Price Versus the iPod
By George Anderson
Yahoo is launching a new online music service. The Internet giant is banking that a low $6.99 monthly subscription fee ($4.99 with a yearly contract) and a million song library
will be enough to get consumers past the limitations that it is not compatible with Apple’s iPod and that songs can only be played while the user is current with their subscription
payments.
Dave Goldberg, general manager of Yahoo Music, told USA Today, “We don’t think the download market is really working. Subscriptions are a better answer.”
David Card, an analyst with Jupiter Research, isn’t jumping on the Yahoo bandwagon just yet. Digital music equals Apple right now, and without support for the iPod, that’s a
huge hurdle,” he said.
Mr. Goldberg is optimistic despite the obvious challenges. “We’ll break even. Our goal is to get a large base of consumers.”
Jupiter projects digital music to generate $500 million in sales this year with 60 percent from downloads and the balance from subscriptions. Mr. Card told USA Today that
he believes the business will grow to $1.7 billion by 2009, at which point subscriptions will make up $900 million of the total.
Moderator’s Comment: Are subscriptions the future of digital music retailing business model? What are your thoughts on Yahoo’s new service?
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George Anderson – Moderator
One more thing: I don’t think Apple is the company that should be worried short-term about Yahoo! It’s Napster and Real that should be plotzing. Yahoo is about to start a price war. If I am a consumer that doesn’t care about iPod compatibility, what’s the difference between Napster, Real, and Yahoo!? Go with the low price. Profits just moved further down the road for these guys.
These subscription services usually charge you monthly, then an additional $0.99 per song to download, yes? I had Rhapsody (part of Real Player service) and dumped it because it wasn’t portable. The music stayed on their server and couldn’t be downloaded to ANY MP3 player…not just iPod. I think that the music needs to be downloadable to some sort of player. Burning CDs is a pain and really the only advantage to this versus buying in retail or online is that you can create your own mix. But once that mix is created, you are stuck with it.
I agree that unless you offer services that are compatible with iPod, you are missing a huge user base. Now that I have an iPod, I won’t bother with any music service that is incompatible.
I can state with confidence that the subscription model will indeed beat out the “a la carte” download model; the only question is how long it will take.
Senior managers in the music industry made the mistake of praising Apple (and Steve Jobs in particular) as a “savior” for their market, but they’re learning (the hard way) that the iPod is fueling the continued growth of unauthorized file-sharing. Subscription models (featuring streaming, instead of downloading) are the best remedy, and provide a great consumer experience — way more fun than downloading.
The challenge is for the industry to get behind these subscription services and educate consumers that they will enjoy their music much more if they switch to such services. It’s a matter of carrots instead of sticks. Unfortunately, the industry is still more interested in beating its customers with sticks (i.e., lawsuits) instead of taking a more positive, proactive approach. Very sad.
A “huge hurdle” indeed. Apple reportedly owns 92 percent of the hard disc music player market and 65 percent of digital players overall. Their new iPod Shuffle, introduced 6 months ago, has already captured 58 percent of flash-based players. At their low monthly subscription prices, Yahoo is bound to get a lot of sign-ups, but I suspect it may be just enough to encourage the company to lose money on the program for a few years before giving up. Then again, Yahoo is such a powerhouse that a nice little, loss-leader music service could simply be seen as one more marketing ploy to keep their loyal users sticking around. Perhaps winning sizable market share isn’t ultimately that important for them.
James, I think you meant Napster, not iTunes in the example above.
Peter, you seem quite sure about the subscription model winning, but where’s the evidence? You must know something no one else does. Subscription models may eventually take a large chunk of the market, but we’re a long way from declaring a winner. Right now there are two primary “vectors” for the music loaded onto any portable player: CDs and P2P downloads. DRM’d downloads whether purchase or subscription, are a distant third. Yahoo’s entry in the market is significant in that it offers a lower price but, otherwise, it’s not all that interesting. Remember one simple fact: they all have the same music for the most part; a song is a song is a song.
So forget all the red herrings about purchase or rent, download or stream. Right now they are experiments, and they are changing. The subscription model has serious flaws in concept and execution. Most services have a confusing mix of monthly fees, separate fees if you want to take your music with you, separate fees if you want to buy a track, not all tracks are available to buy, etc. What a mess!
The iPod vs. “everyone else” is also a red herring. At present only a handful of players are compatible with Microsoft’s Janus subscription DRM software. Hardly enough to base a “freedom of choice” argument on. That will change over time, but Apple has plenty of time to respond.
Finally, it remains to be seen whether the music industry can avoid shooting itself in the foot. They are hammering Apple to create more complex pricing schemes so they can squeeze every cent of profit out of the music, dumping less desirable tracks for less and jacking up the price for new hits. Makes sense, but Apple has succeeded in large part by making it EASY. It’s too early to lose that simplicity.
The wireless carriers are getting into the act, and all signs point to them trying to charge $2-$3 a TRACK for the privilege of buying a song you can only play on your handheld phone/player. I doubt Apple is wringing its hands over that losing strategy. Hmmm, I’m 16 and I can download music free from a P2P service or pay $2 to get one song on my phone. Let me think, aaaah, such a tough decision.
In conclusion, we’re very early in the revolution folks. Retail music is going to change, no doubt about it, but the warriors are still sharpening their swords and loading their ammo. They’re testing each other with limited engagements. The war lies ahead!
Subscription services that require continued membership for music to be playable are ultimately frustrating to customers and will not stand. Here’s why: They gradually accumulate negative experiences across the market as users discover the built-in barriers to exit.
It’s insulting to pay a buck for a single track only to find that it is confined to the device you downloaded it to (MSN music) or dependent upon continued monthly subscription (iTunes). Subscription services such as Rhapsody or the new Yahoo! service also tie the user to a web-connected device.
My listening habits are simple: I rip or download MP3 format tracks from legal sources, save them on my hard drive, and load them onto an SD card so I can listen to them using Real Player on my Palm device.
Music subscription schemes require us to accept cost and complexity for the financial benefit of the record companies. I, for one, ain’t buying in.
Subscriptions may well be a part of the future of digital music but the market share Apple has at present would indeed make me think twice, or perhaps more than twice, about launching an incompatible service! Besides, Apple will eventually release its own streaming iPod and try to take that side of the market also. I agree with Rick — not sure this will be viable for Yahoo long term.
One day marketers will realize that capturing the consumers attention, dollars and loyalty is about far more than price. Apple has captured the hearts and dollars of consumers because the iPod is easy-to-use, well made, and cool! The company’s music service is easy to use and yes, cool! From the very beginning, Apple has sold the iPod by promoting the music and iPod’s music capabilities to fashionable, image-conscious consumers. The price is secondary.
Yes, other companies may have a better business model, lower prices, and even a better way to download music. But none of Apple’s competitors have figured out how important it is to create a music product and service that customers can’t live without because it is cool!
I agree that subscription is going to play a role in the future, but to beat out downloading? No way. The problem is, if I end my subscription, I completely end my access to the music. If I buy a CD, I still have the CD. I’m not willing to give that up…especially downloading to my iPod. Where subscription needs to go is to give iPod users the benefits of radio – I want to be able to subscribe to a ‘new music’ service that will let me download a set of songs each week from various artists that are in the genres I like, and be able to listen to them for a limited number of times – and mark that I want to buy the ones I like the next time I’m on the iTunes site. That would be worth $6.99 a month.
The music industry really needs to get creative about how to enhance consumers’ appreciation of music and their favorite artists – as Apple found, they’ll buy. Stealing, aka file sharing, is a part of any retail operation. If they had only made it easy for us all to participate legitimately, then they wouldn’t have the problem they have today.
The portability issue is a red herring; it’s a problem that’s already solved (via the “To Go” services that Napster and Rhapsody currently offer), and further R&D efforts will make it a complete non-issue.
Keep in mind that other technologies such as cell phone networks and satellite radio are also beginning to offer similar services, so there’s no reason to have an “Internet-centric” view of this market.
So the technology won’t matter (and it shouldn’t). All that matters is the right business model, and all signs point to the streaming/subscription model as the eventual winner.
Certainly online subscriptions are going to be part of the revenue picture on the Internet. Though I don’t think anyone can predict right now what the complete model will look like in 5-10 years.
Content providers face an enormous number of variables. Just to name a few: There is a pervasive sense that “content wants to be free.” Obviously, this is an unsustainable model. But it is a hard habit to break. And all the descendants of Napster, to the chagrin of the music industry, are insuring that this old habit dies hard. Ad-only-supported content– it seemed 3 years ago– was also proving to be an unsustainable model. And yet everything we read this week predicts explosive online ad growth. It’s so hot (does this feel like the year 2000 again?), that interactive agency Organic has 60 online-advertising-related positions it cannot fill.
Online advertising will get smarter and smarter. Marketers will know more about you and, therefore, be able to target you with goods and services you care about. Far from being a 1984 Orwellian future, this, in my view, is a future to look forward to. You mean I don’t have to be bombarded with all kinds of communication I don’t care about? Instead I will learn, for example, only about things like the new Harry Potter book and whether Macy’s is having a special on Shiseido lipstick. (You now know my personal passions). Smarter advertising will be more valuable. More valuable means more money. An important part of the revenue model for content online.
In the pay-for-content future, companies that distribute content online will learn which customers want to purchase with one-off micro payments, and which customers simply want to pay a small monthly fee and have unlimited access to whatever content they are interested in. Which customers are more valuable? Will micro-payments survive? Who is the great fee aggregator? The ISP? The cable company? The media company?
So, yes, subscriptions look as if they will be part of the picture. And what an interesting and complex picture it is likely to be!
Thanks for straightening me out there, Jeff.
I think your comments are on target.
The iPod market is very important here. I think it is a mistake to ignore their large market share. If you look at the numbers, it just doesn’t make sense for the next 3 years.
I do think the subscriber model will end up working, but it must be more inclusive. The worst thing that a company can do here is set consumers expectations incorrectly as to what they’re paying for. This would be a huge ‘word or mouth’ negative as well as likely garner other bad PR.