Placing the bets
Basically, there are two business models when it comes to selling music online: pay-per-download (à la carte) or subscriptions. Consumers are used to owning a CD and disposing of its content in any way. They "have been buying music for 50 years. They want to replicate that experience online", says Eddy Cue, Apple’s vice president of applications and Internet services, overseeing its benchmark iTMS (Hansell 2004). But some people think different: "We see subscription becoming the predominant contribution to our business very soon", Chris Gorog, Napster’s CEO (Banerjeeand Garrity 2004).

iTMS and most other online music stores today bill customers by the track or album they choose to download. In contrast, companies like Napster, Yahoo! and RealNetworks offer a monthly flat fee in exchange for unlimited downloads.

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Figure 1: Online music business models

Figure 1 summarizes the various concepts of music subscription services ("Pay-per-download" is mentioned for the sake of completeness and contrast. The figure is not supposed to suggest homogeneity within that field). Streaming subscriptions or digital radio have already been introduced to the market for some time. This article focuses on the second environment: subscription. In that environment, you can listen to and download as much as you want as long as you pay the fee. Some services allow consumers to listen to the music on their PCs only (PC-tethered), while others make files transferable to portable devices. The third scenario is covered by smaller companies like Wippit from the UK, which will not be covered by this article.

Basics of usage rights management in subscription services
While subscription models provide unlimited access to music, the DRM regime is much stricter. The main difference between actually buying songs and merely renting them is the expiry of files upon cancellation of the subscription. Once you stop paying the monthly or annual fee, the files that you have downloaded cannot be played anymore. If you want to listen to them again, you must prolong the contract and the files are unlocked. In case files are made transferable to portable devices such as an MP3 player, licenses are programmed to expire on a set date. Subscribers need to connect their mobile devices to their PC platform in order to update usage rights on a regular basis.

The prerequisite for transferring protected music to portable devices to-date is Microsoft’s Windows Media Digital Rights Management for Portable Devices (WMDRM-PD, "Janus"). Its real-time clock checks if a subscription license is still valid. If so, the file can be played-back until the end-date of the license. A license contains terms and conditions, or usage rights, by which content usage is regulated (Guth 2003).

In case the consumer has decided to own a track that does not expire, subscription providers offer him or her to buy it for a fee on top of the subscription price. The track can then be played as long as the consumer wishes and be burned to a CD a definite number of times.

The business models
This article takes a look at business models that are trying to challenge iTunes’ business model, namely RealNetworks’ Rhapsody, Napster’s To Go service and the recently launched Yahoo! Music Unlimited.

RealNetwork’s Rhapsody: Real offers four different retail schemes. The low-end offer allows consumers to listen to 25 songs per month for free and eventually buy one or more for the usual 99 cents. Upgrading to US $ 4.99 per month gives access to web radio with a limited option to personalize. Actual subscription starts at US $ 8.99, allowing listening to an unlimited number of tracks on your home computer. In case consumers want to transfer the tracks to a mobile device, the monthly fee is raised to US $ 14.99. These tracks cannot be kept and burned – owning costs 89 cents per song. Unlike other services, tracks are compatible with Apple’s iPod, which is popular with allegedly 70 % of consumers (Seff 2005). This issue is highly debatable, as Real’s policy is in disaccord with Apple. Availability to date: United States only.

Napster: As a basic service, the monthly subscription fee is US $ 9.95, while you have to pay 99 cents for a permanent copy. In case you subscribe to Napster To Go, this fee rises to US $ 14.95. In return, customers can transfer their files to a portable device. The company was the first to employ Microsoft’s Janus DRM system that is necessary if files are to be transferred to external devices. Availability to date: United States, Canada, United Kingdom.

Yahoo! Music Unlimited: There has been quite a buzz about this service, mainly because of its pricing scheme: For $6,99 a month or, alternatively, US $ 59,98 a year, subscribers are allowed to access a library of more than a million tracks and a number of digital radio stations. In case they decide to own a particular track, they are billed a mere 79 cents per. Additionally, files are sharable via instant messenger with other members in the Yahoo! subscription community. Availability to date: United States only.

According to a study sponsored by the Online Publishers Association, more than 60 % of subscription consumers of digital entertainment content decide for a monthly contract (Online Publishers Association 2005). It remains to be seen whether or not Yahoo!’s low annual fee will change that behaviour.

Up- and downsides
The consumer: External devices are much cheaper to fill via a subscription than using individual downloads. Discovering new artists and styles is easy and painless, as you can listen to songs full-length without having to pay for each of them. Some think this is the next-generation radio (Leonhard and Kusek 2005; for a take on Yahoo!’s subscription service being in fact ad-sponsored web radio, see Malik 2005).

It can be argued that subscription services also fulfil people’s need for belonging. Subscribing to a service, they become members of a club or community, not only customers of a shop. On the other hand, consumers may prefer single transactions with different shops and not binding themselves to one single online point-of-sale.

But there are disadvantages. Customers do not own the music they have paid for. If they cancel the subscription, the files become useless. This ultimately is a psychological problem, which is owed to the idea of "owning" music bought on physical media or from a download music store (Palmer 2005). Others say that owning music bought online is just a myth, as users are ultimately not in control of what they can do with the music they have purchased – e.g. burn as often as they want, share with friends and family, etc. (Leonhard and Kusek 2005).

Also, the collection of music can be less concise in case of subscription libraries. This is due to the fact that not the entire catalogue is available both for subscription and for purchase. For example, Rhapsody has 600,000 tracks available in the subscription section, while the music store offers only 500,000 (Garrity 2004). Thus, the customer cannot be sure in every case that the song he or she wants to buy really is available.

The consumers’ sceptical attitude is reflected by results of an INDICARE-survey, in the course of which consumers state that they would rather pay 1 Euro for a song that they can listen to as long as they like vs. 20 cents for a song they can listen to for one month only (read: subscribe).

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Figure 2: Willingness to pay for ownership (Europe)

A survey conducted in the USA asked consumers whether they prefer to buy tracks for US $ 1 each or pay a US $ 10 monthly subscription fee: 40 % chose to pay per track vs. 8 % would rather subscribe (Parks Associates 2005).
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Figure 3: Willingness to pay for ownership (United States)

Subscribing to music is not yet a common idea with consumers. Especially the European market does not appear to be ready for that service. There is only Napster offering subscription in the United Kingdom and some smaller players like UK’s Wippit.

Online Retailers: One of the greatest advantages is a constant revenue stream derived from subscription fees. This considerably reduces economic uncertainty and risk. Subscriptions are also more profitable for them, as revenues usually are split evenly between the record labels and retailers. In the pay-per-track world, about 65 to 70 cents for each 99 cents are transferred to the record companies (Hansell 2004).

Furthermore, subscription services can be cross-selling opportunities. If the subscriber feels positive about the service, he will probably be willing to buy special releases, previews, package deals, tickets, merchandise, videos, books, etc. (Leonhard and Kusek 2005).
But there seems to be quite a long way ahead, as retailers need to work on two major issues: DRM and interoperability. Limited usage rights being the prime obstacle, the educational challenge is higher. It can be doubted that customers want to be educated about anything they spend their money on.

Also, there seems to be a severe misconception when it comes to DRM-awareness: Consumers do not know about it and if they do, they do not care too much (Dufft 2005). Napster’s CEO, Chris Gorog, possibly misinterprets reality when stating: "As we market to the consumer that has not yet discovered digital music, he’ll be going out and purchasing his first MP3 player, and in all likelihood, he’ll want to make darn sure it’s Janus-compatible". He or she hardly knows about DRM, let alone Janus DRM.

Also, retailers should make sure not to end up with a "razor and blade" business model (think Gillette), forcing the consumer to stick with a single soft- or hardware if the tracks are supposed to remain playable. Some argue that ultimately online music stores sell hardware, rather than music (Leonhard and Kusek 2005). For example, you cannot play tracks purchased from Napster on an iPod due to different DRM regimes; or you must use Yahoo!’s software to access its store.

Music labels: Music subscriptions first of all are another distribution channel. For some, it is even the "single greatest defence against piracy, because it most replicates the illegal experience of unlimited access to music" (Chris Gorog).

Given the fact that customers do not have to pay for each track, subscription models are a great platform to promote and expose less known artists. This can significantly increase track plays, the most important measure of success in the industry.

If the record companies are aware of their customers’ perception and need for convenience, subscription services are a great promotional and distributional tool. As holds true for the online retailers, subscription reduces risk and uncertainty by generating a constant stream of revenue.

Conclusion
Subscription services can deliver real value to all stakeholders. Consumers are given access to large libraries of their favourite music; they do not have to pay separately for songs they want to listen to only a limited number of times; it is convenient when it comes to billing and it is cheaper than à la carte.

Online retailers and labels must realize that the biggest challenge is to make consumers comfortable with renting, as opposed to owning, music. They must also be aware that consumers do not care about DRM, but simply want to listen to music. Rights protection being essential for the success of music subscription, success can only come with smart and convenient business models.

In the end, subscriptions as well as commercial downloads compete with DRM-free music files that are perfect goods: they are available anytime, anyplace and without limitations. Some authors say that any cuts from that should be compensated by reductions in price or value-added services (Knopf and Sorge 2003). Others think that every accommodation short of total DRM-protection should be compensated by the consumer (Hansell 2004).

Bottom line
There will only be limited resistance on the side of consumers once prices drop, DRM-issues are resolved, and libraries are filled with millions of easily accessible tracks, which are interoperable with a multitude of inexpensive playback devices.

Sources
  • Banerjee, Scott and Garrity, Brian (2004): Subs may best downloads. In: Billboard, Vol. 116, I. 35, p. 9
  • Dufft, Nicole, et al. (2005): Digital music usage and DRM – Results from a European consumer survey. Online available at: http://www.berlecon.de/research/reports.php?we_objectID=224
  • Garrity, Brian (2004): Song plays is the ultimate test for the health of subscriptions, A Q&A With Rob Glaser. In: Billboard, Vol. 116, Issue 16, p. 78
  • Guth, Susanne (2003): A sample DRM system. In: Becker, Eberhard; Buhse, Willms; Günnewig, Dirk; Rump, Niels (Eds.): Digital Rights Management, Springer, Berlin Heidelberg New York 2003, p. 151
  • Hansell, Saul (2004): Music sites ask, Why buy if you can rent ?. In: New York Times, 09.27.2004, Section C, p. 1
  • Hellweg, Eric (2005): Music unlimited. In: PC World, Vol. 23, Issue 3, p. 4
  • Knopf, Dominik and Sorge, Christoph (2003): Model-oriented analysis of user – right holder relations and possible impacts of DRM. In: Information Services & Uses, Vol. 23, Issue 4, p. 238
  • Leonhard, Gerd and Kusek, Dave (2005): To own or not to own. In: Billboard, Vol. 117, Issue 16, p. 10
  • Malik, Om (2005): The Yahoo music business model. Online available at: http://gigaom.com/2005/05/25/steve-jerry-and-the-yahoo-music-business-model/
  • Online Publishers Association: Paid online content U.S. market spending Report, FY 2004. Online available at: http://www.online-publishers.org/?pg=opa_rsrch&dt=5
  • Palmer, Jimmy (2005): Rent, lease, or buy – Which model is right for you?. Online available at: http://www.drmblog.com/index.php?/archives/60_Rent,_Lease,_or_Buy_-_Which_Model_Is_Right_For_You.html
  • Parks Associates (2005): Global digital living. In: EContent, Vol. 28, Issue 4, p. 16
  • Seff, Jonathan (2005): Napster’s bad math. In: Macworld, Vol. 22, Issue 5, p. 20

About the author: After having graduated from University of Mannheim (Business Administration), Philipp Bohn has joined Berlecon Research as Junior Analyst. He is a member of the INIDICARE-team. Contact: pb@berlecon.de

Status: first posted 21/06/05; included in INDICARE Monitor Vol. 2, No. 4, 24 June 2005; licensed under Creative Commons
URL: http://www.indicare.org/tiki-read_article.php?articleId=112