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Digital Audio Insider is David Harrell's blog about the economics of digital music.

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June 05, 2009

More Thoughts on the Changes at eMusic
by David Harrell
eMusic banner

In an e-mail exchange with Frank Hecker, who publishes the eMusic-focused Swindleeeee blog, he noted: "This is obviously a 'bet the company' strategy for eMusic, and it will be interesting to see how it plays out."

I agree -- the addition of the Sony content will no doubt lead to some new subscribers, but I wonder how many of the current ones eMusic will lose. Though -- to be completely cynical -- from eMusic's perspective, perhaps it's better to trade those long-time subscribers (the ones who are using every single one of their allotted downloads) for new ones who pay more for the service, but use it less.

Debcha from Zed Equals Zee pretty much nailed this idea in her comment to this Pampelmoose post:
...from a financial perspective, the perfect eMusic customer is the one who signs up, pays every month, and then never downloads anything (like joining a gym and then never going). The rabid consumers of obscure indie music who max out their downloads every month are, in this context, a liability. Ironically, eMusic wouldn't be in this position of having to choose between casual and rabid consumers if they hadn't done such a good job of attracting and retaining indie music fans.
I'll clarify that comment by adding that eMusic's revenue sharing model is such that eMusic's take remains the same, whether overall usage is 0% or 100%. Subscriber activity, however, affects how eMusic's pays labels. The health club component is there, it's just one step removed -- eMusic relies on it to boost its per-track payout amount.

My other thought here is that while the long-term, active subscribers are obviously upset, a large number of current eMusic subscribers don't use all of their downloads each month. If you routinely let half of your downloads expire each month, will a decrease in your allotment really upset you enough to cancel your subscription?

Long-term, eMusic's success will depend on its ability to significantly expand its subscriber base. To do so, adding content from the other major label groups and previous indie holdouts such as Sub Pop will be key. After July, eMusic will essentially sell digital downloads for 50 cents a track, coupled with the restrictions of an ongoing subscription, where the downloads expire each month or quarter, depending on the plan.

While 50 cents a track is cheaper than the default prices at both the iTunes store and Amazon MP3, the latter store is pushing hard with the $5 album price. In addition to daily album specials from 99 cents to $3.99, Amazon MP3 offers 50 $5 albums each month, a mix of classic albums and trendy newer acts, both indie and major.

Music fans who are seeking bargain major label content will be able to choose between an eMusic catalog that includes older Sony releases, or watch for the specials at Amazon MP3. It's not an either/or choice, of course -- I buy the occasional Amazon MP3 album special but will probably maintain my eMusic subscription. Yet for these potential customers, the relative attractiveness of an eMusic subscription will depend on the depth of the major label portion of its catalog, as compared to what's currently available for $5 or less from Amazon MP3.

One thing still remains in eMusic's favor, however, in any competition with Amazon MP3 for customers -- the ability to use a subscription to cherry pick individual tracks from albums. Amazon MP3 offers similar per-track prices via its $5 album deals, but no such deals for the purchase of individual tracks.

related: Sony and eMusic: Why the Per-Track Label Payout Might Not Change, eMusic's Per-Song Payout for Q1 2009, More On eMusic Payouts, Why Music Subscriptions Are Like Health Clubs, Treatment of Longer Songs by eMusic

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June 03, 2009

Sony and eMusic: Why the Per-Track Label Payout Might Not Change
by David Harrell
eMusic banner

I'll start with some links to other coverage of the recent eMusic news: Swindleeeee has an overview of the new prices for U.S. subscribers, as well as a proposal for the letter that eMusic CEO Danny Stein should have sent to subscribers. Jon Healey at the L.A. Times has a nice post of the evolving eMusic business model. Dave Allen at Pampelmoose calls the handling of the Sony addition to the catalog a fiasco. And the comments to the 17 dots posts about the subscription changes and an eMusic message board post make it clear that many current subscribers are livid.

As one of the "grandfathered" long-time subscribers, I'm certainly not thrilled to see my current allotment of 50 downloads for $11.99 a month reduced to 30 downloads, which works out to a 66.67% price increase. But as a self-released musician with several albums in the eMusic catalog, I'm also concerned that the price changes will result in a shift in subscribers' attitudes about how they use their monthly or quarterly download allotments. My contention has always been that the "use it or lose it" aspect of the subscription, coupled with extremely low prices, make it far more likely for subscribers to take a chance on newer or unfamiliar artists. While these price changes will -- in theory -- result in a larger per-track payout to labels (though I'm not convinced it will -- see below), I worry that "Long Tail" artists will see fewer downloads of their material, now that each download is more precious to subscribers. Indeed, here's one subscriber's take:
My favorite thing about eMusic was that I would test out albums I never heard before. I've learned about so much great music by taking a gamble and downloading albums based on short previews. With this new pricing I definitely won't be taking that gamble anymore.
There's also the "number of tracks per album" issue, which becomes more pronounced with the new prices. Because of eMusic's track-based subscription model, there's always been a wide variation in the "prices" of albums in the eMusic catalog. Classic jazz albums, for example, which have just a handful of lengthy tracks are relative bargains for subscribers, while an indie-rock album with 20+ shorter tracks is relatively expensive. The price increases won't change the percentage price difference between these albums. However, at 50 cents a track (which will be the standard price for new subscribers), the price for a 20-track album equals the default iTunes album price of $9.99, and it exceeds the $5 monthly specials that Amazon MP3 has been running as of late. The Swindleeeee letter suggests "capping" the price of albums at 12 downloads, even if they contain more tracks. Such a cap for selected albums is mentioned as part of the new pricing plan in some of the eMusic message board posts, but I can't find any official details.

The price increase was obviously a concession to Sony, though eMusic editor Yancey Strickler also noted in one message board post that the prices extended to many of the grandfathered subscribers simply weren't sustainable, with or without the addition of the Sony back catalog. Yet I'm not convinced that the per-track payout will increase by much, if at all, because of the changes in the subscription plans.

As I wrote last week, the eMusic business model is more complex than those of download stores like iTunes and Amazon MP3. Instead of a set wholesale price for each download, eMusic shares 60% of its post-expense revenue with the labels in its catalog, proportional to each label's "paid download share." For the most part, eMusic always refers to the revenue share as opposed to a per-download payment, but dividing the 60% share amount by the total number of subscriber downloads yields the per-download amount. And this is the amount that shows up my CD Baby account, minus CD Baby's 9% commission. (It's not quite that simple, as allowances are made for extra-long tracks and free downloads don't count, but that's the basic formula.)

When subscribers fail to use all of their allotted downloads, it increases the per-track payout. How much "breakage" is occurring? My estimate is quite a bit, perhaps more than 40% to 50%, as the 33.5 cents a track I received for Q1 2009 eMusic downloads of my own music exceeds the per-track rate that many subscribers currently pay.

Just to be clear, this "health club" aspect of the eMusic business model isn't just speculation on my part -- the company spells it out explicitly on its label relations page:
Like any subscription business (such as health clubs, mobile phone plans, and cable companies), our model is based on a consistently substantial percentage of subscribers downloading none or little of their paid allotment. Because these subscribers aren't downloading their full allocation of music, there is more revenue to be divided amongst labels. In other words, this "unused" revenue is part of the gross that is split among labels.
Given the new pricing structure, it's safe to assume that, going forward, eMusic subscribers will be paying an average of 45 - 50 cents per download. Yet 60% of 50 cents is only 30 cents (and that's ignoring the deductions eMusic takes before the revenue share), which is less the recent 33.5 cent payout rate I received. So the subscription changes will only result in increased payout amounts if digital breakage continues to occur.

Why do some subscribers let their downloads expire? It's probably a combination of inertia, the fact that the download period is 30-days, not a month, so the expiration date changes each month, and perhaps simply not finding enough material they want to download each month. But given the way the Rolling Stones catalog dominated the eMusic charts for the brief time it was available, it seems likely that the presence of more "name brand" artists and albums in eMusic will result in less digital breakage by subscribers. So while subscribers will have fewer downloads available, they'll be more likely to use all of them, which may be enough to offset the effect of the price increase on the final per-track payout to labels.

Without significant digital breakage, the per-download payout is bound to be less than 30 cents a track, even under the new pricing model. No doubt some breakage will continue to occur, but it seems likely that the current breakage rate will decrease significantly. Hence, it seems likely that the new subscription plans are more likely to preserve the recent payout amounts I've seen, as opposed to substantially increasing them. So that's my prediction -- higher prices but less breakage will result in a modest increase, at best, in the per-track eMusic payout. I'll update, of course, as I soon as I have any details on eMusic payments for the third quarter of 2009.

End note: One final thing to consider is that the labels in the eMusic catalog are essentially competing for market share of download activity, which then translates into the portion of the 60% of the subscription revenue they receive. While the total number of subscriber downloads each quarter affects the per-track amount, if a label's catalog accounts for 20% of download activity, it receives 20% of the revenue eMusic shares with the labels in its catalog. On the surface, labels should be somewhat indifferent the per-track amount and more concerned about the percentage of the downloads their content accounts for.

However, because U.S. labels must pay mechanical royalties to music publishers for eMusic downloads, the per-track amount does matter. Selling two eMusic downloads at 20 cents is not the same as selling one 40-cent download, as a label nets with the former 21.8 cents after paying mechanical royalties (9.1 cents x 2) and more than 30 cents for the latter!

related: eMusic's Per-Song Payout for Q1 2009, More On eMusic Payouts, Why Music Subscriptions Are Like Health Clubs, Treatment of Longer Songs by eMusic

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May 27, 2009

Less Digital Breakage for eMusic in Europe?
by David Harrell
eMusic banner

Some more Q1 2009 eMusic downloads showed up in our CD Baby account yesterday. But instead of the 30.5 cent rate I wrote about last week, we received either 17.8 or 19.7 cents per track for this second batch of downloads.

CD Baby just confirmed that these smaller payouts were for our non-U.S. eMusic sales. After accounting for CD Baby's 9% commission, eMusic paid out the following rates for Q1 2009:
33.5 cents -- U.S.
19.6 cents -- France and Denmark
21.6 cents -- U.K.
This isn't, however, an apples-to-apples comparison. For the U.S., eMusic doesn't withhold mechanical royalties from its payouts to labels and self-released artists. That is, the 33.5 cent payout includes the mechanical royalty for each download, and labels are responsible for paying the music publishers/composers of each track. (My band hasn't recorded any non-original material, so I skip this step.) But outside of the U.S., eMusic makes a separate payment to Buma/Stemra for the mechanical royalty for each download.

I'm not sure what statutory mechanical royalty rates are outside of the U.S., but assuming they are similar to the current 9.1 cent base rate in the U.S., adding that amount to the label payout amount gets you fairly close to the U.S. payout rate. (I'm hoping the mechanical portion for our non-U.S. eMusic sales will eventually make its way to me via BMI.)

There is, though, another element to consider: eMusic subscription prices are more expensive outside of the U.S. This comparison is a couple years old, but it's probably safe to say there's still a premium for subscribers outside the U.S. And -- as explained in last week's post -- digital breakage by subscribers boosts the per-track amount eMusic pays to labels for each download.

So if the payout rates are fairly similar, despite the differences in subscription prices, the best explanation I can think of, assuming the same revenue sharing percentage, is that -- on average -- non-U.S. eMusic subscribers are less likely to let their downloads expire.

related: eMusic's Per-Song Payout for Q1 2009, More On eMusic Payouts

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May 21, 2009

Single Song Downloads Coming to CD Baby
by David Harrell
CD Baby is working on a site redesign, scheduled to go live in July. New features will include single-song downloads and variable song pricing. From a CD Baby message board post:
One of the main improvements we're absolutely thrilled about is the addition of single song downloads on cdbaby.com. Just like with full album pricing, you'll be able to charge whatever you want for individual song downloads (and each track can be priced differently!)

Oh, and if you'd like to offer some tracks for free as a promotional tool, go for it!
I'm looking forward to these new features. While self-released artists can obviously do whatever they want with their pricing for direct-sold downloads, there's little ongoing flexibility for content sold in digital stores. Although it won't affect the tracks sold by CD Baby's digital distribution partners (iTunes, eMusic, Amazon MP3, etc.) the new pricing flexibility will allow artists to try things like one-day, Amazon MP3-style sales within the CD Baby store.

No word yet on how CD Baby will handle credit card transaction fees for a single-song download. Currently, CD Baby charges a 9% commission for its direct-sold album downloads (the same percentage it takes from sales via iTunes and other digital stores), but doesn't charge artists a separate transaction fee.

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May 20, 2009

eMusic's Per-Song Payout for Q1 2009
by David Harrell
eMusic banner

Our eMusic sales for the first quarter of 2009 just showed up in our CD Baby account. After CD Baby's 9% cut, we received 30.5 cents for each download, which translates into a 33.5 cent payout from eMusic, a little less than half of what Apple pays out for a 99-cent iTunes download.

As I've written before, eMusic is an interesting twist on the health club business model. On the surface, because eMusic simply shares 60% of all of its post-expense subscription revenue with the labels and self-released artists in its catalog, it should be somewhat indifferent to the download activity of its subscribers. But the health club model comes into play when it comes to label/artist compensation: The fewer tracks that subscribers download each month (there's no rollover feature), the more labels and artists receive for each individual download.

Given current subscription rates, I'd guess that the average customer "breakage" is around 50%. If every subscriber used every allotted download, the per-track payout would probably drop to less than 20 cents a track. At that level, a fair number of labels would no doubt pull their material from the eMusic catalog, so eMusic is -- indirectly -- very dependent on the health club habits of its subscribers.

related: More On eMusic Payouts

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May 19, 2009

Breaking Down the New $5 Napster Subscription
by David Harrell
Napster banner

I'm curious to find out if Napster has negotiated any changes in how it compensates labels for downloads and streams for its new $5 a month subscription, which offers unlimited streaming and five mp3 downloads each month. If not, it's hard to see how Napster can make any money from the subscription revenues alone.

My assumption has always been that both Napster and Rhapsody were using the health club business model for their subscription services. Because both services pay record labels a fee for each streamed song (around one cent), they lose money on customers who stream a lot of music each month and make money on those who don't. For example, the basic Rhapsody subscription fee is $12.99 a month. Ignoring all other costs, customers who stream fewer than 1,299 tracks a month are profitable, while Rhapsody loses money on the "gym rats" who stream more than that number each month. In reality, due to other costs, the breakeven number is no doubt considerable smaller.

But if the monthly subscription fee is only $5 -- and you're tossing in five mp3 downloads -- that number gets even smaller. Even without the mp3 downloads, subscribers would cross the profitable/unprofitable line at 500 song streams a month, which works out to just 17 songs a day.

My band hasn't sold many downloads via Napster, but for the few that we have, I've seen a payout range from 61 to 94 cents. (I'm assuming the latter number is for non-US sales.) But even if you assume a standard wholesale price of just 60 cent for Napster downloads, which is a dime less than the iTunes wholesale price on 99-cent downloads, the cost of five downloads a month would eat up $3 of the $5 subscription fee. After that, less than 10 streams a day would account for the remaining $2.

Napster is, however, now owned by Best Buy, a retailer that is very familiar with the idea of "loss leader" products. Perhaps it's worth losing money on some subscriptions to get more customers -- so to speak -- in the store. It's also true that the biggest consumers of music tend to be the biggest purchasers of music, so perhaps these loss-leader subscribers will make up for it by buying more mp3s than they receive with their subscriptions. There's also the customer inertia aspect -- there's no rollover provision for the mp3s so Napster isn't on the hook for unused mp3 downloads. And maybe the $5 monthly fee is small enough that inactive subscribers are less likely to get around to cancelling their subscriptions.

Still, it's a bold pricing strategy and despite the previous lack of broad appeal for subscription music services, I won't be surprised if Napster picks up a considerable number of new subscribers. As Jon Healy noted in this post for the L.A. Times technology blog:
Napster's new price is so low, it could change the way people evaluate a subscription-music service. Instead of wondering whether it's worth paying a monthly fee for something with no residual value (i.e., the tethered downloads and the online jukebox), would-be subscribers simply have to decide whether it's worth buying five MP3s a month from Napster in exchange for access to that jukebox.
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May 15, 2009

Amazon.com Reverses the Digital Payout Percentages
by David Harrell
What percentage of the retail price should the creators of digital content receive?

The standard payout for digital music downloads -- the 70% rate established by Apple's iTunes store, Amazon MP3, and others -- is quite generous, relative to the standard royalties for physical music releases. (How much of that 70% ends up in the pockets of musicians is, of course, another question. For self-released artists, almost all of it, for those artists signed to standard recording contracts, substantially less.)

However, for its new program that allows bloggers to add their content to the Kindle, Amazon has reversed the percentages -- bloggers get 30% while Amazon keeps 70%. More details from Amazon are here.

I suppose you could make the argument that this is a new business, that Amazon has startup costs, etc. (Kind of like the "new technologies" clause that's standard for major label recording contracts, where the royalty rate is lower for new distribution methods...) And relative to standard author royalties, perhaps 30% is actually generous.

Still, it's disheartening that Amazon -- which obviously has a monopoly for providing Kindle content -- has opted for a payout structure for digital content that doesn't transfer the majority of revenues to content creators.

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May 14, 2009

Some Site Housekeeping, No Lala.com Outside the U.S.
by David Harrell
I'm trying to spruce up the site with some small -- but long overdue -- design and usability improvements:

Post titles are no longer bold, but are in a larger type size and link directly to the permalink URL for each. I've added a byline, which seem a little silly, as I'm currently the only one writing for this blog. It's not an ego thing, though -- I'm simply trying to boost my own Google presence. And there's a "share" button at the end of each post, which should make it easier to Digg them, post them elsewhere, etc.

Also, I received an e-mail from a reader in France, letting me know that the Lala.com widgets in the right-hand column aren't working for him. The Wikipedia entry for Lala makes reference to international access being blocked in 2008, as do several reader comments to this TechCrunch post, though I can't find any details at Lala.com about non-U.S. access.

Last.fm seems to be available just about everywhere, though you can't use it to embed single songs or albums. So I'm considering other options for embedding music -- please let me know if you have any suggestions!

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May 11, 2009

Monday Odds and Ends: Competing with iTunes
by David Harrell
From Friday's Wall Street Journal -- New Ways to Buy Bach Online:
Technology entrepreneur Pierre Schwob thinks Bach and Beethoven haven't been given their due in the digital age.

Classical Archives, a new digital store focused exclusively on classical music, is Mr. Schwob's answer to mass-market digital retailers with "a complete lack of understanding of how classical music should be offered," down to the way they often categorize recordings. "It's basically a lack of respect when you say Bach is an 'artist,' not a composer," Mr. Schwob says.

For example, when online shoppers type "Beethoven" into iTunes, the top results they get back include a rock medley by the Trans-Siberian Orchestra, an uncredited recording of "Für Elise" and individual movements culled from greatest hits collections. It's not that the music seller is skimping on the composer -- customers can find complete works by browsing deeper in the iTunes classical section -- it's just that his oeuvre doesn't fit neatly on the virtual shelves with that of Miley Cyrus and the Black Eyed Peas.
I'm all for innovation in the digital music retail space -- and I hate to sound completely cynical -- but the huge challenge in competing with iTunes is that Apple can simply co-opt any major improvements that another digital retailer makes. That is, without patent protection or the use of technology that can't be replicated, if a better way to organize a classical digital store gains traction with consumers, Apple can offer something similar in the iTunes store. (Ditto, as I've written before, for music subscription services.) Sound quality, as mentioned in the article, is a potential differentiator, but that's another area where Apple can change if it proves necessary.

There is one place, however, where I think iTunes might be vulnerable, especially for a niche music genre with extremely dedicated fans, but I'm saving that for a later post. Strictly from a retailing standpoint, I think Amazon.com, which already has huge customer base for music, is best positioned to compete with Apple in the long term.

My other thought here is that from a marketing/branding perspective, it seems like Apple has the done the impossible with the iPod and the iTunes store: It dominates the market yet retains the hipness/cool factor normally not associated with market leaders. Maybe that's simply a testament to the quality and usability of the products, but it seems like Apple is a unique situation -- I can't think of another case where the market leader appears immune from "David vs. Goliath" marketing campaigns from smaller players.

Speaking of Amazon MP3: From Paid Content: Amazon Powers Track Sales For ABC's New 'Music Lounge.'

And he's not referring specifically to music, but Seth Godin says something that I've learned all too well over the past few months:
Free by itself is no longer enough to guarantee much of anything.
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May 07, 2009

Last.fm vs. SoundExchange
by David Harrell
No, as far as I know, Last.fm isn't tangling with SoundExchange, the nonprofit agency that collects performance royalties for sound recordings for Internet radio play (as well as digital cable and satellite radio).

But in a comment to yesterday's post on Last.fm's Q1 2009 royalties, David Rose asked how the radio royalties we've received from Last.fm compare to those we've received from SoundExchange.

Short answer: I don't know.

Here's why: SoundExchange doesn't log every single song played on every single Internet station -- it uses a sampling method to assess overall Internet play for artists and tracks. So far, despite regular airplay on Internet stations like SomaFM (and a fair amount of terrestrial/internet college radio play over the past few months -- our recent album "The Space Between" made the top 30 airplay charts for more than a dozen stations), we haven't been picked up by any of SoundExchange's sampling surveys.

When we are, we'll have to make a choice about collecting radio royalties from Last.fm. When you sign up for Last.fm's artist royalty program, you have to indicate if you're collecting Internet radio royalties via SoundExchange in the U.S. or PPL in the U.K. If you are, Last.fm doesn't pay them directly. If not, you can opt to receive them. (This royalty is completely separate from the fees paid for "on demand" streams -- SoundExchange only collects for non-interactive plays, you can still receive on demand royalties from Last.fm even if you're receiving Internet radio royalties from SoundExchange.)

If we show up in SoundExchange (I assume it will happen eventually), we'll have to decide: Are we better off having ALL of our Last.fm radio plays counted (and paid for by Last.fm), or relying on SoundExchange's sampling surveys to capture our Last.fm radio plays, along with those from other stations/sites?

According to the SoundExchange website (can't link directly to the page -- the site is, unfortunately, built in Flash), in 2009, commercial stations must pay 0.18 cents per listener for each performance of a track. That's more than the .04995 cents we received directly from Last.fm for free radio plays, but less than the 0.4 cents we received for the few "premium radio" of our songs in the first quarter. (I haven't stayed on top of the Internet performance royalty debate, so if anyone has more details on the current SoundExchange royalty rates and/or where they're going, please let me know.)

So far, the dollar amount is small enough that the "direct from Last.fm vs. signing up with SoundExchange" decision is an academic one. My guess is that our total Last.fm royalties for 2009 will be less than $100, so we're unlikely to miss out on much with either approach. I can't helping thinking, however, that at our level, 100% of our Last.fm plays will put more in our pockets than an unknown percentage of our total Internet plays.

One last thing -- I just found the following information on the SoundExchange website:
…your membership in SoundExchange does not in any way limit your ability to enter into direct (i.e., nonstatutory) licenses of any sound recordings that you own, whether with webcasters or other potential statutory licensees. SoundExchange simply requires that SRCOs notify it of any direct licenses entered into with statutory licensees or digital music service providers so that it can ensure that payments received from services that hold direct licenses to certain recordings are calculated correctly and allocated properly.
However, there's nothing on the Last.fm website regarding direct payments for SoundExchange members and I doubt Last.fm would want the headache of sorting out payments that way.

related: Last.fm Royalties for Q4 2008

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