Labels unrealistic pricing assumptions holding back ad-supported music market

By February 25, 2008 12 Comments

Last week I wrote a couple of posts about the music industry, firstly about the trend towards free ad supported music and then about how to combat piracy.

Thank you all for your comments and pointers to new resources and companies.

The big takeaway from the conversation so far is that the record labels are still part of the problem instead of being part of the solution, and the issue is pricing.  The labels have come a long way, and it is great that they are now at least open to the idea of free ad supported music, but as I mentioned in the piece on piracy last week, the industry may have to get used to radically lower unit prices.

Ironically music pirates use the high prices of CDs in the past to justify their actions today.  This quote is from the comments on the piracy post and is apparently typical of comments on blogs from Pirate Bay and other piracy services:

“For years I was forced to buy CD’s for $30+ where I’d find about three good songs and the rest fillers! Who are the real pirates here? The record companies got away with it for too long.. Drop CD.. drop the big production costs..”

In a video of a panel on free music at Midem Antti Ohrling, co-founder of ad supported mobile startup Blyk
makes the point that ad supported businesses need to start with audience not the product.  Spot on, the value of the attention determines the size of the industry and hence what the labels should expect to get, not per-track pricing levels from a bygone era.

If you are interested in this space it is worth watching the video.  As summed up on the Ad supported music blog the gist of the conversation is that unrealistic pricing expectations from the music industry are holding back the development of the ad-supported music market.

The startups in this space (We7, QTrax, Imeem, and new one for me Deezer) are all targeting the users who currently use pirate services.  Their bet is that the added convenience and legality of their service will be enough of a draw that people will leave Pirate Bay and Limewire and put up with the ads they don’t currently suffer.

If they are successful then they are creating money out of nothing.  Currently nobody makes money out of the users of the pirate sites (except the ISPs….).

The reason this isn’t quite the no-brainer it seems for the labels is of course the paid side of the market.  The record labels are starting to get substantial revenues through iTunes and other legal paid download sites at the 99 cents per track level.  I’m guessing that they are afraid of canibalising those revenues with an ad-supported service that nets them less revenue per track.

This is a difficult equation for them to work through because figuring out the right strategy requires you to compare apples with oranges and make wild guesses about how many people will use these new services.  The apples to oranges problem is that the current revenue model is to own a song, but with ad funded it moves to a per listen basis.  To me it is intuitively obvious that the labels will grow their revenues by pulling in the millions of users who currently use pirate services, even if they end up losing money on some users who move away from iTunes to free ad supported services – but to take that position at a big label requires a lot of vision and I suspect entails a fair degree of career risk.

A couple of you made good comments on the per listen v. ownership point.  Firstly, as consumers we are used to paying (by parting with cash) at the point when we choose to own a track, and for these new models to work we are going to have to get used to paying when we listen (by putting up with ads).  This is, of course, not unlike radio today.  Secondly, at the moment it is only possible to track the number of listens with a streaming service, but over time we are likely to get the technology which allows us to track the number of times a downloaded song, with ad embedded, is listened to.  That last one was from Steve Purdham, CEO of music download service We7.

Overall, it feels like this market is definitely coming, and the growth of companies like Imeem and We7 show that, but as ever in digital music it feels like the labels are holding things back.