Saturday, April 07, 2007

How Price Sensitive Are You?

It should be no surprise that the recent EMI announcement has spurred lots of discussions of late. In general, most people I've talked to are excited by the prospect of buying DRM-free tracks. If you take subscription models out of the discussion, you'd be hard-pressed to find anyone who wouldn't want more rights and freedom associated with the content they buy, regardless if they ever plan to exercise those rights.

The real nut of the discussion is whether you think it is worth a 30% premium. If I bought tracks (which I don't because a subscription service better serves my needs), I think I would gladly throw down another 30 cents on each track. Or - as the labels indubitably hope will happen - I'd just buy the whole album which are offered sans DRM without the premium.

But, I think the stipulation above is the key to it all... for people that currently buy tracks, I think they will pay the premium. The real question is, will those people that don't buy pay more for the same rights and content they currently get (for free). This is very similar to the recent announcement about Rhapsody raising their prices. It's a near-term win in that they will generate more revenue out of their EXISTING users. But I'm not convinced either will actually generate more users (certainly not the Rhapsody price change).

I recently read an interesting paper by economist Will Page arguing that the price of recorded music is quickly moving towards zero. I can see the logic in the argument, but it got me wondering... we, as consumers, seem to love to pay for things that are virtually free. How does the music industry learn from this?

At work, there is free coffee provided for those who want it. Yet, everyone goes and pays $2/cup for Starbucks. Same for water.... their are water fountains all over this country. Remember when we used all drink from them? Now everyone walks right by the free water fountains on their way to pay $1/bottle for the same stuff. Why do we do this? There is some perception that the quality is better for these premium products, even if that's not the case (Consumer Reports rated McDonald's coffee higher than Starbucks, but which do you drink?).

The problem for the music industry is that virtually no one cares about audio quality (in terms of bitrate), and even less can tell the difference - particularly when listening through a pair of 20 cent earbuds, or even a $200 "home theater in a box" system. There are people who claim that audio quality matters and that they can tell the difference between 192kbps MP3s and 128kbps MP3s. Yet, if they really cared about audio quality they wouldn't be listening to MP3s in the first place (it is a very lossy compression scheme). Freedom, portability and interoperability trump audio quality every time.

Don't get me wrong, I applaud EMI and I hope that the other majors follow suit. Actually, I think the other labels *have* to follow suit for the consumers to benefit. Having different content with different rights is going to confuse the hell out of people in the near term, and unfortunately the labels suffer under the delusion that consumers know and/or care what label an artist is on (and what that label's parent company is). It's like asking a moviegoer what studio put out the movie they just watched. Why would they care?

I don't claim to have the answers, but I certainly have a lot of questions....


fred said...

Regarding your position that people don't care about audio quality-
I think it may be a matter of ignorance. The pedestrian MP3 listener, IMHO, doesn't know (and doesn't know that he doesn't know) that Digital music files are not all the same.

A lot of my friends, who are not part of the digital music cognoscenti, don't know MP3s from FLAC, OGG etc. They just assume that because they buy a song online somewhere, and "it's on the computer", that it must be high quality.

MP3s from the early Napster days are not the same as MP3s created with LAME (

steven walcott said...

i think you should read 'the tipping point' by malcolm gladwell. it talks a lot about markets and different kinds of personality types that make a market develop and prosper.

while i agree that most people can not tell the difference in audio quality, the people who consume the most music DO care about audio quality. the people who listen to the most music and are obsessed with it, and spread it around to other people are the ones who make the market for music move. this is my opinion but it's adapted from malcolm gladwell's book. if the labels don't focus on servicing the people who spread the music around and have taste, then you're going to have large numbers of people on iTunes, etc but a stagnant market. so it does matter that the people who are key to spreading music DO care about audio quality, and when they're alienated from buying/exploring - well you see what happens because it's going on right now.