Thursday, March 07, 2002

eMusic economics It's worth reading through this NY Times puff piece on the music cartel's online offerings. First of all, note how you need Microsoft products to run anything at all (Windows, I.E., Windows Media Player). I wouldn't be surprised if it's being served of some flavor of NT, or will be soon. This is a glimpse of the Microsoft future where they control every bit from creation to transport to distribution.

Secondly, it's worth looking at what a bad deal these services are. The marginal cost of producing an album is the same as producing a single. But willingness to pay for singles is lower ($4) than albums ($15), so the profitable thing to do is phase out singles for albums--which is what has happened. But albums are actually a terrible deal--most of the songs on them are lousy. But through this sort of bundling, consumers get more value overall (higher willingness to pay) thus distributors can charge a higher price (which, keeping cost constant = higher profit).

A fairly priced single, at $1.50 a song, is stiff competition to the album, so note how painful it is to put together partial albums in these services. Also, the $1.50 single ($15 album with ten tracks) lets you hear these songs in perpetuity -- at a 5% discount rate this works out to 7.5 cents a year, or 0.625 cents a month (I think, sloppy maths here I'm afraid, it's late). This clearly is much less than the extortionate amounts being charged per month for music now. These online services are a joke. Any real competition would gut them instantly.


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