David Packman, over at Re/code, just wrote one of the most interesting analyses of the music industry in the US that I have ever read. He looked at long-term spending patterns of music consumers across years and across the different media and used those numbers to come up with a surprisingly steady number:
“Consumers are willing to spend somewhere around $45–$65 per year on music, and that the larger a service gets, the lower in that range the number becomes. And these numbers have remained consistent regardless of music format, from CD to download.”
Conversely, though, the on-demand music streaming services are currently charging $120 per year, twice as much as what consumers are historically willing to spend. Mr. Packman explains: “This is because the three major record labels, as part of their music licenses, have mandated a minimum price these services must charge… The services are not able to charge a price they believe will result in maximum adoption by consumers.”
It’s this latter sentence that makes me wonder. After all, these companies are trying to provide a service consumers want and are willing to pay for. Mr. Packman gave this model two options to survive. Either “consumers decide to spend more than two times their historical spend on recorded music, or major record labels allow the price of subscription music services to fall to $3–$4 per month.” He concludes that since consumers will not pay more for music the music industry must lower prices.
While I don’t disagree with that conclusion, and not knowing much about the internal operations of the music industry, historically I haven’t seen the music industry show any kind of pricing flexibility. Regardless of physical production costs, the price of a song and a song bundle have remained essentially the same throughout the years. If they won’t budge then on-demand music services will die. The question is, what music products and services will remain?
1. Digital downloads: at around $1 per song this model seems to fit the industry pricing demands and consumer consumption. Will more people stick with this model, forgoing streaming?
2. Genre streaming services like Pandora. Pandora just raised the cost of its ad-free version to $5 a month from $4 a month. This is closer to the $3-$4 “magic number” but I am assuming the current price raise is a result of increased royalty fees which means that the music industry is, again, forcing a price above what consumers are willing to pay. Especially for a service that is not “on-demand” music but more like a radio.
3. Ad-supported genre-streaming. Pandora says that only 3.3 million subscribers of more than 250 million registered users total are paying for ad-free listening. That means advertising is paying for the music but this is nothing new. Broadcast radio has been around for almost 100 years. This isn’t a new model, just newer technology.
4. “In the mood” streaming like Songza. With less choice than Pandora for musical selection by limiting the selection to predetermined playlists, Songza offers a take-it-or-leave it approach to music streaming.
Looking at these different listening/business models I can “plot” their differences on a very clear scale: the user choice scale. On one extreme you have the “I want this song and no other” attitude of a digital download. This is the most expensive (per-song) option but it’s one time, meaning that the user can listen to the song countless times without paying an additional fee. On the other end of the scale you have the “just play me what you’ve got” model, where the user selects a broad category and the service picks the songs to play. This is a one-time broadcast and the user cannot choose to hear the song again. In fact, the user has very few “rights” in this model but it is (currently) free.
In conclusion, considering the fact that consumers won’t pay over $60 a year for music and that the industry won’t reduce on-demand royalty costs, we, the tech industry, are going to have to think of new models that work within those guidelines. I really like what Songza is doing but there must be more music products out there that will work for consumers and businesses, while not incurring the music industry’s ire.
Let’s give this some more thought, shall we?