Sources said eMusic’s backers … are also seriously considering adding a streaming component in a bid to build upon its recent growth.

… According to sources, the streaming component would be a value-added feature for premium subscribers.

The thinking is that the economics of a download-only model and a streaming-alone model don’t work on their own, but putting them together in a tiered system could help retain subscribers.

I think adding a streaming option would be a great idea, not as a substitute for downloading but rather as an easy way to audition albums before deciding whether or not to spend my (limited) downloads on them. I wrote a lengthy blog post on this topic back in October (Should eMusic offer streaming?) discussing the pros and cons of this. I doubt my post influenced (or was even read by) anyone at eMusic, but it’s nonetheless gratifying to see eMusic apparently considering integrating streaming capability into the service.

I’m curious as to whether anyone else subscribing to eMusic shares my opinion on this, or whether people are looking to Spotify or other ad-supported or freemium services to provide your streaming fix. In this connection it’s unclear what any potential eMusic streaming service would look like. Here are some open questions along with my speculations and opinions to supplement my earlier thoughts:

Standalone service vs. tied to current eMusic service. The New York Post article claims the proposal is to offer streaming as an add-on to the current service, not as a standalone service. I think this is the best way to approach it—position eMusic streaming as a useful option to enable easier music discovery for eMusic subscribers, not as a competitor to Spotify, etc.

Extra-cost option vs. bundled into existing plans. The New York Post article is unclear on this point; however the phrase value-added feature for premium subscribers implies that streaming would be bundled into the overall eMusic subscription price for the higher-priced plans, and not offered at all for the Lite, Basic, or (maybe) Plus plans. I think bundling makes sense if streaming were positioned as a aid to music discovery for people who listen to and download a lot, and not as a substitute for downloading.

Right now I’m paying for a combination of the eMusic Basic plan (annual) and a $5/month Napster subscription for streaming (and some extra downloads — though remembering to actually download them is a PITA). If eMusic were to offer streaming I’d happily drop Napster and upgrade my eMusic plan to a Plus or even Premium plan. (I skipped getting a Plus plan when the recent price increases hit because of concern about wasting the extra downloads on stuff I wouldn’t like that much. Being able to try before I buy via streaming helps alleviate that concern.)

Unlimited streaming vs. a cap on streamed tracks. Of course I’d like any eMusic streaming option to not have a fixed limit on streams per month. However if eMusic has to pay streaming royalties on a per-track basis then it might make sense for it to impose a monthly limit on streams per subscriber. Since I’d be using streaming primarily to try out stuff before I download, I could probably live with a maximum cap of (say) 10 times the number of my download credits, e.g., 500 streamed tracks per month to go with a Premium plan offering 50 download credits.

Streaming tracks vs. (only) streaming albums. Would eMusic allow streaming individual tracks without restriction (other than a possible cap on streams per month), or would eMusic and/or the labels try to bring into the streaming world the concept of album only tracks (i.e., not allowing you to stream particular tracks unless you streamed the entire album)?

If eMusic allowed streaming individual tracks on an a la carte basis then labels might see this as a way for subscribers to evade the album only restrictions, especially for albums with a small number of tracks. (Don’t download that 2-track electronic release for 12 credits, just stream it instead.) On the other hand, to my knowledge no other streaming service implements album only restrictions of any kind, and I suspect the business and royalty model for streaming is different enough to make such restrictions unnecessary or at least not desirable.

Tied to PC vs. available on smartphones. The conservative approach would be for eMusic to implement streaming only in the context of the current web-based download service. For example, if you had the streaming option then the Listen to this album and Listen to this song buttons on an album page might be configured to play the full (streamed) album or track instead of just 30-second samples (as at present).

eMusic might also offer a standalone streaming app for smartphones, like the various iPhone apps for Spotify, etc. However I doubt that eMusic is eager to compete directly with (or be compared to) the streaming-only services, and there would be a number of non-trivial business issues that would have to be dealt with in creating an eMusic offering for mobile devices. Also, I think mobile streaming is more useful as a replacement for terrestrial and satellite radio than as an adjunct to a download service. I think that if eMusic does offer streaming that it won’t be for mobile devices, at least initially.

So, my final prediction: Sometime in 2010 eMusic will offer streaming as a bundled feature of the Premium and Connoisseur plans (but not Lite, Basic, or Plus). It will not cost anything extra, however introduction of streaming may occur in conjunction with a further round of (relatively small) plan price increases, possibly associated with adding more major label content. For those eMusic subscribers who have streaming, it will happen transparently using the existing Listen to this album and Listen to this song buttons on album pages. Such subscribers will be able to stream any album or individual track on eMusic, without any restrictions except possibly for a cap on total streams per month that is tied to the number of plan downloads.

There will not be an option to stream to smartphones or similar mobile devices (e.g., e-book readers with wireless capability), with the possible exception of devices that connect via wifi and have web browsers that provide equivalent support for eMusic downloading and streaming to that of standard PCs. (However even this may be restricted in some cases for business reasons.)

Your thoughts?

• Eve Beglarian, Far Off Country (Four), performed by Maya Beiser, from Almost Human. I like this album but have a bit of aversion to spoken-word accompaniments to classical tracks, like those here.
• Neutral Milk Hotel, Two-Headed Boy Part 2, from In The Aeroplane Over The Sea. This album is legendary among people who know it, but I have to confess I feel more admiration for it than love.
• Mogwai, I’m Jim Morrison, I’m Dead, from The Hawk Is Howling. I’m a major Mogwai fan, but on first listen I thought this was relatively minor Mogwai. I’ll have to give it another try.
• Arvo Pärt, Nunc dimittis, performed by the Estonian Philharmonic Chamber Choir, from Da pacem. I’ve been a big Pärt fan ever since picking up Litany (based on a recommendation in Wired, oddly enough).
• Tristania, Angellore, from Widow’s Weeds. An experiment on my part in venturing into the melodic metal arena; not bad, but I’m still not that interested in metal.
• M.I.A., Fire, Fire, from Arular. I was dining at Fatburger, which features a free jukebox with a net connection, when someone played Paper Planes from Kala. I decided to reciprocate by playing Galang Galang from this album.
• Eve Beglarian, Far Off Country (One-Two), performed by Maya Beiser, from Almost Human. iTunes put two tracks from this album onto the list; I have no idea why.
• Dumptruck, Better Of You, from For the Country (not on eMusic). In my opinion this is one of the best non-country country albums ever recorded, right up there with Meat Puppets II.
• The Fall. An Older Lover etc, from Palace of Swords Reversed (not on eMusic). I have lots of Fall albums; this is one of the better ones.
• Johann Johannsson, Englabörn, from Englabörn. I like Johannsson but don’t recall liking this album as much as IBM 1401: A User’s Manual.
• Amiina, Saga, from Kurr. Another Icelandic production, not in the league of Bjork or Sigur Rós, but well worth listening to.
• Team Dresch, Hate the Christian Right!, from Personal Best (not on eMusic). The Butchies have their charms but are no substitute for this band. Supposedly Team Dresch have reformed and are (maybe?) recording a new album; I always worry about this sort of thing but am definitely looking forward to it if it ever happens.
• The Wedding Present, I’m Not Always So Stupid, from George Best Plus. I listened to this album only once; it was a bit too much of its time for me.
• Super Furry Animals, Patience, from Rings Around The World. Another album I listened to only once, and need to try again.
• Bocuma, Boards Of Canada, Music Has The Right To Children (not on eMusic). CollabNet didn’t really take off as a company, but I have to say that my co-workers there (who recommended this to me) had great taste in music.

Before getting into my own proposal I should address two possible answers to this question that reflect conventional wisdom. The first is simply to assert that streaming is the future way music will be delivered to listeners, and that services like eMusic that offer downloads are ultimately doomed. One sees this attitude reflected in the hype around Spotify, for example, as embodied in comments from Bob Lefsetz and others.

On the other hand, streaming services face a variety of obstacles both from a consumer point of view and from an industry point of view. As a listener my concern with relying solely on a streaming service is twofold: First, I’ll want to listen to music in contexts where there’s no network through which to stream. This concern can be addressed to some degree by offline caching of tracks; this is essentially what Spotify offers as part of its premium service.

However note that for various reasons such offline use is typically implemented using a DRM scheme that expires tracks if your subscription ends. (Spotify is no exception in this regard.) This restricts portability (you can use only approved devices) and doesn’t address a second concern: That I’ll lose access to my favorite music due to the actions of the service, the labels, or others with a legal interest in the music. Recall the recent controversy over Amazon deleting copies of 1984 and Animal Farm from users’ Kindles: what a DRM-based content service giveth, a DRM-based content service can taketh away.

From a music industry point of view the problem with streaming services is that they don’t yet have a viable business model. Even Spotify, the great hope for streaming, has people predicting its imminent death, with its founder begging the music industry to change its ways in order to help make Spotify and similar services sustainable for the long-term. This concern is well-founded; details on Spotify’s business model are hard to come by, but a reasonable analysis concludes that royalties and licensing costs for Spotify are extremely high, and that it’s able to survive for now only through special deals with labels.

My conclusion is therefore that traditional streaming services remain unattractive from both my own perspective (which may be shared by others) and a business perspective. My own concerns can be addressed by the possibility of getting DRM-free downloads, and the financial concerns might be addressable by a business model that eliminates either free-to-consumer streaming (requiring that all customers have a paid subscription) or all you can eat streaming (putting a cap on total number of streams per subscriber per month) or both. As it happens, eMusic subscribers are already required to pay a monthly fee and also have a cap on their use of the service; what they don’t have is access to streaming via eMusic.

This brings us back to the question we started with: Should eMusic add streaming? The second snap answer is that eMusic is by its nature a download service, that eMusic users don’t need or want a streaming service, and that eMusic couldn’t make a success of such a service.

Regarding the first objection: As I stated in my previous posts, I personally need a low-cost way to preview music for my permanent collection, and streaming services offer the most convenient way at present for me to do that. However the lack of such a service at eMusic means that I now have to use a minimum of two services. This is inconvenient for me and in the long run at least is bad for eMusic, since it takes subscribers like me away from the site and lessens our loyalty to the service. I suspect my experience is representative of many eMusic users.

As for the second objection, some might point to the present incarnation of Napster, which at first glance seems to be offering the same thing as a hypothetical eMusic+streaming service: a paid subscription service offering a combination of streaming and MP3 downloads. Yet Napster is seen as gasping in the face of competition from Spotify. Why should an eMusic+streaming service be any more successful?

The answer is that eMusic would not be trying to compete directly against Spotify. Rather it would simply be trying to better serve the existing eMusic subscriber base and offer a more attractive value to prospective subscribers, while doing so in a manner that is consistent with eMusic’s business model. Thus streaming in the context of eMusic would not be positioned as a primary service; instead it would be positioned (at least initially) simply as a way for subscribers to try out releases before they download them—an extension of the current Listen to this album function on every eMusic album page that plays 30-second samples of tracks.

(In the longer term eMusic could also offer standalone streaming, most notably in the form of an app for mobile devices such as the iPhone; this would allow eMusic subscribers to also audition releases in their cars and on the go, again without having to switch to a non-eMusic service. It may be better for eMusic to wait on this until it can offer the complete eMusic experience in a mobile context, including over the air downloads; however for business reasons, including existing eMusic contracts with wireless carriers, that may not be possible for quite some time.)

In order to minimize the impact on its existing cost structure and business model, eMusic could and (in my opinion should) put fixed limits on the number of tracks a subscriber could stream per month. For example, we can imagine an eMusic Basic plan that would offer 24 download credits (the same as today) along with the ability to stream up to 100-200 additional tracks (or 10-20 albums) on demand. How big could this limit be? It’s very hard to tell. Royalty arrangements for on-demand streaming are fairly complicated, with separate royalty streams going to labels and to songwriters and publishers (mechanical royalties). In some cases these royalties are paid on a per-track basis, and in some cases they are calculated as a percentage of revenue. (This discussion thread gives a good feel for the confusion occasioned by streaming royalty arrangements even among people involved in the music industry.)

I’ll leave it to others to figure out exactly what level of streaming service eMusic could offer profitably, and at what price point. Streaming capability could be offered as an extra cost option to the current plans, or bundled into future versions of the standard eMusic subscription plans (for example, as part of some future round of price increases). The important part is not the exact pricing, it’s offering a service that is well-integrated into the current eMusic offering, financially sustainable for eMusic, and perceived as a good value by its customers.

In this regard the division between downloads vs. on-demand streaming vs. automated streaming (Internet radio) is an artificial one from the point of view of customers. At heart eMusic is not a download service per se; it is a music service that delivers a particular type of experience to a particular type of customer. The first paragraph of the eMusic story says nothing about MP3 downloads; it talks about a more immersive, authentic music experience, better prices than mass market digital music retailers, the most musical context, subscription-based pricing that rewards discovery, and other aspects that eMusic thinks are key value propositions for the service. If adding a streaming component (or for that matter an Internet radio component) would enhance those aspects then eMusic should seriously consider investing in such improvements.

In the end there are two general ways forward for digital music services. The first is exemplified by Spotify today and by (the original) Napster in the past: attempts to remake the music industry through high-profile, potentially high-reward, and (to one degree or another) high-risk business strategies. The problem is that in a fundamental sense the music industry doesn’t want to be remade: There are multiple actors with their own interests, an attachment to traditional ways of operating, and both legal precedent and political clout to back them up; even with general consensus that the industry is in crisis the collective action problem is daunting. In the long term the structure of the industry may indeed change as new genres and industry players emerge, but this may take 10-15 years or more (as I’ve previously argued). In the meantime services like Spotify may achieve some measure of success, but it’s equally likely that they’ll just crash and burn as they run out of cash.

The second approach is the one that I think is most suited to eMusic: To work within the realities of the music business as it exists today and then to do what one can to serve customers best within those constraints, aiming for consistent profitability and growing the customer base organically (being patient for growth but impatient for profits, as Clayton Christensen puts it). To use a sports analogy it’s like hitting for singles in baseball instead of swinging for the fences, or having a consistent ground game in football vs. throwing the long bomb.

It’s an unexciting strategy to be sure, but then eMusic at present is an unexciting company. With the collapse of the rumored acquisition of eMusic by Amazon eMusic’s owner Dimensional Associates lost any immediate prospects for selling eMusic at an attractive valuation. Now with eMusic’s subscriber base relatively stagnant and the company’s image damaged by the Sony PR debacle, eMusic’s only hope in my opinion is to execute well, become consistently profitable, and achieve long-term sustainability. At that point eMusic may become an attractive acquisition candidate for someone looking for a nice boring business with steady cash flow and some plausible prospects for growth.

Rather than have Swindleeeee!!!!! join the millions of other blogs that have dribbled off into nothingness, I’ve decided to give it a dignified exit. More specifically:

• I’ve moved all my old Swindleeeee!!!!! posts over to this blog under the music category, in case you ever have occasion to read them or link to them.
• If you subscribed to Swindleeeee!!!!! using a newsfeed reader (e.g., Google Reader, NetNewsWire, etc.) and you want to see my future posts on similar topics, please subscribe to my music-related posts on this blog using the new feed URL http://blog.hecker.org/category/music/feed/.
• As time permits I will redirect I’ve redirected all permalinks for the old Swindleeeee!!!!! site to the corresponding posts on this blog, so that the old URLs will still work for anyone who’s referenced them in a blog post or other context.

Thanks to all of you who read and commented on Swindleeeee!!!!! posts. Please continue reading this blog if you’re interested in what I might have to say on eMusic and the music industry.

However with the recent price increases and the introduction of album pricing I suspect that eMusic is consciously moving away from reliance on digital breakage. One problem of eMusic’s model from the labels’ point of view is that the per-track payouts were in no way guaranteed: If a greater percentage of eMusic subscribers happened to use their full monthly quota of downloads then per-track payouts would inevitably decline. The vast majority of the reported disputes between eMusic and labels, including those labels who’ve left eMusic, revolved around this issue.

I’ve previously criticized labels for the single-minded focus on per-track revenue and profit as opposed to total revenue and profits, but labels have at least two reasons for their position:

• While per-track payouts might fluctuate, labels typically have fixed costs they need to cover per track, most notably for mechanical royalties paid to songwriters and music publishers. If the per-track payout becomes too low then labels lose money on every track distributed through eMusic, with no way to make it up on volume.
• As CD sales continue to decline labels are under pressure to maintain their revenue and profits. All other things being equal, the simplest way for labels to survive, at least in the short term, is to try to hold the line on pricing of digital tracks and charge as much as the market will bear. In theory they may be giving up some revenue and profits by pricing tracks too high and thus forgoing sales to more price-sensitive buyers, but (at least based on a recent Billboard analysis) it may be that in practice higher prices do not hurt sales enough to offset the benefit of higher per-track payouts.

One obvious way to increase per-track payouts is for eMusic to increase the price of subscription plans and/or reduce the number of monthly downloads included with a plan. This is essentially what eMusic did with its recent price increases; the eMusic Basic plan had a reduction in number of downloads, while the Plus and Premium plans had a price increase as well. These changes had the effect of fixing a minimum per-track price of about $0.40. However the per-track payout would still vary based on the behavior of eMusic users and the amount of digital breakage in a given month.

Enter album pricing, which as implemented by eMusic in cooperation with Sony and other labels can be thought of as a way to achieve the same effect as breakage while eliminating (or at least minimizing) the element of chance associated with breakage. For example, consider a user on the Basic plan who has a monthly download quote of 24 tracks. In the absence of album pricing the user might in a given month download an album of 4 (long) tracks and another album of 8 tracks, and then not use the remaining 12 downloads. The breakage is thus 50% of the user’s quota, and the effective per-track price is about $1.00 per track ($11.99 divided by 12). However in another month the user might download 18 tracks, corresponding to 25% breakage and an effective per-track price of $0.67, and in a third month might download all 24 tracks in the monthly quota, resulting in a per-track price of only $0.50 and no breakage.

However under album pricing purchasing many albums with less than 12 tracks actually requires 12 download credits, as noted by many eMusic messageboard posters and discussed in a Billboard analysis of eMusic’s recent changes. In our example, instead of using 12 downloads of 24 to download two albums of 4 and 8 tracks respectively, the user could well have to spend 12 credits per album, thereby using up the entire quota of 24. Strictly speaking there was no breakage (i.e., the user spent all the credits to which they were entitled) but the resulting per-track price of $1.00 is the same as under the old plans with 50% breakage.

As more and more albums move to album pricing, it becomes increasingly difficult for a user on a Basic plan to buy more than two albums per month, and if they use eMusic at all it’s like they’ll buy at least two, and thus have no breakage in the traditional sense. In effect album pricing allows labels to remove the element of chance involved in user behavior and manipulate the per-track price themselves (i.e., by designating a particular album of less than 12 tracks as requiring 12 credits, and designating particular tracks as album-only) according to their business objectives.

It’s correct that the per-track price is effectively reduced when an album with more than 12 tracks is sold for 12 credits under album pricing. However in practice this most likely doesn’t matter, since per-track costs such as mechanical royalties typically are not any higher for albums with more than 12 tracks than they are for 12-track albums. (For the full and gory details see the maximum rate per album discussion in chapter 16 of Donald Passman’s All You Need to Know About the Music Business.)

So the labels win in the case where albums have fewer than 12 tracks, and don’t lose in the case where they have more. eMusic keeps the labels happy, and if some users don’t download even the few albums they can now afford (and thus help raise the average per-track price even higher) then it’s just icing on the cake.

Quite coincidentally eMusic’s recent deal with Sony will shortly result in Michael Jackson’s back catalog being available on eMusic, at prices ranging from about $0.41 per track to $0.50 per track on the new eMusic plans. Since Michael Jackson died before his releases hit eMusic, Sony has a period of a few weeks during which it can sell Jackson’s releases in digital format at full price to buyers who are not price sensitive, after which more price-sensitive buyers are free to buy them through eMusic at significant discounts. For example, an eMusic buyer who doesn’t care about bonus tracks should be able to snag a copy of Thriller for $3.69-4.50 on the standard plans (9 tracks at $0.41-0.50 per track), representing a 50-63% discount relative to Amazon or the iTunes Store.

By having such a delay Sony can maximize profits by avoiding offering lower prices to buyers who are very price-insensitive and must have the albums as soon as possible after Michael Jackson’s death, while still being able to get sales from price-sensitive buyers who don’t mind waiting a bit. (See my earlier blog posts on the economics of the Sony-eMusic deal and optimizing eMusic vs. non-eMusic sales for more on price discrimination in the eMusic context.) It’s essentially the same strategy Sony is employing by holding current releases back from eMusic until two years have passed, only with a much shorter release window for the full price version.

By looking at iTunes and Amazon sales figures before and after Michael Jackson’s albums show up on eMusic, Sony should be able to get a pretty good idea of the extent to which sales through eMusic are cannibalizing sales through other digital music stores. If it turns out that offering Jackson’s releases through eMusic has little or no effect on iTunes or Amazon sales, that would be an argument for Sony reducing the two-year delay for offering other Sony releases to eMusic customers. If this indeed happens it would be an oddly providential side effect of Michael Jackson’s death.

One final thought: My comments above might seem cold and calculating, but they would not have been foreign to Michael Jackson himself, who famously counted his friendship with Paul McCartney as less important than the opportunity to acquire publishing rights to the Beatles catalog. The King of Pop understood that as far as the major labels are concerned the true value of music is simply the present value of that music’s future sales.

UPDATE: As it turns out, the Michael Jackson catalog on eMusic is being sold under the new album pricing plan, which is really just variable pricing under another name. In particular an eMusic customer would be charged 12 download credits for downloading the album Thriller despite it having only nine tracks. Thus the eMusic price for Thriller for US customers would be somewhere between $4.92 and $6.00 on the standard plans, or between a 40-51% discount off the standard Amazon or iTunes price. Still a substantial discount, but not quite as attractive—more like the Amazon 50 for $5 promotion except all the time.

1. Casual listening to familiar music at my computer.
2. Casual listening to familiar music when I’m offline.
3. More focused listening to a) familiar and b) less familiar music while driving.
4. Auditioning music for inclusion in my core collection.

Here’s how my jobs to be done match up with various digital music products and services being offered today:

• Since I listen to my core collection of music both online (job 1) and offline (job 2), downloaded MP3 files (or other download formats playable on an iPod or iPhone, such as AAC or FLAC) are the best choice for jobs 1 and 2. They also satisfy job 3a, that part of job 3 that involves listening to familiar music.
• Either satellite radio stations or Internet radio stations (i.e., using the iPhone to connect over 3G) will work to satisfy my need for novelty in listening while driving (job 3b). (Terrestrial radio stations are useless given my taste for non-mainstream music.) For my purposes I don’t care if the stations are human-curated, or auto-generated based on either genre (like Slacker) or similarity to a particular artist (like Pandora). Note that while driving I can’t afford to distract myself by frequently fiddling with controls, so Internet radio features like song rating or skip-ahead are overkill from my point of view. (In Christensen’s terms they overshoot customer needs, at least in my case.)
• Auditioning music for my collection (job 4) requires listening to whole tracks (not 30-second samples) and ideally being able to listen to a whole album all the way through without being interrupted by ads or having to explicitly hit the play button again. Since I normally audition music while I’m using my laptop and I’m online, job 4 can be done by an on-demand streaming subscription service like Napster or Rhapsody that is ad-free and can play whole albums with a single click. If I don’t mind occasional ads I could also use a free ad-supported service like Imeem (which also supports whole album plays).

Under my previous eMusic plan I didn’t worry too much about downloading things I might not like. With 40 tracks I could download the equivalent of three or four albums per month, and it was OK if some turned out to be clunkers. I don’t have time to listen to all that much music, and can’t readily absorb more than one or two albums per month into my core collection of things I listen to frequently.

Unfortunately eMusic’s new higher prices discourage this sort of experimentation (as many current eMusic subscribers have commented). In order to maintain a roughly comparable monthly expenditure on digital music I’d have to switch to an eMusic Basic Annual plan (at about $10.83 per month for 24 tracks) or an eMusic Lite plan ($6.49 per month for 12 tracks). With only 12 or 24 tracks per month I feel more pressure to make sure that every downloaded album is one I’ll want to listen to more than once.

In the short run I’m looking at the following possibilities, in order of increasing cost:

• Subscribe to the eMusic Lite plan and then use Imeem or a similar ad-supported on-demand streaming service to audition candidate albums for possible downloading via eMusic. Total cost: $6.49 per month for 12 downloaded tracks, or $0.54 per track.
• Subscribe to the eMusic Basic Annual plan ($129.99 per year for 24 tracks per month) and supplement it with Imeem as discussed above. Again I would have to listen to Imeem ads while I’m auditioning an album, and would also be locked in to my eMusic plan for a whole year. Total cost: $10.83 per month for 24 downloaded tracks, or $0.45 per track.
• Do a combination of the eMusic Lite plan and a paid Napster subscription for on-demand streaming; for $5 extra per month this eliminates ads and gives me an additional 5 MP3 tracks a month. Total cost: $11.49 per month for 17 downloaded tracks, or $0.68 per track (averaging across the two services).
• Do a combination of the eMusic Basic Annual plan and a paid Napster subscription. Total cost: $15.83 per month for 29 downloaded tracks, or $0.55 per track (averaging across the two services).

For any of these strategies I can add access to Internet radio stations to address job 3b, listening to new and unknown music while driving. There are a number of choices here, including the iPhone apps for Imeem, Last.fm, Pandora, Slacker, and others. Of these Slacker probably meets my needs best, since it features easy access to genre-based stations—this gives me a bit more novelty than basing a station on a particular artist. I may also continue listening to satellite radio in the car, since it’s more convenient than hooking the iPhone up to the auxiliary input port and a car charger.

(Note that at this time there does not appear to be any service offering on-demand streaming to the iPhone. I’m guessing that this is due to Apple and/or AT&T blocking such access. This is not a major problem from my point of view, but it is yet another annoying aspect of today’s music industry.)

In the end I’ll likely go with the combination of an eMusic Basic Annual plan for downloads, Imeem for on-demand streaming, and Slacker for Internet radio. This should take care of me for the near-term, assuming that Imeem, Slacker, and other music services are able to continue in business offering free services. We may also see Spotify in the US at some point, which would provide another option.

However I can’t help thinking that this is much more complicated than it needs to be. It would be great to be able to hire one service to do all of my musical jobs to be done, at a price that’s reasonable. Would such a service be possible? What would it look like? What would it cost? These are questions I’ll address in my next post.

For a long time now I’ve been a fan of disruptive innovation theory as pioneered and popularized by Clayton Christensen and his colleagues. One of the key concepts in Christensen’s theory is that people hire products because they have certain jobs to be done. To quote the folks at Innosight (a consulting firm co-founded by Christensen):

Using the jobs-to-be-done concept requires first understanding the problems a customer faces—whether at work or in daily life. We find it helpful to push for as much specificity as possible when describing a job. Complete a job statement that looks like the following:

[Customer] wants to [solve a problem] in [this context]

Identifying the context is particularly important. For example, trying to access the latest news while you are on an airplane is a fundamentally different problem than trying to access the latest news while sitting in front of your television or commuting to work.

Thus, for example, when it comes to music and music-related content I have at least four separate jobs to be done:

1. Occupying my mind while I work, do spare-time writing like this, or surf the web. For this purpose I typically prefer to listen to music I already know (to avoid encountering unfamiliar songs that might break my concentration) and to listen to full albums (to prolong the time before I need to select something else). In this context I’ll typically be using my laptop and have an Internet connection.
2. Occupying my mind while I work or read on plane or train trips. My listening patterns are the same as with job 1, but I’m typically using my iPod (or the iPod app on my iPhone) instead of my laptop, and (at least on planes) have no way to connect to the Internet.
3. More actively listening to music while I’m in the car driving. Sometimes my listening patterns are the same as in jobs 1 and 2; other times I prefer to listen to random music chosen by others, to avoid having to distract myself by choosing what I want to listen to, and also to increase the novelty factor. (I’ll refer to these are jobs 3a and 3b respectively.) In this context I have a choice of satellite radio, my iPod (no network connection), or my iPhone (Internet connection over the AT&T 3G network).
4. Auditioning music for jobs 1 and 2, i.e., deliberately seeking out new music and actively listening to it in order to determine whether I want to make it part of my core collection of things I listen to on a regular basis. I typically combine this type of listening (which I do on my laptop) with reading music reviews on eMusic, Amazon, or other sources, or looking for recommendations on 17 Dots or the eMusic message boards. Since I tend to listen to albums I typically audition entire albums and not individual tracks.

Note that the above simply reflect my personal uses for music, and are far from exhausting the range of possible jobs to be done involving music. For example, one might listen to music to accompany exercise, to pump oneself up for a sports event or a big presentation at work, to establish a mood for a date or other occasion, or to serve as a marker signaling ones’ membership in a social group or subculture (e.g., Williamsburg hipsters). However since I’m part of eMusic’s target audience (music lovers in the underserved 25-54 demographic) I suspect that many eMusic subscribers share at least two or three of my jobs to be done.

There are a couple of other factors to take into consideration; again I suspect I share these with many eMusic subscribers:

• I am price-sensitive, but not extremely so. On the one hand, I’m not willing to buy music at the typical present-day price points, e.g., $0.99-1.29 per track or $9.99 for an album. On the other hand, I have little or no interest in spending extra time tracking down free downloads (whether authorized or not), buying or trading for used CDs, or waiting for periodic sales (e.g., Amazon’s Daily Deal or 50/$5 promotions).
• I pay little or no attention to current mainstream pop, rock, or hip-hop, and am content to buy primarily from independent labels or (to a lesser extent) from major label back catalogs.

Given the above, what types of music products and services should I hire? More on that in my next post.

The first is from Billboard columnist and Coolfer founder Glenn Peoples, who welcomes the fact that Sony is now pricing for profits, not margin. In other words, rather than trying to maximize its margin or profit per sale (i.e., by selling only at relatively high prices), Sony is now looking more seriously at maximizing its profit overall: The goal is not to maximize per-unit margin but to reach more consumers and gain incremental revenue and profits.

How will Sony do this? By practicing price discrimination to identify and sell to more price-sensitive buyers:

A person who doesn’t want to pay more at iTunes may be willing to shop elsewhere to save money. How does Sony find this group? It licenses its music to a store known for offering downloads at relatively low costs to high-volume buyers. … Per-unit revenue may be lower but total revenue and profits should increase.

If Sony can profitably sell through eMusic (and presumably the new $0.40 per track floor price is designed to allow them to do that), and if selling through eMusic doesn’t cannibalize sales through higher-priced outlets (which the 2-year delay in releasing to eMusic is designed to address) then any incremental sales through eMusic are pure gravy as far as Sony is concerned. Those sales are money that Sony would not otherwise have seen—either the buyers would have downloaded unauthorized copies via P2P or they wouldn’t have bothered to get the releases at all.

(I’ll once again plug the book Information Rules, which addresses the problem of pricing information goods like digital music in a quite readable and accessible manner. You can get a flavor of the book by reading the paper Pricing Information Goods by Hal Varian, one of its co-authors—who not so coincidentally is now Google’s chief economist.)

The second example is from David Harrell of The Layaways and Digital Audio Insider, who contends that even with higher prices eMusic’s per-track payout may not change:

… it seems likely that the presence of more name brand artists and albums in eMusic will result in less digital breakage by subscribers. So while subscribers will have fewer downloads available, they’ll be more likely to use all of them, which may be enough to offset the effect of the price increase on the final per-track payout to labels.

Without significant digital breakage, the per-download payout is bound to be less than 30 cents a track, even under the new pricing model. No doubt some breakage will continue to occur, but it seems likely that the current breakage rate will decrease significantly. Hence, it seems likely that the new subscription plans are more likely to preserve the recent payout amounts I’ve seen, as opposed to substantially increasing them.

(Digital breakage is the term—apparently coined by Harrell himself—for the money eMusic and labels realize from eMusic subscribers not using all the downloads that they paid for, analogous to the similar phenomenon with gift cards. The music industry term breakage dates back to the days of fragile 78 RPM records, when labels would pay royalties on only, e.g., 90% of records manufactured and shipped, on the assumption that the other 10% were broken in transit and thus never reached consumers. The practice evolved into a standard up-front cut of sales that labels took for themselves on all music sold, no matter the format, and used to reduce royalties paid to artists.)

The final outcome of all this is going to depend on the following factors, among others:

• the growth in the number of eMusic subscribers due to adding major label content;
• the changes in per-track payouts due to changes in subscriber behavior (both by new subscribers and existing subscribers); and
• the changes in the relative fractions of downloads going to indie labels due to competition with major label releases.

If the per-track payout changes are a wash then from an indie label perspective this deal is a net plus only if eMusic significantly increases its subscriber base and indie labels are able to capture a reasonable portion of downloads from the new subscribers. This is obviously a bet the company strategy for eMusic, and it will be interesting to see how it plays out. Digital Audio Insider has the most in-depth analysis of eMusic payouts around, and will be a key place to find clues as to whether eMusic’s bet is paying off for indie labels and musicians.

My goal was to write something that treated eMusic subscribers as the mature intelligent adults they (mostly) are, while still announcing all the service changes that eMusic made, including the more unpopular ones. Remember, this is a work of fiction. I don’t work for eMusic, do not in any way speak for eMusic, and have no formal relationship with eMusic other than as a usually-satisfied customer.

Without further ado, my imaginary missive (with footnotes from me as indicated):

Dear eMusic subscriber,

I’ve been actively involved with eMusic for several years as CEO of Dimensional Associates, the company that acquired eMusic in 2003, and as executive chairman and now CEO of eMusic itself. [1] The eMusic staff and I are proud of eMusic’s position as the internet’s corner music store, offering a deeper, more personal alternative to mass market digital music retailers, at prices that provide good value compared to other retailers’ standard pricing. Over the years we’ve worked to make eMusic better by increasing the depth and breadth of music we offer and the help we provide to make music discovery easier. Today I’m writing to tell you about the latest evolution of eMusic and how it will affect you.

Our focus from the beginning has been on music from independent labels. We are proud to offer more than five million tracks from over 60,000 record labels that span every conceivable music genre. We also strongly believe in providing music listeners digital music in industry-standard formats free of DRM and related restrictions, and our independent label partners were early leaders in selling music as high-quality MP3 files. However at the same time we believe that great music is great music wherever it comes from, and the major labels of today offer extensive catalogues of quality music from many of the most innovative labels and artists in history. We’ve therefore talked with various of the major labels over the years to try to find ways to offer that music to our subscribers in DRM-free form at a price that provides good value to our subscribers and in a manner that’s consistent with our focus on helping our customers expand their listening horizons. [2]

Today I’m pleased to announce that we’ve reached an agreement with Sony Music Entertainment to offer our U.S. subscribers access to music from the catalogues of labels like Arista, Columbia, Epic and RCA, beginning later this year. This agreement (which we’re working to extend to non-U.S. subscribers as well) will include all Sony releases more than two years old [3], and will bring to eMusic works by artists including the Strokes, Bruce Springsteen, Leonard Cohen, The Clash, and many more. We’ll continue our tradition of helping you discover great albums and tracks among this wealth of music, through recommendations, reviews, and in-depth articles from our knowledgeable staff. Our editorial director Yancey Strickler has more information on how we plan to integrate these new releases into eMusic while continuing to highlight the independent offerings that have always been the heart and soul of the eMusic experience.

Our goal in offering music from Sony (and perhaps other major labels in the future) is to make eMusic a more attractive and comprehensive service to current subscribers and new subscribers alike. We also want to attract even more independent labels, and more releases from the independent labels already on eMusic. That means finding price points for music that provide good value to our subscribers while still enabling all our label partners (both independent and major) to profitably offer their releases through eMusic under our traditional subscription-based model. [4] Based on our discussions with Sony as well as with our independent label partners, we’ve concluded that a per-track price of at least $0.40 [5] will enable our label partners to make eMusic a sustainable business proposition and us to continue to invest in improving the service we offer to you, while still providing a significant value compared to the typical prices offered by other digital music services.

We’ve therefore changed our eMusic U.S. plans to reflect this new approach, with an eMusic Basic plan now offering 24 downloads for $11.99 per month ($0.50 per song) and other standard plans offering better prices (as low as $0.41 per song) in exchange for higher monthly commitments. We’ve also changed the pricing for our non-U.S. plans to be more consistent with U.S. pricing, and in anticipation of our being able to offer more labels’ music to our subscribers outside the U.S.

When making past price changes we’ve offered at least some existing subscribers the option to continue their plans at the previous price levels. Unfortunately we can no longer continue that practice; it is not financially sustainable in the long run, and arguably is also unfair to more recent subscribers who cannot take advantage of older plans. [6] We’re therefore requiring all subscribers under such grandfathered plans to select from one of the current plans when their existing plan refreshes. We will offer you the default choice of a current plan most similar to your existing plan.

We recognize that these new plans represent a significant price increase over previous plans, especially for long-time subscribers and subscribers with Plus, Premium, and Connoisseur plans, and could make eMusic less attractive to many current subscribers. We appreciate having your business over the years, and we hope you’ll stick around to check out our new expanded offerings and the many other improvements we’ll be making in the coming months and years. For those subscribers active as of August 1 we’ll provide a free 15-track booster pack as a small token of our appreciation for continuing your subscription.

We’re also working to make eMusic a better value by addressing a long-standing issue with our track-based subscription model. We know that many of our customers are avid listeners who tend to purchase entire albums, not just individual tracks. Unfortunately purchasing an album with a very large numbers of tracks through eMusic is often more expensive than purchasing the same album from other digital music retailers. We’re moving to correct this problem by offering album pricing that will allow you to download selected albums of 12 or more tracks for the price of 12 downloads. [7] In cooperation with our label partners we will work to extend this album pricing to more and more releases over time, so that eMusic subscribers don’t have to hesitate before deciding to download a complete album.

This is a major event in the history of eMusic, and we understand that many of you are concerned that the eMusic you know and love will be no more. The eMusic staff and I are committed to ensuring that eMusic remains the best place on the Internet for discerning listeners to discover and purchase new music at value prices. We appreciate your past business, and hope you’ll continue to be part of the eMusic community.

Yours truly,

Danny Stein [8]

1. Danny Stein became CEO after the resignation of David Pakman, who had been CEO since the Dimensional Associates acquisition.

2. In several interviews over the years David Pakman spoke of his desire to have eMusic offer back-catalog material from major labels in addition to independent label releases. Apparently at least one such deal was approved by middle management at a major label, only to be killed by senior management.

3. As noted above, eMusic’s focus was always on obtaining rights to sell older major label releases. I’ve never seen any indication that eMusic wanted to go head-to-head with the iTunes Store and Amazon in selling new major label releases. Also note that many independent labels have held new releases back from eMusic in an attempt to maximize revenue from other higher-priced outlets, in an attempt at price discrimination.

4. Recall that under eMusic’s business model payments to labels are sensitive to both the nominal per-track prices (i.e., as defined in the plans) and the fraction of downloads that are paid for but never used (what David Harrell of The Layaways refers to as digital breakage). The more downloads go unused, the higher the per-track payout. (Again, David Harrell has a thorough discussion of how this works in practice; see also eMusic’s own explanation to labels.) Labels typically have to pay a fixed amount of royalties to artists and songwriters for each track, so per-track payouts that are too low mean that labels cannot profitably sell through eMusic. Thus per-track pricing has in the past been a point of contention between eMusic and various independent labels.

5. As can be seen from my overview of the new US pricing, no published eMusic plan offers a nominal per-track prices of less than $0.40. (Some existing subscribers have been offered a non-published plan that works out to about $0.39 per track.) I therefore conclude that having a hard floor at $0.40 per track was a key element of eMusic’s agreement with Sony; in practice the actual average per-track price will be higher, due to both digital breakage and the fact that most eMusic subscribers will be on plans that are more expensive on a per-track basis.

6. The discontinuation of the grandfathered plans is arguably the most controversial part of the changed pricing, both because long-time subscribers with such plans are disproportionately represented among eMusic message board posts, and also because eMusic is viewed as having made a firm commitment to continue grandfathered plans as long as the customers in question continued as subscribers. The argument that offering grandfathered plans is unfair to new subscribers is somewhat weak, but it’s the best I could do on short notice.

7. Assuming a floor price of $0.40 per track, under album pricing a complete album would cost about $4.80. Amazon offers a few albums for less than this as part of its special Daily Deal program, but this would be an everyday low price for eMusic, at least for those albums selected for album pricing. I think album pricing could be a significant improvement to eMusic, but unfortunately eMusic did a poor job of communicating where this might apply and what eMusic will be doing to expand the number of albums offered this way.

8. One more time: Danny Stein didn’t really write this letter, I did.