Recorded music is caught in a catch-22.
As products have become more innovative, revenue declines. Streaming services offer legal alternatives to piracy. Downloads offer an inexpensive way to enjoy digital music. Track prices top out at an affordable $1.29 and the current trend -- with price competition by the likes of Amazon.com and 7digital -- is toward cheaper downloads. The access model (streaming) hinges upon the frequency with which consumers listen to music, not how often the buy music.
The picture painted at the Digital Music Forum West, according to Jon Healy, is grim. Healy sat in one a panel that discussed some revenue trends that have reshaped income statements over the last decade. NPD's Russ Crupnick laid out some stats: per capita annual spending on recorded music dropped to $35 in 2008 from $44 in 2006, and as download purchases are rising a full two-thirds of consumers still purchase CDs. Free streaming services, Crupnick said, are cannibalizing download sales.
Yes, consumers are spending less as they are given less expensive alternatives -- costs for digital albums and tracks are lower than those of CDs, and streams cost less than downloads. These are effects of format substitution. Give consumers a way out of spending money on music and they're going to take it.
What would happen if consumers streamed less and purchased more? An issue related to falling consumer spending is the price of downloads versus the price of competing products. A key question labels need to address is the price of downloads and what is the most desirable product mix (more buying and less streaming, for example). Lower prices could very well boost sales, but just how much sales would jump is anybody's guess at this point.
Limited test runs are not likely to duplicate the conditions in a real, across-the-board price drop. (A limited-time sale will create a rush to buy that would not occur when prices are permanently dropped. A quiet trial of lower prices for random catalog titles is far from the reality of a permanent price drop. A permanent price decrease would need to carry with it a vast education piece so consumers had clear information on the price cut.)
Even without a huge increase in unit sales, there could be a benefit in simply getting consumers to buy downloads rather than stream songs. Downloads are a superior way to monetize recorded music in the sense they represent guaranteed money at the time of sale. Streaming results in tiny bits of revenue spread out without certainty over a long period of time. Those streams may or may not add up to a download.
For example, a $1.29 track at iTunes results in about $1.00 in wholesale revenue. If a single stream results in 75 cents for the content owner, it would take more than 133 streams to generate $1.00. But the calculation should include the time value of money since the streaming royalties are collected over a period of time. Taking into account the time factor, if the song is streamed 133 times over one year (spread out evenly with royalties paid out monthly), that's worth just under $0.96 today (using an 8% discount rate). But of course, over the course of many years a stream will continue to collect royalties. Over a few years, far more than $1.00 could be collected for a popular song.
In reality, a person is likely to listen to a song often at first and then trail off. If the consumers listens 60 times in the first month, 30 times in the second month and zero times after that, the present value of the royalties is about $0.67. Album purchases provide better even economics since some tracks will get fewer listens than the most popular tracks. In other words, the purchase model pays out whether or not the songs get heard.
The advantages of selling downloads -- and bundles of downloads -- is apparent. They represent guaranteed revenue received immediately. A download that gathers dust is more desirable than a song that gets streamed only briefly and is then forgotten.
Figuring out where to price downloads means figuring out what consumers are likely to do with the alternative -- will it get a lot of streams or just a few? Huge price cuts would undercut the download's value proposition, but a case could be made for being flexible and occasionally taking far less than normal rates.
This stream-or-sell debate may not last decades, but in the coming years it will be an important discussion. Just as some consumers today buy both physical and digital formats, consumers in the future will both purchase and stream music. The two types of music experiences will need to better coexist.
Recorded music is caught in a catch-22.