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MySpace Gets Into Digital Music September 3, 2006

Posted by David Card in Media.
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MySpace is going to do a digital music store. Well, sort of. Actually, it’s going to enable unsigned artists to sell songs online. That’s a logical, cool service for the thousands of bands with pages on MySpace, and for their fans. And MySpace addresses several issues that are huge challenges facing retailers trying to make a business out of a la carte downloads.

But it’s not going to make anybody any serious money anytime soon.

Yes, Virginia, there is a long tail. No, no company in the entertainment business can make a lot of money off of supporting only the tail, without also delivering the hits. And for now, no rockstars or major labels are going to be interested in unprotected MP3s, which is what MySpace will offer, except for promotional purposes.

But as I suggested, MySpace nicely handles three of the key problems facing digital music retailers:

– Royalties to labels and publishers tie up 65 to 80 cents of a 99-cent download. Credit card fees add another quarter. Working with Paypal (exclusively for the moment) and charging artists a smallish, flat fee effectively halves the COGs of a digital single for MySpace and its technology partner, SNOCAP.

– Another big cost for music retailers is audience acquisition. MySpace gets over 50 million visitors a month, although not all of them are there for music.

– And then there’s the iPod. No problem. DRM-free MP3s will play fine on any device you want.

Some other observations:

Playing to its social media viral strengths, MySpace will encourage users (and bands) to embed links to the store on their pages or send them in e-mails or message blasts. In classic Web 2.0 fashion, you can embed those links in any other site or blog that allows it. However, with no DRM there’s also no affiliate management system: no way for me to get a cut if you buy a song from my favorite band via my recommendation. There doesn’t appear to be a star-recommender system yet – for ego gratification – but that should be do-able.

But a friend’s recommendation is only the Number Three music purchase influence (cited by 19% of music buyers, and 33% of those aged 18-24), after radio and music videos on TV. I think MySpace needs to beef up its player experience a bit. It wasn’t clear to me whether there will be a centralized store, or just links scattered on pages and in the player.

SNOCAP appears to be taking most of what risk there is in this venture: MySpace gets a cut of the fee, but didn’t pay SNOCAP for the technology integration. I assume MySpace is covering bandwidth costs, but I forgot to ask. SNOCAP is covering storage costs. Artists that “sign up” with SNOCAP don’t sign a contract, it’s more like a terms-of-service agreement. SNOCAP doesn’t get any rights, but it absolves itself of any publishing royalty liabilities. (SNOCAP uses Philips digital fingerprinting technology and its own registry of music to track and enforce copyrights.) At some point, SNOCAP may have a network of customers – right now MySpace is its only notable one — and this could ease its content aggregation, and be good for the artists, too. By the way, there’s no P2P file-sharing network involved – i.e., no way to tap into music on users’ hard drives – which is what SNOCAP’s technology is theoretically designed to monetize.

Finally, MySpace is going to let the artists charge whatever they want. Variable pricing is not that big a deal. First, it’s not completely variable, because of that flat-fee charge — and there are no album discounts yet. But more important, according to the latest JupiterResearch (unpublished) survey results, 99 cents remains the sweetspot for what people are willing to pay for a digital single from their favorite band. In fact, a broad swath of young-ish adults, from 18 to 44, like the 99-cent price point, it’s only geezers that force the median price point down.

Variable pricing for digital music is inevitable, and will ultimately be a good thing. But right now, Apple is right: simplicity is better at this early stage of the market. Oh, and if anybody was wondering whether MySpace is a threat to the iTunes Music Store — let alone the iPod — the answer is “not in the slightest.”

I only wish big artists would play around with unprotected MP3s. eMusic is carving out a nice niche with world music and indie labels that way. But I don’t see it happening soon. And DRM should unlock new revenue streams (like try before you buy, rent-to-own, digital-physical hybrids, “EP” packages, affiliate re-sales, etc. etc.) rather than hopelessly trying to lock in 20th century business models. But, heck, I still think cutting CD prices in half would cure most of the industry’s piracy problems.

UPDATED: I dunno why the Times thinks I think Apple keeps 35 cents of every 99-cent iTunes sale. We must have had one of those “failures to communicate.” Apple’d be lucky to keep that much. I’d estimate it’s closer to 15 cents, once royalties and credit card fees are accounted for.

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