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What to do About Falling Music Sales

David Goldman at CNNMoney.com writes about the decline in the music industry business

Apple’s (AAPL, Fortune 500) iTunes is credited with finally getting people to pay for digital music, but it wasn’t unveiled until 2003.

In the time between Napster’s shuttering and iTunes’ debut, many of Napster’s 60 million users found other online file sharing techniques to get music for free. Even after iTunes got people buying music tracks for just 99 cents, it wasn’t as attractive as free.

and

Now just 44% of U.S. Internet users and 64% of Americans who buy digital music think that that music is worth paying for, according to Forrester. The volume of unauthorized downloads continues to represent about 90% of the market, according to online download tracker BigChampagne Media Measurement.

Matt Yglesias responds

Music industry executives can tell themselves that as long as they want. But under conditions of perfect competition, the price of a song ought to be equal to the marginal cost of distributing a new copy of a song. Which is to say that the marginal cost ought to be $0. That’s not a question of habit, you can look it up in all the leading textbooks. Of course real businesses rarely operate in circumstances of perfect competition, and record companies have a variety of political and legal tools they can deploy to try to protect monopoly rents. But this is hard to do. I think the real story with the iTunes store is that over time competitive pressure has impelled it to largely drop DRM and over time I expect we’ll see that the CPI-adjusted price of songs declines.

If you are a music industry executive, you can wait for CD sales to bottom out at somewhere close to nothing. Or you can take the initiative

I don’t know if any research has been done on this or not. But it seems to me that $1 is just too high a price for a song. At that price, a high school or college student faces the choice of transferring music from his friend for free or paying $40 to get a few albums of a new band that he got interested in. There’s no contest.

You might say that by this logic you can never win against free. You can, if you make it really easy to access and download cheap music from legal sites. If iTunes had song downloads for 10 cents you would convert a large majority of “pirates” to legal downloads.

Piracy Pulling Down Music Sales

The FT reports that 95% of digital music downloads are illegal. The RIAA has tried many things, including taking college kids to court. Nothing works.

To my mind, piracy of music:

1. Is inversely related to the chances of getting caught, which is very low.
2. Is inversely related to the punishment if caught, which is mild.
3. Is inversely related to the disapproval from friends and family who might know that you are using illegal music. This is almost non-existent.

All of these factors might indicate that piracy can’t be vanquished. But there is something that the music labels could do to start beating it back – reduce the cost of digital music dramatically.

Today the price of a song averages around $1. The marginal cost of delivering the next song is close to zero. So if you were to somehow know what the price to downloads curve might look like, all you would do is to set a price where the product of price and downloads was maximum. But of course, you don’t. Which is why the price of a song is stuck at $1.

I don’t know if any research has been done on this or not. But it seems to me that $1 is just too high a price for a song. At that price, a high school or college student faces the choice of transferring music from his friend for free or paying $40 to get a few albums of a new band that he got interested in. There’s no contest.

You might say that by this logic you can never win against free. You can, if you make it really easy to access and download cheap music from legal sites. If iTunes had song downloads for 10 cents you would convert a large majority of “pirates” to legal downloads.

Obviously, executives in the music industry have a pretty tough choice. First, they may not be able to convince all parties – Apple, artistes – to agree to a dramatically lower price. Doing it for one song doesn’t really work – it won’t change habits. They need to go the Full Monty. That’s a tough sell. Even if they managed to get that far, it is likely that revenue would plummet in the short term before it started rising again. On the other hand, it takes one bad quarter to get you fired.

The leap of faith is that reducing the price per song to a tenth of what it is today can take the share of legal downloads from 5% to 50%. Isn’t it time someone took that chance? After all, things can’t get much worse can they?

Digital Book Economics

I got a Kindle recently and have so far enjoyed it. In almost every respect it beats the experience of reading the dead tree version. It is light and portable. I read non-fiction more than fiction and I hate lugging around the heavy hard cover. Turning pages (no paper cuts!) and bookmarking are both better. It seems to be perfectly designed to be read while working out on an elliptical. Font size control is a boon for those of us over 40. If you want a new book, buying it and downloading it wirelessly is dangerously simple and quick. I foresee bigger contributions to the Amazon.com empire from the Pradhan family.

There are a few disadvantages of course. The biggest one is the price. At $360 or so you don’t want to leave it on the airplane! You can’t loan a book to someone else. Books with illustrations won’t offer the same experience for a while (no DC comics on the Kindle so far). You are forever tied to amazon.com as your supplier of books. Much like the lock-in that music downloads from iTunes created for the iPod until Apple also moved to mp3 downloads. Funnily, the DRM that the publishers insist on creates a lock-in that benefits the device manufacturer the most.

Kindle, and hopefully other e-books, will change the economics of the book publishing industry. I can’t say if it will be for better or for worse for the publishers (probably worse) or authors (probably better). But the readers will certainly have more choice. And this can be very, very good for Amazon’s shareholders. More »

Zoho and the Bottom of the Software Pyramid

Last week Sridhar Vembu the CEO of Adventnet, makers of the Zoho suite of software, was featured on the Economist’s Face Value. This may seem like a big deal for the CEO of $60 M company (The Indian CEO featured before Sridhar was TCS’s Ramadorai). But you have to hand it to the Economist. For a magazine that covers politics, economics and business, it has the pulse of the software industry. What Zoho is attempting to do can be game-changing for business software. More »

The Nature of Switching – Implications

In my last post I described a framework to understand how individuals make switching decisions. Using this framework, let’s examine its implications for marketers of technology.

At the most basic level the framework says that to maximize the chances of switching you should maximize Switching Benefits, minimize Switching Costs and make Research and Trial really easy.

Maximize Switching Benefits

If there isn’t a compelling feature or two in your product that will get a large percentage of your target user base to check out your product, it won’t work. When you introduce a product, it is more important to focus on the Switching Benefits than on lowering the Sacrifice. If the Switching Benefits aren’t there, you won’t get enough people into Research & Trial. If the Switching Benefits are there but the Sacrifice is somewhat high, at least you’ll get the trials and perhaps some early adopters to switch. You might also get some parallel runs, where users use both products for a while. But most importantly, you will get feedback.
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The Perfect Notebook

One of the few old world habits that I stubbornly stick with is writing with a fountain pen. I don’t write nearly as much as I type, but when I do, l like the feel of a good ink nib against paper. It helps me think better, or so it seems. More »

Big Pharma vs Nature

I read an article about something interesting that I now can’t seem to find on the internet. The article was about a study conducted by some Indian doctors that indicated that wheat grass juice can reduce transfusion requirements in Thalassemia patients. A paper on the subject in Indian Pediatrics from 2004 is what I was able to google.

One of the (many) problems with modern day drug discovery system is that it is driven completely by a template that provides no incentives to discover naturally found active ingredients with therapeutic properties. Discovering new drugs is an expensive process requiring tens of millions as investment before the drug can be commercially exploited. Most drug candidates don’t make it. If you amortize the cost of these failed drugs over the few successful ones, the costs multiply rapidly. The entire edifice of the pharma industry rests upon the ability of companies to successfully exploit a successful drug through patent protected pharmaceuticals. The problem with naturally found active ingredients is that a patient can get the cure without buying the pill. More »

Company of One

The English word company means “A group of persons”. I would surmise then that the business entity “company” got its name because it comprised of a group of persons engaged in a common business purpose.

An individual can start and run a company all by herself. There is nothing new about that. What is however changing is just how much that company can achieve with a small team. A few individuals can create a company with millions of dollars in revenues and tens of millions of dollars of value. More »

Joost – Internet TV for Real

I got an invite for Joost and tried it out yesterday. It rocked.

Joost, for those who haven’t heard about it yet, is basically internet TV. Full screen, high(er) quality, mainstream TV content streamed to your computer over broad band. The guys behind it are Janus Friis and Niklas Zennström, the same duo that did Kazaa and Skype. With their backgrounds you have to take Joost seriously.

And it doesn’t disappoint. Yesterday, I downloaded the beta version of the client software and settled down to try it out. My verdict – this was vastly superior to any other video on the internet and ‘acceptable’ when compared to regular TV. Every program started with a few seconds of rickety video but once the buffering kicked-in, it was smooth sailing from there on. More »

Don’t Believe Everything You Read

On May 16, Engadget, a blog on consumer electronics, posted breaking news that Apple’s iPhone and Leopard OS were going to be delayed. This was based upon an internal Apple email that they had been able to lay their hands on.Within a few minutes, AAPL had lost 3% off its market cap. Techcrunch has a blow by blow account here. Paul Kedrosky has another interesting take on the episode here.

My interest in this episode is in connecting it with other recent developments in text analysis based algorithmic trading to see what this might augur for the future. More »