Free Music

Fred Wilson at A VC has been outlining his vision for the future of music marketing and distribution (short version: music will be free). He is a maven for rock and pop and a regular commentator on technology and venture capital, so I listen to him.

I think free music can be a great business. In this post, I’d like to make explicit something Fred is leaving implicit, a key feature that I think is necessary for mass adoption. The payment model itself has to respond to consumer preferences. There is too much variation in taste for “one-size” monetization.

First, it’s worth reading all of Fred’s posts:

Here’s the core of Fred’s idea, from the original post, The Free Music Business:

The music industry should be doing all that it can to build this discovery/navigation layer because unlike the print industry, the music industry gets paid (or has the right to get paid) every time someone listens to music that is streamed over the Internet. They get paid a compulsory license if someone listens to a stream that is defined as “internet radio” which is about a tenth of a cent per listen. And they get paid a penny a listen if the song is listened to “on demand” like through Rhapsody.

I believe these fees are easily recouped via advertising once the free music business takes off. … [W]e will have an abundant free music business where all the music is available to everyone and discoverable via search and social discovery. And that business will print money just like online print media does today.

Fred gives some examples of albums he’s bought. He’s paid (A) $27 for three different copies of an album he listened to about 1000 times in 25 years, and (B) more than $27 for a compilation he listened to once. Under pay-per-use, a single track on the good album works out to about $10 of revenue at 40 listens per year (every 9 days or so) and $0.01 per listen. Depending on your discount rate, that cash flow is worth about $5 – $6 in present value dollars. This for a track I can buy today for $0.99 on iTunes or say $1.50 on a CD.That feels like a horrible deal for me, the consumer. True, iTunes has DRM, and CDs come with a bunch of music I probably don’t want, but 400% is too much premium to get around that.

On the other hand, pay-per-use permits musicians to price discriminate and solves the lemon problem for consumers. If you pay per use, you automatically pay the most for the music you use the most, and a negligible amount for the music you are only sampling.

I predict that the music market will sort into several mutually-supporting tiers or models:

  1. Ad-supported, free streamed music – internet and radio
  2. Streaming pay-per-use without ads – $0.001 per track
  3. On-demand pay-per-use without ads – $0.01 per track (say $3 to $5 NPV)
  4. Streamed unlimited listens with monthly fee – like Sirius or XM (perhaps this model will go away)
  5. Unlimited listens, priced at a discount – say $2.49. This will be a permanent, DRM-free MP3 or hosted on-demand service, portable to all my devices, like buying a CD and ripping it. The discount from $5 to $2.49 compensates listeners for the risk of buying a lemon. Social discovery tools like last.fm will reduce this risk and therefore reduce the discount.
  6. Physical, packaged media, vinyl and CDs – probably at a premium to what they cost today, say $25 and up.

The key to getting consumers to accept free/ad supported music is to allow them to choose from a menu of pricing and licensing options.

There is a core of music that I listen to every week. I don’t want to feel a hit to my wallet when I listen to Beethoven 7 or Kind of Blue. There’s other music that I own today but shouldn’t – I’d be better off with pay-per-use. There’s music that today I hear on the radio – some of this would be better as pay-per-use and some I’d rather keep ad-supported. (But I will not tolerate ads that disrupt the listening experience. In fact, I know a public radio station that uses its policy of no pre-recorded ads as a selling point during donation drives.)

The winner in this market will be the company that best figures out how to integrate, mix, and track these different ownership classes simultaneously and seamlessly for each user. For example, No. 2 and No. 3 above could be indistinguishable to the end user – you just get a surcharge for calling up Save Ferris. In the meantime, I buy used CDs for $6 and vinyl for $0.25 per disk, and I listen to the radio.

UPDATE: Isabel Wang riffs on utility pricing for music and software.

UPDATE: Seth Godin is thinking about price elasticity of demand. “Free stuff spreads. You don’t make any money from the thing you’re giving away, but you do get attention, which is worth as much, or more in many cases. Charge even a penny, though, and the drop off is huge.” When three bloggers like Fred Wilson, Seth Godin, and Chris Anderson agree on a trend, something is in the air.

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