Tim Lee

Music Wants to Be Free

Over at Techcrunch, Mike Arrington reaches the conclusion I advocated a couple of years ago: in the long run, the market price of most music is going to be zero. I think Arrington actually focuses too much on piracy. Yes, in the short run peer-to-peer networks are an important source of price pressure. But the far more important factor is the sheer number of people who want to be rock stars. Now that the bottleneck of CD production and distribution has been removed, any musician can reach an infinite number of fans at zero cost. As a result, more and more musicians will find it in their self-interest to voluntarily give music away for free as a means of building up their fan base. Over time, consumers will get used to music being free, and at some point music will be just like news and punditry are today: the vast majority will be free and ad-supported, with a small minority continuing to try to charge money.

However, I do think Arrington gets this backwards:

The price of music will likely not fall in the near term to absolutely zero. Charging any price at all requires the use of credit cards and their minimum fees of $0.20 or more per transaction, for example. And services like iTunes and Amazon can continue to charge something for quality of service. With P2P networks you don’t really know what you are getting until you download it. It could, for example, be a virus. Or a poor quality copy. Many users will be willing to pay to avoid those hassles. But as long as BitTorrent exists, or simple music search engines like Skreemrallow users to find and download virtually any song in seconds, they won’t be able to charge much.

On the contrary, the transaction costs of charging small amounts of money is the reason I think the price will drop from its current price of around a dollar to zero. In the absence of those transaction costs, it’s possible to imagine the price gradually falling over time, perhaps reaching 25 cents in 5 years and a nickel in 10 years. But the problem is that the costs of processing a 10 cent payment is on the order of 10 cents, (and as Clay Shirky has convincingly argued, this isn’t likely to change) so it makes more sense to just give the song away and find other ways to monetize those eardrums.

October 5, 2007 | Comments |

Viewing 7 Comments

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    Tim:

    As always, an intersting post. But it doesn't explain one fact that Ihad observed: the site allofmp3.com charged between 8 cents and 20 cents per song, and apparently they made money.

    So, i agree that the price will approach zero, but I also believe that the black/grey markets serve information purposes, and in the case of allofmp3.com, it showed the recorded music industry a pricing strategy that will work well.

    Now, they will take that information and implement it, I believe...
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    If you read Shirky's article, one of the things he talks about is bundling as an alternative to micropayments. So one of the ways to deal with falling prices is to give more songs in a bundle. (eMusic also does this). In the medium-term, I think this strategy might be somewhat effective. An even more effective strategy might be something like Netflix, where you simply pay a flat monthly fee for access to a massive database of every song ever recorded. If they price it right that could generate revenues in the ballpark of 10 cents per song.

    In the long run, though, I don't see any reason to think a price of 25 cents or 10 cents is any more sustainable than $1. The newspaper industry is gradually discovering that it makes more sense to give away content and sell ads than to try to charge for the stories themselves. While I certainly could be wrong (markets surprise people all the time) my guess is that the same thing will happen to music.
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    The newspaper industry is gradually discovering that it makes more sense to give away content and sell ads than to try to charge for the stories themselves.

    Just today the price of the St. Louid Post Dispatch, went up to 75 cents...

    Allofmp3.com did kind of bundle, in that you had to start your account with $10.00, and add increments of $5.00..
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    ef, I'm talking about online. Offline, the economics of the news business hasn't changed so there's no reason to think the price of paper newspapers will fall.
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    "An even more effective strategy might be something like Netflix, where you simply pay a flat monthly fee for access to a massive database of every song ever recorded. If they price it right that could generate revenues in the ballpark of 10 cents per song."

    Tim, wouldn't you agree that flat fee all you can eat systems only work for stuff you rent, in which case you can set a limit to the amount of stuff you can "simultaneously" enjoy. Netflix works because you can only have 2 movies (or 1, or 4) home at the same time. I think people still want to own their music, mostly because, unlike movies, people are likely to listen to the same piece of music much more often (and probably much more erratically) than the movies they watch. People also want to enjoy their music everywhere, whereas most people only watch movies in a single place. So a technological solution (the "here's this box that lets you listen to movies in your living room through our service" kind of arrangement) isn't practical for music. I don't just want to listen to music in my living room. I want it on my mp3 player when I go hiking, I want it in my office when I work, I want it in my car. I want to have it at partys. I want to be able to bring it to someone else's house. You get the point. This is much easier done when I own the music in an unrestricted format than if you rent it to me, in which case you have to control it. The implementation of the "flat fee" which emusic, audiolunchbox and others have devised is a workable solution, but it supposes that one service must have a large selection of music I want. I'm not willing to pay 10$ a month for the privilege of buying music if I don't want to buy most of it. Music is difficult when it comes to rentals because ti's easy to rip and it's hard to control without frustrating the consumer.

    I do agree that in the end, musicians are simply going to offer their music for free (or nearly free) to anyone and everyone to gain awareness. Given what artists currently make off the sale of a cd, they're much better off giving it away for free if it can ensure a packed audience everytime they have a gig somewhere.
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    I think there is some confusion about just what type of good music really is. I think music is more like rolex watches or the latest designer clothes then it is like a commodity. Sure there are many people who want to become rockstars and it might be nothing but chance that determines which of them do become rockstars but there will still be a limited number of rockstars because people want to listen to the same music as their friends and like to listen to popular groups that are constantly presented to them.

    In other words people will continue to pay for music (short of an adoption of an alternative IP model) just for the right to listen to popular music. Sure some people make a point of pride of listening to obscure stuff but most people want to listen to the big acts that are highly visible and their friends like too.
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    Charles, that's a good point, but I'm not sure it's necessarily true. If the price is low enough, there might be some people (including me) who would pay for constant access to a database of every song ever made. Yes, in theory I could download a million songs to my hard drive and then cancel the service. But that's a pain. It would take a long time to download all the song, and I'll likely discover new music later that I hadn't thought of. So if the price is low enough (under about $5/month) I suspect that you could simply have a flat-fee, all-you-can-download plan without any sort of usage restrictions and you'd still have a lot of people signing up just for the convenience of being able to get the music they want when they want it.

    But like I said, markets surprise people. I'm definitely not going to say I know exactly what the business model will be. But it's a safe bet that people will find some.

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