Using Pricing to Kill Your Industry

An alert reader sent me this piece called “The Buy-Rent Scam” about the music subscription pricing model. Essentially, you pay a monthly fee, and as long as you pay that fee, you have access to the company’s music library. It’s like the radio, except you pay for it, and in exchange, you can listen to whatever songs you want. However, you don’t actually own any of the music you subscribe to—stop paying your monthly fee, and no more music. This is a great model for the industry (and Microsoft, which is pushing it heavily), but pretty lousy for the consumer. How many people are really going to spend enough *every year* to make this worthwhile? Even the overpriced CDs I bought in the 80s (now ripped onto my iPod) are a better investment.

Who would invent such a customer-hating pricing scheme?
Naturally, the music industry, which while ranting (accurately, if with a shrill tongue) about how it’s illegal to file-swap, doesn’t like to mention that the industry was found guilty of price-fixing (see CD Pricing: How to Lose Friends and Alienate People).

There are two highly effective ways to use pricing to kill your industry.
First, engage in senseless price wars. Unfortunately, the music industry is far too savvy to do this, so they the second track, which is to make pricing so good for them and so bad for the customer that people don’t want to buy their offerings any more. I used to spend a fair bit of money on music, but I’m so tired of it that I buy used CDs or purchase occasionally from iTunes. (The last “new” CD I bought was after a Bob Schnieder concert, where they had a PC plugged into the sound board, and they had a double-disc recording of the show about 15 minutes after the encore.)

Why do record companies do this?
They’re a “blockbuster” industry, like pharmaceuticals, movies, or venture capital, where most products lose money, and a few mega hits have to carry the portfolio. Unfortunately, this leads to a lot of slickly-produced garbage, because everyone’s trying to create the next Britney Spears (surely one was more than enough?). The industry has always viewed computer technology as the enemy, because people might illegally download a song from Britney Spears instead of paying $18.99 for a couple of tracks on a filler-laden album (because the industry more or less killed off the single to force people to buy the albums). What the industry doesn’t seem to focus on is how technology can transform their cost structure, dramatically lowering the break-even point for new records and new artists. In addition, technology can make it easier to recommend artists I might like to try, based on my existing tastes. In other words, it can help me buy music by those artists, who suddenly need fewer sales to make money for their label. And as a customer, I’m fine with a certain degree of DRM (officially Digital Rights Management, but more accurately Deny and Restrict Me) to protect the industry’s (I mean the artist’s) intellectual property, as long as I can make reasonably fair use of what I bought and therefore should own.

Just think how much money the record companies could make, and how happy music lovers would be.


  1. Matt Konda

    Although I personally don’t like the music subscription pricing model for myself, I can imagine consumers for whom it would be a good deal. It is not unlike cable television with movies on demand. Restaurants across the country pay subscriptions for a music stream that fits their clients’ image.

    One thing that is interesting to me about the music industry’s position in this case, is that it seems that they are in the position to make money both in the traditional shrink wrapped CD fashion, and in a more open, per song, online fashion. But it seems to me like the process of realizing their potential in these very different markets may be slow.

    For example, you might imagine that the industry could promote different bands in different ways, depending on whether their expected appeal was radio/CD or online/MP3. In theory, this would allow the music industry to support more diverse musical acts, and then pour more money into them accordingly. It seems to me that this whole thing is in the middle of an “evolution”.

    I’m curious about the structure of the pricing deals that allow a company to provide a subscription based service. Take the company you mentioned, who does it pay what for rights to let you play the song? Has the model been validated at this point? Are these generally affiliates of the music industry? Do they share information about the popularity of the music?

    Ultimately, consumers have to decide whether they are comfortable with these schemes, and furtunately, in this area there still are choices as far as which type of payment scheme they want.

    Unfortunately, on the flip side, the music that gets out may still be limited due to the “label’s not yet evolved” methods…

    And in the end, why aren’t artists selling their own music online on their own terms? I haven’t seen the growth there that I would have expected. I would imagine that retaining the right to do this, and establishing a basic commerce site would be one way to treat your groupees right!

  2. Reuben Swartz

    On the buy vs rent point– for most consumers, I think music is not like cable. We want to be able to listen to something again and again. Even with cable, we can record a show and watch it later if we want to.

    As for more innovation in the industry, especially bands going directly to their fans– I’d love to see more of it, too. I bet there are bands that do this, we’re just not hip enough to know about them.

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