eMusic customers in general can plan their music purchasing and minimize the risk of over-spending their budgeted amounts per month, and price-sensitive eMusic customers in particular can get a good deal in terms of actual (not nominal) per-track prices by purchasing tracks in volume and downloading all the tracks per month to which they’re entitled.
Since eMusic presumably has complete records on the buying and downloading activities of its customers, and has also in effect conducted experiments in pricing strategies by changing its pricing model in the past, I’m presuming that eMusic can in fact demonstrate to labels using hard data that its current business model is good for both eMusic and the labels. In other words, the labels don’t just have to take this on faith.