Encouraging colleges to offer low-price music subscriptions and downloads to their students may be as detrimental to the music industry's long-term health as the piracy that the business hopes to erad
Barry Sosnick is president of Earful.info, an entertainment products consultancy, and a music marketing professor at Five Towns College in Dix Hills, N.Y.
Encouraging colleges to offer low-price music subscriptions and downloads to their students may be as detrimental to the music industry's long-term health as the piracy that the business hopes to eradicate.
In 2003, Penn State University became the first institution of higher education to provide low-cost access to music. More than 80 campuses now have similar programs.
These colleges are offering music subscriptions to reduce their potential liability, safeguard their students from identity theft, reduce computing costs and protect intellectual property.
I believe the major record labels are underestimating the marketing and financial consequences of their support for these programs, which are eroding music's value and jeopardizing the industry's revenue stream.
The labels openly endorse inexpensive music at colleges. Sony BMG operates the Campus Action Network. Recording Industry Assn. of America president Cary Sherman co-chairs the Joint Committee of the Higher Education and Entertainment Communities with Penn State University president Graham Spanier.
Napster, Rhapsody, Cdigix and Sony Connect are the main companies servicing colleges. They offer discounted rates that are substantially less than the usual $9.95 monthly subscription fee and 99-cent download fee found off campuses. Cdigix offers tethered downloads at 28 universities for a $2.99 monthly subscription fee and 89 cents per song download. It is estimated that Real Networks has its Rhapsody at 20 schools for $2-$3 per month. Napster is servicing 14 colleges and universities.
In some cases, the schools (such as the University of Maryland) pick up the entire fee for the subscriptions. Their students only pay for downloads.
Usage is vast at colleges. For example, Penn State has 20,000 students signed up for the Napster service, streaming or downloading 170,000 songs per day. Cornell University's 13,000 students accessed more than 10 million songs in a year. This summer the University of California system announced it will offer subscriptions to its 600,000 students on 33 campuses.
Use of these services will swell as portable MP3 devices grow more popular on campuses, where they are becoming academic requirements. Duke University, for example, provided each incoming freshman with a 20GB Apple Computer iPod.
Retail is affected immediately. For students enrolled in university subscription programs, accessing music entails no variable cost (and only a small, below-market per-track fee for portability). As a result, these students do not have any incentive to purchase music in stores. Many music retail stores are located in college markets -- one major specialty retailer has 43% of its stores in such locations. The loss of sales and its impact on the margin mix could destroy the profitability of even the hardiest retailers.
Low-cost college subscriptions and downloads are essentially continuous promotions. Studies show that frequent promotional activity erodes the lifetime value of a customer, destroys brand equity and fosters the commoditization of product categories. For artists, labels and retailers alike, sales and margins are at risk.
What's more, students will face greater music prices upon leaving school. Recent graduates will endure sticker shock when considering whether to buy music. This should further reduce purchase intentions.
The service providers -- Napster, RealNetworks and Cdigix -- also need to be aware that their campus pricing structure will weaken their brands and long-term financial prospects.
The music industry must eliminate or alter these college programs for the long-term health of the business and to protect the brand equity of their companies and artists.