Music Wants to Be Free

by on October 5, 2007 · 14 comments

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.

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