Frank Hecker

Now that Amazon has opened a beta version of its MP3 store and everybody else has commented on it (see for example Hypebot’s roundup, as well as good takes from Duke Listens! and Digital Audio Insider) I wanted to revisit my earlier Amazon predictions. So without further ado here’s the scorecard:

• I predicted variable single track pricing from 60-75 cents for back catalog material, $1 for most material, and $2-3 for hot singles. Amazon instead seems to have opted for a standard price of $0.89, slightly undercutting the iTunes Store price for DRM-protected tracks, and significantly less than the iTunes Store price for DRM-free tracks.
• I predicted use of a single DRM-free format, namely MP3 at some high bit rate. This was an easy prediction, and I don’t deserve any credit for making it.
• I predicted that Amazon would offer variable pricing on digital albums, with album prices ranging from $2-3 at the low end to $10 at the high end, with the eventual maximum being in the $5-7 range. Amazon in fact is offering a limited form of variable pricing on digital albums, with most albums being $8.99 (again, slightly undercutting the iTunes Store) but some albums priced under $5. Note that these are true albums, not EPs; for example, Joanna Newsom’s Ys (only five songs, but they’re long ones) is sold for $9.99 at the iTunes Store but is only $4.95 at Amazon MP3. A less extreme example is the Decemberists’ The Crane Wife, a 12-song album that’s $9.99 at the iTunes Store but only $7.99 at Amazon MP3.
• I also predicted that Amazon would offer a discount on the digital album for people buying the corresponding CDs. This is not the case: If you want both the CD and the digital album you have to buy both separately at the standard prices. As I noted in my post offering such discounts on a regular basis would likely require changes to standard music licensing schemes, so their absence is not surprising.
• I predicted that Amazon would offer a sort-of-subscription plan with discounts (and/or free tracks) to people willing to commit to volume purchases. This is not part of the initial Amazon offering; Amazon has never offered this for books (to my knowledge), so it’s possible it may never be offered for digital music either. (Amazon does offer club prices for members of the CDNow Preferred Buyer’s Club. As I understand it, this is a function of Amazon’s having taken over operation of CDNow’s store, not an Amazon-native program.)
• Finally, I predicted that Amazon would leverage its existing technologies to provide two value-added services: backing up music libraries using Amazon S3, and personalized music recommendations using the Mechanical Turk service. Nothing like this is part of the initial MP3 store; in fact, Duke Listens! points out that Amazon currently doesn’t do a very good job of recommending new or future MP3 releases that might be of interest.

Overall I’m a pretty poor predictor, although in my defense I was deliberately trying to be over the top a bit in terms of suggesting things Amazon might do to differentiate itself from existing services.

Some other comments:

• As some others have commented, putting MP3 in the name of Amazon’s digital music store is an interesting strategy. I agree with others that it advertises the DRM-free nature of the store and puts that front and center. (By contrast, eMusic has gone back and forth on this; some of their ads have put more emphasis on iPod compatibility than on the tracks being DRM-free and in the MP3 format.) I also think that this is a subtle thrust against Apple: It encourages buyers to think of the MP3 format as the standard DRM-free format, and by implication casts the AAC format used by the iTunes Store as being associated with DRM and non-openness. In fact AAC is a perfectly open and standard format, but its use as part of Apple’s proprietary Fairplay DRM scheme has perhaps tainted the format in some people’s eyes vis-a-vis the MP3 format.
• The Amazon page for a CD has two prominent links (one text link, and one in the sidebar) to the corresponding digital album (if one is available), including a mention of the digital album’s price. However the page for a digital album has only a small text link to the corresponding CD page, with no mention of price. I’m guessing that Amazon wants to promote digital albums as a lower-priced alternative to people unsure about a CD purchase, in the same way that it highlights lower-priced used CDs to people contemplating purchasing a new CD. However Amazon assumes that people buying a digital album have limited interest in a CD—probably a good assumption.
• The Amazon page for a digital album doesn’t display any of the listener reviews submitted for the corresponding CD. This seems a strange oversight: A major strength of Amazon is its user-contributed reviews; why make it difficult for MP3 buyers to find existing reviews for the same work in a different format?

In conclusion, I think the significance of the Amazon MP3 store is as follows:

• It represents a tipping point in the move away from DRM. Amazon has put its stake in the ground: this is an MP3 store, not a store for digital music some of which may be DRM-free and some of which may not. Amazon has no incentive whatsoever to accommodate labels that insist on using DRM, and at a certain point I think such labels will not be able to resist the pressure to make their digital releases available through Amazon.
• It intensifies the downward pressure on digital music prices, and in particular breaks the consensus that $9.99 is a fair price for the vast majority of digital albums. $8.99 is the new standard price for major label digital albums sold through major music retailers like Amazon, and I would not be surprised to see this drop to $7.99 or even $6.99 over the next couple of years.
• It constitutes the first real competition for the iTunes Store (as opposed to eMusic, which was and is merely would-be competition). At the same time it recognizes the primacy of the iPod and iTunes (i.e., the software as opposed to the store), as opposed to being yet another futile attempt to overthrow Apple.

As for its possible effect on eMusic, my thoughts on that must wait for a future post.

Now that I’ve done a lengthy eMusic-related post I feel less guilty about doing yet another post on Amazon and its rumored plans to enter the digital music market; in particular I wanted to highlight two (relatively) recent articles on the topic.

From the pro side of the fence (i.e., someone paid to have opinions and publish them) comes an article Why Amazon is Important by Mark Mulligan of Jupiter Research. (Incidentally, Mulligan blogs a lot about digital music but has mentioned eMusic only a few times, mostly in passing.) Mulligan refers to Amazon as the sleeping giant of the digital music market and notes that

Digital music is still niche and waiting to break through to the mainstream online, let along more broadly. Amazon is perfectly placed to aid that transition. They have mainstream online reach and are a key destination for music for mainstream as well as aficionado music fans.

This is not a stunningly original insight but it is something that the mainstream media overlooks at times. Mulligan also notes that Amazon needs to sell digital music that’s playable on iPods, an obvious point, but ties this to the less obvious argument that Amazon’s best customers tend to be technologically sophisticated early adopters, and that therefore Amazon offering digital music would be a defensive move against the possibility of losing those customers to the iTunes Store as digital downloads replace CDs as the main distribution vehicle for music. Unfortunately Mulligan ends on an off note as he claims that Amazon really needs to either be DRM free or interoperable …, apparently buying into the myth that there could be such a thing as interoperable DRM. Remember, Mark, DRM is defective by design.

Now let’s turn to an intelligent amateur, Paul Lamere of Sun, who does research on improving music search and categorization and makes some Amazon predictions as part 5 of a series on the top 5 things in digital music that didn’t happen in 2006. (See also parts 1, 2, 3, and 4.) Lamere addresses some points that I and others have previously covered—the importance of using the MP3 format, Amazon’s strengths in music recommendations, the possibility of variable pricing, and so on—but also has some valuable insights I’ve not seen elsewhere, at least discussed in such detail. In particular, Lamere makes some key points about Amazon’s strengths in the area of web services and metadata that remind me of Tim O’Reilly’s argument that data is the next Intel Inside:

Amazon has a great set of web services built around their data. … Exposing their data in this fashion places Amazon at the center of the online literary ecosystem. Any startup company that wants to be in a business related to books will use Amazon’s API because it is easy, the data is of high quality and it is free. This is good for the startup, and even better for Amazon since all of those startups end up sending their customers to Amazon. Amazon is already a big part of the music ecosystem. They already have lots of data for music CDs that is available via their web APIs. They are probably the largest supplier of album art on the web. The Amazon part number—the ASIN—is used throughout the web as an unambiguous identifier for an album. Once Amazon starts to sell individual tracks, I would expect that Amazon will create an ASIN or an equivalent for each track in their database. This track-level identifier may become the primary way of identifying tracks in the music world since Amazon makes it so easy to get all of the information about an item once you have the ASIN. This could be a key enabler in the next generation of music—a ubiquitous song ID tied to deep metadata.

Lamere also has some interesting recommendations for Amazon: that it connect its own music IDs to existing MusicBrainz IDs in order to leverage community-generated metadata, that it support an open vendor-neutral standard playlist format, and that it make its 30-second clips available DRM-free to use as input to next-generation music discovery tools.

I didn’t intend to frame it this way, but in the end reading Mulligan vs. Lamere is a good contrast: competent but somewhat generic commentary vs. an interesting and (to a large degree) unique perspective. I doubt I’ll seek out Mulligan’s writings specifically, but I’ve added Lamere’s music-related posts to my NetNewsWire subscriptions.

It’s unseemly to gloat that I told you so, but I’m not being paid for this gig so I’ll take my satisfaction where I can find it: According to a Digital Music News report on Amazon’s plans (free registration required), Amazon will be integrating its much-rumored digital music offering into its existing CD-centric online store:

… MP3s from participating artists will be blended into the larger, existing Amazon store. They are not trying to replace iTunes, iPod, Zune, whatever, one source said. It’s going to look just like Amazon does today. That means that a search for an artist will yield a number of results, including CDs, merchandise, DVDs, and MP3s if available.

As I previously pointed out:

… one of the things I think is most interesting is the potential impact of having [Amazon] sell both CDs and DRM-free digital tracks in an integrated way, and how that might affect the way both CDs and digital tracks are sold and perceived.

Digital Music News also notes that Amazon will likely launch with an all-MP3 offering and without digital content from all major labels:

… if major labels opt not to license their tracks in the open format, the ecommerce giant has decided not to wait. They are utterly, unflinchingly confident that they have 100 percent of the leverage in this situation, one source flatly stated. They are not waiting for the [major] labels at all.

Again, as I wrote before regarding the major labels wanting Amazon to push DRM:

… as a top 5 music retailer Amazon presumably has some actual influence over the major labels, and may be able to help push them kicking and screaming into the post-DRM world, especially now that EMI has broken away from the pack. Why give in to major labels’ demands at this time, as opposed to waiting until they might be more eager to make a deal?

And finally, as almost everyone (including me) has speculated, Amazon will apparently offer some form of variable pricing:

Meanwhile, multiple sources also pointed to an approach that includes variable pricing, though the store will insist that providers sell in the MP3 codec.

Unfortunately sloppy language marred one other prediction in the article, namely the question of whether Amazon will introduce its own digital media software:

Instead of competing with iTunes, Amazon will encourage users to incorporate their downloads into the Apple store, and transfer tracks to their iPods. Stick with iTunes, but buy from Amazon, one source quipped.

Here the article is confusing the iTunes Store (i.e., the online service operated by Apple) with the iTunes player (i.e., the desktop software used to store users’ digital tracks and synchronize them with their iPods). Obviously Amazon will be offering an online service that is independent of and competitive with the iTunes Store, but apparently Amazon will not attempt to compete with the iTunes player. It remains to be seen whether Amazon will offer some automated or semi-automated way for people to have tracks purchased from Amazon moved into the iTunes player’s catalog. That point aside, coexistence with the iTunes player is a good strategy, at least for now, especially given the immature state of would-be iTunes competitors like Songbird.

Update: Paul Resnikoff of Digital Music News has some additional comments on Amazon’s entry into the digital music market. His main point is that Amazon’s strategy of incrementally adding MP3 content is tailored to Amazon’s strengths as a music retailer, and wouldn’t make sense for anyone else; I agree 100%. He also thinks that the major labels (except for EMI) will sit out this round and wait to see if this whole let’s sell DRM-free music thing is just a fad; no surprise there.

Courtesy of Hypebot’s New Music Business Briefing this week: The mainstream music industry press (in the form of Billboard) talks about the possibility of Amazon entering the digital music market. Some quick points, for those keeping score at home:

• Hypebot brags that they’ve been out in front on the Amazon story for some time now. Fair play to them, they’ve done a good job of keeping up to date with Amazon-related developments.
• Billboard revisits the complaints of the major labels that Amazon wasn’t willing to take on Apple with a DRM-based offering. Sorry, folks, I pointed out over a year ago what a stupid idea that was, especially given that Amazon is in business to serve its customers, not the business models of the major labels.
• As I predicted, Amazon has at least been trying to establish price points for a la carte downloads below the prevailing $0.99 per track model (which in turn is based on a wholesale price to labels of $0.70 per track). However Amazon is encountering resistance, and it’s not clear if it will be successful, at least initially.

Interesting times. But enough Amazon for now; this is an eMusic blog, so I’ll try to post on eMusic next.

Today Hypebot posted the promised article discussing how Amazon can succeed in the digital music business. Also as promised, I will now comment on Hypebot’s advice and how it compares to my own:

Be the first major U.S. store to sell EMI in the mp3 format.

This advice seems overly short-term: Sure, Amazon might get some initial press for being the first major US store (note the qualifiers!) to enter the digital music market with major label MP3 offerings, but this does not a long-term strategy make. I think it needs to be coupled with something else, and I think that that something else is Amazon having a clear and public goal to be the market-leading commercial provider of digital music in the MP3 format–a goal which in essence amounts to supplanting eMusic as the perceived number two player behind the iTunes Store. As I’ve written previously I think this is a realistic goal, and achieving it would pay big dividends for Amazon in terms of market credibility, just as it has for eMusic.

Offer labels and consumers variable pricing.

I agree that any Amazon digital music store will use variable pricing, so Hypebot and I are in sync here. The key point (as noted by Hypebot) is that for variable pricing to succeed in the marketplace it must offer benefits to both labels and customers–it can’t just be an excuse to charge people more for the latest Justin Timberlake hit. Given that Amazon is already known as a place to get good (though not necessarily the best) deals on CDs, having a variable pricing scheme that offers (at least some) music at prices below the iTunes Store will reinforce Amazon’s existing music marketing strategy.

(By the way, Hypebot gives the example of a music label netting 15 cents a track from eMusic for that old Joy Division track. To my knowledge there is one and only one Joy Division track on eMusic, on a soundtrack album.)

Offer multiple formats.

I’m not convinced that Amazon should offer music in formats other than MP3, despite the claim that UK’s 7Digital and indiestore are already doing it with great success. There are at least three differences between 7digital’s case and Amazon’s:

• Unlike 7digital Amazon sells digital music players, and in particular sells a lot of iPods. Given that a key part of Amazon’s strategy is cross-selling across different product categories, why would Amazon offer to sell customers digital music in formats like WMA that can’t be played on the iPods Amazon is trying to sell those exact same customers?
• Unlike 7digital, for Amazon selling digital music will not be the main event, but will likely be a supplement to selling CDs. Given that, it is not necessarily essential that Amazon offer digital versions of every major label release that it’s already selling on CD. If a particular label doesn’t care to offer its releases in MP3 format, Amazon can simply not offer a digital version to customers as an option when displaying its (existing) pages for those releases. (In some ways this situation is analogous to Amazon’s Search Inside feature for books, where some publishers allow Amazon to do this and the more paranoid or hidebound ones do not.)
• Unlike 7digital, as a top 5 music retailer Amazon presumably has some actual influence over the major labels, and may be able to help push them kicking and screaming into the post-DRM world, especially now that EMI has broken away from the pack. Why give in to major labels’ demands at this time, as opposed to waiting until they might be more eager to make a deal?

By offering only MP3 tracks Amazon would simplify choices for customers and offer compatibility with all digital music players they sell–why would it do otherwise?

Why not sell CD’s alongside downloads?

An obvious piece of advice, and one with which I agree wholeheartedly. However it would have been good for Hypebot to go further and offer more detailed advice on how Amazon could combine CD and digital sales. I can’t overstate how important is Amazon’s ability to offer an integrated CD/digital offering; in my opinion it is the only thing that gives Amazon a realistic shot at threatening the dominance of the iTunes Store.

(Incidentally, with regard to selling downloads alongside CDs Hypebot is wrong in saying that amazingly no other download service does it. Magnatune does this, and perhaps others as well, though to be fair Magnatune is a special case since it is not a general digital music retailer offering releases from multiple labels.)

Enable over-the-air downloads.

I don’t know enough about the market for OTA downloads to venture much in the way of an opinion here. However I will say that, unlike selling CDs and MP3 tracks, selling OTA downloads will require Amazon to go outside itself and its own technical infrastructure and rely on partners, and I don’t know whether the benefits of participating in the mobile market would be worth the costs and complexities of doing so.

Overall I don’t disagree with any of Hypebot’s advice, and it’s great to see some Amazon predictions from someone who’s actually in the business. However I felt Hypebot’s treatment of the topic was somewhat superficial, and I’d really like to see more people take a detailed look at the options open to Amazon in the digital music market. Is anyone out there already doing that?

After exhausting myself making predictions about Amazon and its possible entry into the digital music market, I’m now prompted to return to the topic, prompted by Hypebot’s latest article on why Amazon doesn’t seem to be doing anything yet. I might quibble with some of Hypebot’s stated reasons (e.g., how likely is it really that Microsoft can make a success out of Zune?), but after thinking about it I do agree that an Amazon/eMusic deal doesn’t necessarily make sense, both because of the difficulty in bringing over the eMusic subscription model into the Amazon environment and because Amazon is probably perfectly capable of matching eMusic’s other features on its own (as I noted in my first post on the subject).

I’m looking forward to reading Hypebot’s thoughts on how Amazon could create a successful strategy for entering the digital music business. In the meantime before the pros weigh in I thought I’d make one more amateur’s attempt to speculate on a future Amazon offering. After re-reading my posts, here’s my current thinking on the key approaches Amazon should take:

• Amazon should leverage the fact that it will be selling both CDs and digital tracks, including offering cost-effective ways for customers to add digital track or album purchases to a CD purchase or vice versa, whether at the same time or at a later time. For example, a person might buy a digital track, like it, and then come back later and buy the digital album and/or the CD; Amazon should make it easy and cheap to do this.
• Amazon should offer some sort of pricing scheme that allows it to offer more value to its customers, for example by offering at least some digital tracks and albums for amounts significantly lower than the current standard $0.99 and $9.99 prices respectively, and/or by offering reasonably aggressive discounts on digital music to customers willing to commit in advance to a certain volume of purchases.
• Amazon should leverage its strengths in the area of back-end infrastructure to create Amazon-specific service offerings that others would find relatively difficult to match. I mentioned a music backup service based on Amazon S3 and a personalized recommendation service based on Mechanical Turk; there may be other such possible offerings as well.

There are also the obvious things Amazon could do, like using buying data for digital music to further refine its existing recommendation engine. (For example, the fact that someone bought a given CD after buying the corresponding digital album should be taken as a positive recommendation for that album.) There may also be other things I’ve neglected to mention; for example, I didn’t address the issue of Amazon bundling digital music with the music players it sells, either by offering coupons for later downloads or by pre-loading music on the devices.

Finally, two areas where I think I went a bit astray in my predictions:

• In retrospect I think my advocacy of a relatively complicated form of variable pricing was probably a mistake. I think any form of variable pricing is more likely to feature a set price for a given track, based solely upon the identity of the track.
• I think Amazon would not be able to rely as much as eMusic on people not downloading their maximum entitlements under their subscription plan. In eMusic’s case the subscription plan is mandatory, so casual users are thrown into the same pool of downloaders as the heavy users, with the former subsidizing the latter. In Amazon’s case the casual users would have (and would no doubt take advantage of) the option to buy tracks or albums a la carte, so the pool of subscription users would be much more weighted towards heavy downloaders who’d be more likely to use up their monthly quotas, resulting in corresponding lower discounts.

At this point I’ll conclude and await Hypebot’s next Amazon-related post.

This is the fourth and final in a series of posts (following parts 1, 2, and 3) speculating on Amazon’s rumored entry into the digital music market. In this post I discuss two additional music-related services Amazon might offer, particularly to customers already signed up to a subscription plan. The standard disclaimer applies: This is all fevered speculation and nothing more; I do not have any inside information about a possible Amazon acquisition of eMusic, nor about other future plans of Amazon or eMusic. Here follows my final attempt to play foolish prognosticator:

Amazon will offer a backup service for digital tracks purchased through Amazon or otherwise, leveraging the infrastructure used for the Amazon S3 offering. As noted in my first post, CDs can serve as a form of backup for people buying digital music. However at the same time many people (including current eMusic customers) have digital music collections for which they do not have the corresponding CDs. Amazon already has a “Simple Storage Service” offering whereby (sophisticated) customers can store data on Amazon’s servers, at a price of $0.15 per GB per month for the actual storage used and $0.20 per GB of data transferred from the customer to Amazon. This existing infrastructure will be leveraged to provide a custom service whereby Amazon customers can backup all or part of their music libraries to Amazon’s servers.

The service will work as follows: When purchasing digital music, whether by itself or in conjunction with a CD purchase, Amazon customers will be offered the option of having Amazon keep a copy of the track(s) in a music locker tied to their existing Amazon accounts. No separate registration step or account setup will be required, and nothing will actually need to be transferred from the customer to Amazon (since Amazon already has a copy of the track(s) in this case). For customers currently signed up to a subscription plan (as discussed above) the cost of backup will simply be added as an incremental charge to the customer’s existing monthly subscription fee. For customers not on a subscription plan the cost of backup could be charged as a one-time fee, based on Amazon’s future costs for the needed disk storage over the customer’s lifetime.

Amazon customers will also be able to able to backup digital tracks previously purchased through other services or ripped from CDs. In this case the backup will be done by Amazon-provided desktop software. For example, such capability could be included in an Amazon-specific download manager (like the current eMusic download manager) or a full-fledged Amazon digital music player (like iTunes or Songbird).

Assuming pricing comparable to current S3 pricing, a customer with a 40GB music library could back it up through Amazon for $6 per month at present, with this cost decreasing over time. (This assumes that Amazon actually stores separate copies of a given track for each customer. If copies can be shared among customers then the price could be reduced even further.) The music locker service will thus be a relatively straightforward up-sell for customers already on an Amazon music subscription plan.

Two final notes: First, this service will not be like eMusic’s current scheme whereby customers can re-download tracks previously downloaded. That service works only for tracks currently offered by eMusic; if a label pulls its offerings from eMusic then customers lose the ability to re-download previously-purchased tracks from that label. This is not acceptable in a true backup service.

Second, this service will not be usable as a way to share tracks with other users (at least not in practice). Each locker will be specific to a customer and will be accessible only using that customer’s standard Amazon userid and password, the same credentials used for one-click purchases and other actions. A customer allowing others to download from his or her account would be putting his or her own credit card account and personal information at risk.

Amazon will offer a personalized music recommendation service based on a combination of the current Amazon recommendation engine and human tweaking of recommendations done using Amazon’s Mechanical Turk service. Amazon already has a number of features to drive customers purchasing one item to consider purchasing another one, including automated recommendations based on a customer’s past buying history, information on related items (e.g., people who bought this item bought these items too), recommendation lists created by other customers, and so on. If it acquires eMusic then Amazon can also add eMusic’s editorial content (eMusic Magazine, the eMusic Dozens, and so on) to the mix.

As I noted in an earlier post, a major problem for many customers on a subscription plan is finding enough music worth downloading each month; this is especially true for busy people who are interested in discovering new music but do not have the spare time to explore the net reading music-related web sites and blogs and listening to sample tracks and Internet radio stations. On the one hand eMusic (and in future Amazon) is happy enough to have customers paying money and not actually using the service. On the other hand customers not getting value for money will eventually end up being ex-customers, and possibly disgruntled ones at that. Thus Amazon will have an incentive to keep subscription plan customers satisfied and wanting to come back for more.

In an ideal world each customer would have a real person serving as their dedicated guide to the world of new music, with that person taking into account the customer’s unique tastes. The eMusic message boards provide frequent examples of such personalized recommendations provided by live humans in response to requests, but unfortunately the message board approach won’t scale.

Perhaps the optimum way to approach this problem is to start with a machine-generated list of recommendations and then have a human review the list to vet it for compatibility with a given customer’s tastes, as well as to perhaps suggest additional items which the recommendation algorithms somehow missed. As it happens, Amazon already has the basic infrastructure needed to construct such a mixed automated/manual service, in the form of the Mechanical Turk service, its existing recommendation engine, and related technologies. As with music backups I think this is a service for which many customers will be willing to pay extra, for example as an additional charge (say of $2-3 per month) over and above the subscription plan price.

Ideally the personal recommendation service could be configured to have recommendations be automatically purchased and scheduled for download to the customer’s computer (e.g., when the customer nexts run the Amazon-provided software). That would minimize the total amount of work time-starved customers would have to do. However note that it will not be in Amazon’s interest to have a customer’s entire download allotment used up in this manner, for reasons noted earlier. It will be better to leave the customer a partial quota of downloads that they can either use at their own discretion or let expire unused (and thus subsidizing more active customers).

This completes the fourth and final post in the series. I’m all written out at this point, so I don’t have any grand final conclusions to draw, other than that I think that online digital music stores are past due for more customer-friendly pricing and useful customer-oriented innovations, and that based on its technology platform and music retailer experience Amazon is perhaps the most likely company to bring such pricing schemes and innovative services to market.

This is the third in a series of posts (following parts 1 and 2) speculating on Amazon’s rumored entry into the digital music market. In this post I discuss how Amazon might adapt eMusic’s subscription model to its own purposes. To repeat the disclaimer I made previously: This is all fevered speculation and nothing more; I do not have any inside information about a possible Amazon acquisition of eMusic, nor about other future plans of Amazon or eMusic. But enough of disclaimers, on with the wild guesses:

Amazon will offer a subscription service providing extra discounts and/or free tracks in exchange for a commitment to purchase a given amount of music per month or per year. I think that the current eMusic subscription scheme (e.g., 30 tracks for $9.99 per month) will break down somewhat if/when major labels are introduced into the mix, since they’re going to want some form of variable pricing, whether in the form of a true a la carte price model (as in the iTunes Store), a credits-based system that requires more credits for certain tracks (as with Audio Lunchbox), or something else. However at the same time it’s clear that the subscription model is very attractive from the retailer’s point of view, offering as it does a stable revenue stream, and I think it can be made attractive to customers as well.

I think the most straightforward way to implement a subscription model in an Amazon context will be to move away from a model based on a fixed number of tracks and towards a model that essentially offers discounts to those customers willing to commit to buying a certain amount of music per month or per year. (As with eMusic the commitment will be up-front, i.e., customers will pay Amazon each month or year before actually selecting the music they wish to purchase.) In an ideal world discounts offered by a subscription plan would apply to both digital tracks (and digital albums) and to CDs. However because Amazon already offers significant discounts on CDs it’s much more likely that discounts will be offered only for music purchased in digital form, although Amazon could and I hope would count CD purchases towards a customer’s monthly purchase commitment.

For example, a commitment to purchase $10 of music per month (whether in digital or CD form) might get customers a 30 percent discount off standard Amazon digital music prices, with customers willing to commit to higher amounts getting correspondingly higher discounts, up to a maximum discount of perhaps 50 percent or so. (Alternatively the discount could be offered in the form of extra free digital tracks, although with variable track pricing such a scheme would be more complicated to manage and understand.)

By way of comparison note that eMusic’s current Basic plan runs $9.99 for 30 tracks and its new Connoisseur Plan runs $25 per month for 100 tracks. At 33 and 25 cents per track respectively these plans offer 45 and 58 percent discounts respectively from the 60 cent per track price offered with the 10-track booster pack, the nearest thing eMusic currently has to an a la carte single track offering.

Amazon already has one analogous scheme, namely the Amazon Prime program in which people pay $79 per year to get free two-day shipping. As with Amazon Prime and with eMusic currently, customers buying lots of music under the Amazon subscription plan and maxing out their quota will be subsidized by customers who for one reason or another don’t end up using their allotment and thus don’t take advantage of the full discounts to which they’re entitled. The exact discounts for the various plans will in practice be tweaked periodically to ensure that the actual per-track revenue received (after accounting for unused downloads) is high enough to satisfy the various labels, major or otherwise.

Obviously customers on a monthly subscription plan will be very valuable customers for Amazon, and it would be nice if Amazon could offer additional things that such customers would want to buy. In my next (and final) post I discuss two such added-value offerings.

In my previous post I speculated how Amazon’s rumored entry into the digital music market (e.g., through a possible acquisition of eMusic) might initiate some changes in the way music is sold online. In this post I make some specific predictions about how Amazon might integrate digital music offerings into its current online store. To repeat the disclaimer I made previously: This is all fevered speculation and nothing more; I do not have any inside information about a possible Amazon acquisition of eMusic, nor about other future plans of Amazon or eMusic. However speculation is always fun, so let’s start imagining the Amazon music store of the future:

Single digital tracks will be sold in a variable pricing scheme based primarily on the perceived demand for the track, both on its own and in relation to the demand for the album containing it. Rather than try to come up with such a scheme on my own, I’ll simply point to Digital Audio Insider’s proposal for variable pricing that aims to be friendly to labels while being acceptable to customers. The basic idea is simple:

Allow variable pricing for individual songs based on purchase order. That is, charge more for the first track a customer downloads from an album, but then charge that customer less for additional downloads from that same album.

In this scheme a given track does not have a fixed price (since the price may vary based on purchase order), but we can take the price for the first track purchased from an album and reference that as the nominal per-track price. Such nominal track prices would further vary from album to album, for example between new releases, mid-line releases, and budget releases. More specifically, my prediction is for nominal per-track prices as follows:

• 60-75 cents for back catalog material and for albums containing a large number of tracks of relatively equal importance (as is the case for many classical CDs)
• $1 for the majority of releases
• $2-3 or even more for albums containing one or two hot singles plus a fair amount of filler, as well as for albums with a small number of very long tracks (as in the case of many CDs of electronic music, as well as many CDs of classical symphonic music)

Note that the prices we’re discussing here are list prices for a la carte purchases; users signing up for a subscription plan will get significant discounts, as discussed in my next post.I’ve estimated a minimum price of at least 60 cents based on eMusic’s current pricing for booster packs ($5.99 for 10 tracks, or 60 cents per track). Since booster pack downloads never expire and can be used at any time. I’m guessing that eMusic set booster pack per-track prices high enough to cover the minimum royalties demanded by the independent labels eMusic deals with. Major labels will of course want more, and for at least the immediate future they will no doubt get it; hence the predicted $1 nominal per-track price for most releases, consistent with current practice in the iTunes Store and elsewhere.

All digital tracks will be sold in a single high-quality DRM-free MP3 format. In other words, I think that Apple’s current plan to offer both DRM-restricted and DRM-free versions of a track at two different prices is simply due to legacy issues. If Amazon were to offer digital downloads then I see no reason why it should offer DRM-restricted tracks, given the likelihood of other major labels following the lead of EMI. The format will be MP3 because that is the universal format understood by all digital music players (including of course those sold by Amazon itself). Again, I think the choice of AAC for the iTunes Store DRM-free format is an Apple-unique decision due to Apple’s own championing of the format as part of the Fairplay scheme and its desire to disadvantage non-iPod players that don’t happen to support AAC. Finally, I doubt that most customers know of or care about the sound quality differences due to different MP3 bit rates, fixed-rate vs. variable-rate MP3 encoding, and related factors, so offering a given track in multiple levels of sound quality will just confuse them. The default format (whether 192Kbps VBR or something better) will be high-quality enough to satisfy the vast majority of customers. Anyone else can just buy the CD and rip it themselves.

Digital albums will be sold both as a discounted alternative to buying single tracks and as an low-cost add-on when buying a CD. As with the iTunes Store and other digital music stores, those buying all their music in digital form will have the option to buy an entire album at a price lower than that of buying all the album’s tracks separately. However unlike the iTunes Store (and like Amazon’s current CD pricing) digital albums will be sold in a variable pricing scheme analogous to that used for single digital tracks. Digital album prices will range from $2-3 at the low end to a maximum of $10 at the high end; however over time the maximum price will be forced down to the range of $5-7. As in the current Complete My Album feature of the iTunes Store, people who have already bought digital tracks through Amazon will get credit for their track purchases when buying the albums containing those tracks, so that in total they will never pay more than the price of the album.

At the same time, those buying a CD of an album will be offered the option to also get the digital version at a low fixed incremental cost, perhaps $2-3 or so. This extra charge will be justified based on the convenience of getting the digital version right away (i.e., before the CD arrives) and avoiding the need to rip the CD once it’s received. The digital option will also tie into the Amazon-provided backup scheme discussed in a future post.

(Incremental pricing like this will of course require changes to the current royalty regime, since both labels and music publishers will naturally want to continue to be paid full royalties on both the CD and digital album considered separately. This change can be justified on the basis that otherwise labels and publishers would not see any incremental royalties at all, since customers buying CDs would balk at paying full price once more for a digital version of the same album, and would just rip the CD themselves.)

CDs will be sold both on their own and as an upgrade to digital albums. Amazon will of course continue to sell CDs as standalone items for those who wish to buy them. However at the same time it makes sense to sell CDs as an incremental upgrade when a customer is buying a digital album. The cost of doing so should be (and I think will be) such that a customer adding a CD purchase to a digital album purchase will pay the same total cost as a customer adding a digital album purchase to the CD purchase.

Ideally it should not matter whether the purchases are made at the same time or different times. In other words, a customer should be able to buy a digital album, listen to it, decide they want the CD, and then come back to Amazon and purchase the CD at an incremental price identical to what they would have paid if they had purchased the CD at the same time as the digital album.

Over time the list price of digital albums will be driven down below the current $10 per album standard, with CD prices possibly dropping a bit as well. Thus it’s possible to imagine purchasing a CD and digital album combination for the same price or even less than Amazon charges for CDs today. In the meantime Amazon has another possible way to sell digital music at discounts below present-day list prices, namely to adapt eMusic’s subscription model to Amazon’s own business model, as discussed in my next post.

When considering the possibility of Amazon buying eMusic, one of the things I think is most interesting is the potential impact of having a single major online music store sell both CDs and DRM-free digital tracks in an integrated way, and how that might affect the way both CDs and digital tracks are sold and perceived. (Smaller services such as Magnatune have provided such a combined offering already; however, with all due respect they’re not Amazon, one of the top five music retailers. Also, both Wal-Mart and Best Buy sell both CDs and digital tracks online, but not in an integrated manner.) I’m also excited by the possibility of bringing Amazon’s many industry-leading features (reviews, recommendations, etc.) to the digital music market. Although the rumored Amazon/eMusic deal may never come off, it’s still fun to speculate how it might lead to new sales and pricing models in the music industry.

(Note that I’m assuming here a relatively incremental model of change, as opposed to the sort of wholesale revolution like that envisioned by people like Bob Lefsetz, e.g., in his recent April Fools Day post. However many of the changes I’d like to see will likely require changes to the complicated world of music licensing, including minimizing payment of double royalties when a given customer purchases a given work in multiple formats.)

Traditionally CDs and digital tracks have been seen as competing products: Someone who downloads a digital track (via a paid service or P2P) is supposedly one less CD buyer, and someone who buys a CD will presumably rip digital tracks from it on their own and not pay for them separately. Thus the perception arose that a rise in digital sales inevitably accompanies a decline in CD sales, leading ultimately to the death of the CD. However I don’t see this as inevitable at all. I see CDs and digital tracks as two different but complementary forms of the same product, with a given customer buying either or both. What I do see as doomed are the traditional pricing schemes and sales models for CDs and digital tracks.

Let’s start by putting aside the views of music labels, publishers, and retailers, and instead adopt the view of the customers (who after all will ultimately drive the direction of the music industry). From the customer’s point of view digital downloads are attractive for their convenience and immediate compatibility with digital music players: You can buy a digital track or digital album, download it, and transfer it to your iPod or other device, with the whole process taking just a few minutes. On the other hand CDs are attractive as mementos (especially CDs with more elaborate artwork and packaging) and for their usefulness as a tangible backup of the same music in digital form: You can keep a CD for use if you ever need to have the digital music in a different format (e.g., MP3 vs. AAC vs. FLAC) or in case you lose your digital copy entirely, e.g., due to accidental deletion or a total disk failure.

Buying a CD doesn’t preclude wanting the same album in digital form, or vice versa. Indeed everyone buying a CD and ripping it is an example to the contrary, as is everyone burning a CD from digital tracks they’ve purchased. It’s simply that customers purchasing music in one format are not paying for the other format, in large part I think because the current business models for selling music make it too inconvenient and expensive for customers to do so.

Next, consider the fact that CD prices and digital album prices are converging: As noted in a Digital Audio Insider article, for many releases Amazon CD prices are comparable to or even lower than iTunes digital album prices. You still have to account for the cost of shipping, but this matters less than one might think. For many people this makes it hard to justify paying for a digital album vs. buying a CD and ripping it, and will likely lead to pressure to lower the prices of digital albums. (Of course eMusic customers already live in this world, where typical albums cost from one to five dollars depending on the customer’s subscription plan and number of tracks on the album.)

Finally, the one size fits all pricing model of the iTunes Store and other services seems to be breaking down, with the introduction of variable pricing for different formats (e.g., $0.99 for DRM-protected tracks on the iTunes Store, vs. $1.29 for higher-quality DRM-free tracks), to be possibly followed in the future by variable pricing based on other factors. Steve Jobs to the contrary, I think customers are perfectly able to understand variable pricing schemes and perfectly willing to accept them as a standard business practice. After all, they’re prevalent in practically every business people are familiar with. (For example, people who buy DVDs know that they’ll pay more for a current hot movie than for something their parents watched while they were in high school.) At the same time customers don’t want to be ripped off by pricing schemes that in essence force them to buy the same thing twice.

Based on the above thoughts and others ideas about how Amazon could leverage its existing features and technologies, I’ve come up with a number of blue-sky predictions for a hypothesized Amazon/eMusic offering. (Of course Amazon or even some other digital music store might do this in any case, eMusic acquisition or no, but this is an eMusic blog so I have to bring it in somewhere!) Note that this is all fevered speculation and nothing more; I do not have any inside information about a possible Amazon acquisition of eMusic, nor about other future plans of Amazon or eMusic.

For reasons of length I’ve split this article into multiple posts; my next post predicts how Amazon might sell digital tracks, digital albums, and CDs as complementary offerings.