The music subscription model

I had almost forgotten that Microsoft was supposed to launch their iTunes Music Store killer this year, perhaps even their own player (but more likely to be co-launched with some hungry electronics conglomerate). What ever happened to that?

Now we know.

Reuters reports that Microsoft has stopped licensing talks with the big 4 music labels.

The most informative note in the article was this one:

According to several people briefed on the matter, the labels separately were seeking royalty payments of $6 to $8 per user, per month. People close to the labels say that is in line with what existing subscription-music services pay, the Journal reported.


We can assume that the $8/month price is when it is billed monthly and the $6/month price when it is billed annually.

Let’s look at the numbers. This means that Yahoo! is losing $1 per month per user. Virgin is at $0 and Napster is at +$2. That’s not including capital and bandwidth costs which must be quite sizable. We are, after all, talking about a subscription service.

Wow!

It is clear that Yahoo! must be using music as a loss leader. For what? Anyone have a clue, because I can’t tell.

Virgin must have read Innovator’s Dilemma and believe digital music downloads is a disruptive technology.1 So they are pulling a Blockbuster v. NetFlix, right down to the deceptive advertising.

Napster is trying to make a profit, but we’ll see how that goes after they eat the cost of giving a free buffet to various colleges and nobody ends up using it when they leave.

When Virgin first launched, a colleague of mine who was involved in it and loves to bash me for being an Apple apologist2 asked me why I thought it would fail. My arguments were as follows:

  1. The average consumer doesn’t care (and shouldn’t have to care) about the legal intricacies of ownership vs. copyright. At the end of the day, when they purchase a music CD from the store, they feel like they own it. That’s a strong frame that isn’t going to be toppled easily.
  2. While defenders call it “all you can eat buffet” and detractors call it “renting”: most likely subscription services are a niche at best.
  3. If it turns out that subscriptions are lucrative, there is absolutely no barrier to entry for Apple to offer it at a later date.

Ownership

I believe my friend’s comeback was, “I think you are wrong. That’s not how I think of my music.” I hope you can see why I was quietly amused by that retort.

I think it is also a tad bit ironic that that the RIAA uses the confounding between ownership and copyrights to equate “piracy” with “stealing” and make statements like: “The market should decide” when they’ve been given a perpetual monopoly of the product (a known market defect).

Live by the sword…

The subscription mentality

Caitlin actually explained the subscription issue more succinctly by saying simply: “We watch a movie only once, a few times if it is good. We have no problem listening to the same music over and over.”

That music is fundamentally different from movies is why the Walkman worked but the Watchman fails.

Forgetting that is why everyone clamors for a “video iPod” but nobody buys one. You know people are out of touch when they start bandying terms like “convergence” and predicting the cell phone will “kill the iPod” but can’t come up with a concrete solution for the former and can’t offer a practical reason for the latter. Oh, I can see the advantage of having my address book on my cell phone as the next guy, but explain to me the advantage of having a music player share the same battery as my lifeline?

Apple’s play

The $6-$8/user/month royalty explains Apple’s position about music subscription: there is no gold in them there hills. Why would Apple give up the fiscally solvent “pay per download” model for the totally insolvent “subscription” model? How will even a Walmart-like efficiency in the supply chain solve this conundrum?

It is ironic that the people have intuited the same conclusion. You never hear the rumor sites speculating on an Apple music subscription service, even though they are going on hyperdrive about a Video iPod from Apple. Good for them.3

For some reason the eternal video iPod rumor always reminds me of CmdrTaco’s immortal words: “No wireless. Less space than a nomad. Lame.”

He can explain it away like Microsoft apologists will explain away the 640K comment while ignoring the reality: You missed the point.

Good luck

My colleague left to take a job at Virgin Digital. I wish him luck.

But I’m not holding my breath.

1 When will the business world figure out that Clayton M. Christensen was full of shit? Oh well, that’s for another article.
2 Can you say projection?
3 Dru said today that if Steve Jobs could go up onto stage show you a turd encased in glass and make you want it. True, if anybody can sell me on a video iPod or a subscription service it’d be Jobs. But unlike Dru, I remember the silence that descended the convention center when Apple started charging for iTools to realize even His Steveness is mortal.

10 thoughts on “The music subscription model

  1. I don’t understand why Yahoo Music Unlimited can’t work with iPods – which is what most people have anyway. I would have liked to try that Yahoo service.

    You’re right – I don’t like to “rent” my music – but I do like to rent my movies (from Netflix).

    And the Video iPod – I don’t understand how that would work… If it’s for downloaded video’s – where can you download movies? Or will that be part of iTunes?

  2. Yahoo Music Unlimited doesn’t work with iPods because it uses Windows Media as the DRM. I think a number of people would like to try their service if that was the case (given that Yahoo! is losing over $1/user/customer.)

    I don’t understand how a Video iPod would work either. A lot of people forget that after the Sony Walkman in the late 70’s, Sony introduced the failed Watchman in the 80’s before striking gold again with the Discman in the 90’s.

    Right now, iTunes has the ability to play back video (due to the QuickTime thing) which has been restricted to including music video liner notes with iTunes albums (sans DRM) and Vodcasts. The interface seems very kludgy to me as well as I am uncertain how that would work into a daily routine. For instance, I can see people listening to podcasts on a long commute, but can’t say the same for video.

    The reason people clamor for it is because they blindly follow ideas such as “digital convergence” or chant “disruptive technology” without really intuiting what benefit a person gets for such a “convergence” or what is so disruptive about the idea (besides making things inferior).

    Thanks for your comments.

  3. Article puts a music industry slant on extortion.

    I like the quote: “The industry doesn’t want to repeat a history of undervaluing itself.” It really is a nice rationalization even if it fails as a frame. Fun stuff though.

    Yahoo! doing a rev share off of streaming dollars: that’ll give the music industry some cojones to pull out of iTMS. Looks like soccer moms aren’t the only people who need to worry. (Still, to do that without losing another racketeering lawsuit is going to be hard.)

  4. Looks like I was wrong about Apple having a clue. Today they announced a the iPod TV.

    I’m betting the nano sells but this doesn’t.

    I have been wrong before. I didn’t think the mini would have such amazing sales. (Though I was certain about the original iPod, iPod Shuffle, and nano.)

  5. Re-reading this article, I’d like to point out that I was wrong about the iPod video.

    Apple replaced the iPod and iPod photo with the video model and sales have been very strong.

    Microsoft has a deal with MTV as their music store. I’m not too sure how that one worked out, but if I had to hazard a guess they are making MTV do the deals with the music industry and be the fall guy for that fiasco.

    When a multi-billion dollar paranoid company like Microsoft won’t touch a music deal, then it kind of makes you wonder about the sanity of MTV execs.

  6. A review of Microsoft’s URGE service. Notice the tag: “iPod-killer.” I guess the 100th time is the charm…

    The comments do a good job of pointing out the fallacies in the article. If Microsoft wins, it’s because they have a bundling advantage (I like to point out that this is a clear case on monopoly maintenance as Microsoft is a convicted monopolist). It is simply not okay for Microsoft to come out with something okay or almost as good—it has to be fundamentally better, which it obviously isn’t.

    Fortunately, I think that Microsoft’s leverage advantages are not very strong in this case. Their products (in this case the operating system) rev too slowly. Windows Media is teh suck. I mean another JPEG standard when JPEG2000 kicks its ass already? What are they smoking?

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