No One Price for Music June 17th, 2015.

More of the same

Last week at WWDC Apple announced something "revolutionary": yet another music streaming service selling a $9.99 per month subscription. For those not keeping track at home, that adds Apple Musicto the fairly lengthy list of competing services with the same music at the same price: Spotify, Rdio, TIDAL, Deezer, and not-into-the-brevity-thing Google Play Music All Access.

It was widely reported that Apple wanted to offer a lower price, but those negotiations clearly ended up where all the others did before. So you might wonder, is $9.99 the market clearing price for interactive streaming?

Well, yes and no. Obviously there is a market clearing. And Spotify's recently announced 20M subscriber count is a testament to the fact that many consumers are cool with that price. On the other hand, Spotify lost nearly $200M last year and judging by history will lose even more this year [1]. No other interactive streaming services have reported profitability either. Does it really count as a market clearing if no one can turn a profit?

The friendly skies

In a lecture on the complexity of planning airline flights, Carl de Marcken, a founder of ITA software [2] shared the following observation of various airline economists:

There is no price such that the price times the demand at the price equals the cost of flying a large jet.

This is deceptive in its simplicity—there's actually a super complex economic model sitting behind that quote. But it's been distilled down to a kind of shocking punchline. Pick a price, charge everyone that price, and flying the plane is not profitable. Lower it, and you get more customers, but not enough more to get back into the black. Raise and your revenue per customer goes up, but you lose dollars from all of the people unwilling to pay more.

In this sort of economic environment, you might wonder how airlines make a profit at all. Often they haven't but at the moment they're doing extremely well [3]. How? Price discrimination. They simply charge different people different prices according to their relative desire to pay. If there's no one price, there's no paradox.

The appeal of a single price is obvious. It simplifies the user experience (not to mention the billing code) and makes it easy for consumers to shop around for the best deal. The flip side of that is, it's not a great business model unless your product has very generous margins built in. Like the airlines, streaming services do not [4].

What we've tried

The streaming services actually agree that price discrimination is a valid strategy. In most cases they don't make a big deal of it, but there are many people with access to these services who are not paying $9.99/mo.

  • Technically speaking, splitting services into paid and free tiers is price discrimination. There are certainly folks out there willing to try out three months of Apple Music for free who would not be willing to pay for it. I'm loath to count this as useful price discrimination though, because people who don't pay you are not really customers.

  • Spotify, Rdio and others often offer education discounts for college students, often at half the typical subscription price. This is a good idea ™ except I'm not sure those subscriptions ever convert to full price…

  • TIDAL has a premium price tier for music streamed in high definition. Like first class seats on airplanes, some people genuinely like to have the best of the best. And catering to them opens up more margin for the service (the price is double but the streaming costs are not).

  • Beats was the first to create a family plan, which they've brought to Apple Music. As a per user fee (6 people can use it together) it feels like a real deal for folks. But it's incremental revenue for the service above and beyond the typical subscription for people who are willing to pay a premium not to share a password with family.

As noble as these efforts are, all of them taken together have not been enough to get any company comfortably over the profitability line. If music streaming is going to be a sustainable enterprise more drastic measures will need to be taken.

What we should try

It's obvious but underexploited that music is art, and as such has an extremely wide range of perceived value. Justin Bieber's All That Matters is for his fans the second single from his latest album and for most people a throwaway blue-eyed soul love song. For me, it's my most played song of 2013 (!). Even the same song can mean something different depending on the context in which it's presented. So to charge roughly the same price for every song seems a little silly.

In the 90s, record labels sold a basic CD for casual fans, and added extra tracks and a fancier cover for the real fans on the deluxe version. These days, those two album versions sit side by side in streaming services, sending the same money to the labels regardless of which you click on.

How can we simulate this in the digital age? One way is to split the catalogs of these services into smaller pieces. That way they can be priced independently at rates that better reflect the contextual value of the songs to the customer base. Here's a small selection of variable pricing ideas I'm certain would raise revenue for streaming services.

  • New releases versus catalog–The movie industry does a killer job windowing content. If you want to see a movie when it comes out, you pay a premium to watch it in the theater. Those patient enough to wait 6 months can rent it, and if you wait a couple years maybe you can catch it on Netflix? Music fans who want to hear the latest music should pay a similar premium, and fans willing to wait deserve a discount. Ask Taylor Swift! Promotional singles for new music can stay for free, though, as an preview for the paid new release service.

  • Classics only–For some people, good music stopped being made decades ago. These wiser souls often skew older and (conveniently) wealthier. A subscription to just the 10% of the current catalog made in the golden era would be worth a lot more than 10% of the current price.

  • By genre–Arguably, we already have a service that streams all the great DJ music. But you can imagine lots of mini streaming services focused on great curation within a more narrow musical scope. For a discount, country music fans would love a separate service that didn't involve them subsidizing the heavy metal fans (and vice versa). Fans interested across genres would subscribe to multiple of these the same way you can opt into extra channels with your cable TV package.

  • By the minute–Pay-as-you-go plans are popular cell phone plans due primarily to the flexibility they allow in spending patterns. Rather than committing to a fixed price subscription, you can instead choose to pay more or less depending on your current budgeting needs. Conveniently, all of these streaming services actually pay the rightsholders by the song, so this payment option better aligns their cost structure than an all-you-can-eat subscription. And paying a few cents a song doesn't sound all that bad unless you consume dozens of hours of music a month.

  • Fully dynamic pricing–If you're still with me, I saved the crazy one 'till the end. Assuming a service is willing to commit to a pre-paid plan as described just above, they can actually charge anything to anyone at anytime. This is the same technique Amazon uses to find an edge while selling low-margin hard goods. Notice I've been going through the entire Hiatus Kaiyote recorded catalog? You can dynamically give me a discount to encourage my spending spree. Notice I'm one of millions who all of a sudden are interested in Rick Astley? Raise the per-stream price and maximize the profit. We're a long way from this world, but it pushes the idea to the limit.

I know these suggestions are unlikely to be put in place. The major labels are intransigent. The streaming services are complacent. And the fans are stingy and little bit spoiled by so much cheap music (myself included). Even still, I'm holding out hope that we'll find a sustainable streaming future, and I'm certain the path there will include ideas like these.

Have ideas of your own for the streaming services? I wanna hear about them. I'm @__aston__ on Twitter.

  1. Spotify also lost around $70M in 2013. WSJ ↩
  2. ITA was acquired by Google but have served as the backend for Kayak, Hipmunk, and Orbitz, among other travel sites. ↩
  3. Cheaper fuel is part of this, but the airlines were doing fine before those drops, too. ↩
  4. OPEC is an oil cartel that makes it difficult for the airlines, and some would argue the record labels are a cartel as well. I disagree, but that's a whole other blog post. ↩