Paying to Play

May 1, 2003 12:00 PM, BY SARAH JONES AND SARAH BENZULY

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Has it really been three years since Napster appeared on computer screens worldwide? That can seem like an instant or a lifetime, depending on your view of “Internet time.” Since then, illegal file-sharing music sites have spread through the Net like wildfire, igniting the most significant copyright debate our industry has seen in decades. There have been lawsuits and countersuits, injunctions and offshore servers, hacks and breakthroughs.

And all the while, consumers continued to swap their MP3s online, in effect determining how music was delivered through this medium. The media focused on illegal file sharing but largely ignored the other problem: There were no legitimate choices for those who wanted to download their favorite songs over the Web.

Reacting to widespread consumer demand for downloadable music, major-label-backed services such as pressplay and MusicNet launched last year — albeit without much fanfare. Initially, they offered little to attract customers: limited marketing push, limited content, limited flexibility and limited access — a limited business plan. According to a recent study, less than 1% of the general U.S. population had even heard of these sites, let alone visited them. It was a rocky start.

But today, the label and other subscription services offer a wide range of content to compete with the file-sharing sites. Though this business model is still in its infancy, the services are ready for the mass market. A good majority of major-label content has been licensed; there are more options for what users can do with the music that they buy, whether they want unlimited streaming or a la carte downloads; and pricing plans are in place. All systems go.

$9.95: AN ALBUM OR A MONTH?

In the physical world, music fans walk into a record store and know exactly what they're purchasing; whether on vinyl, cassette, CD or DVD, an album is an object — a collection of songs on a physical medium — that's theirs to keep. The same idea holds true in the online CD retail marketplace: A user can surf on over to Tower.com, Ama zon.com, BestBuy.com, find the CDs that they want and proceed to the online checkout stand. But in the “invisible” universe of streaming and downloading, the concept of music as a physical product is undergoing a radical change.

“Consumers already understand how to download music on the Internet,” explains Emusic.com's general manager Steve Grady. “What we have to do is give them a very good reason to pay for that as a service. If you think that's about selling units, then you're on the wrong track. It's not about how much you're making per unit, it's about how much you're making.”

Music services are trying to get consumers used to the idea that $9.95 — or any comparable monthly sum — can buy them a chunk of time, not a physical product. Most sites today offer unlimited streaming and/or “tethered” downloads (those that can only be played on the computer to which they were downloaded) or a la carte “portable” downloads, which, for about a dollar a song, consumers are free to copy to their portable devices and burn to CD. It's still too early to determine which combination of these services will work best, because no single model will work for all music fans: Some will appreciate the “discovery” aspect of unlimited downloading, while others will demand portable downloads so that they can take their music on a morning jog or weekday commute.

Even as this new music-by-the-month notion sinks in, a generation of Web-bred consumers is emerging with their own sense of what is valuable. “The generation that's there now is still relatively accustomed to buying CDs in a physical format,” says Grady. “Those kids who are 10, 11 and 12 years old are growing up in a completely different world. It's not that they're not willing to pay for something, but they don't associate the same kind of value with something that they're downloading over the Internet as they do a CD that's bought in the store. That's just reality; let's accept it and build something around that.

“What you have to do is get people to pay for some service around the music that makes it easier for them to pay for it than it is to steal it,” Grady continues. “That's the battle: adding value to the music, adding value to the whole experience of finding the music that they want. That's what people are ultimately going to pay for.”

FORGING A NEW BUSINESS

Subscription options average about $9.95 a month, a marketing decision based on the idea that a month of access will cost less than the price of a single CD. For example, Emusic began with two levels of service: $14.99 per month for a three-month subscription, or $9.99 per month for users willing to make a 12-month commitment. “We have a mixture of light, medium and heavy downloaders, and that mix has to ultimately be profitable,” says Grady. “There are things that we can do that a peer-to-peer network could never do, such as guarantee the quality of a download. When you download a track from us, you're downloading it from our servers; you know what it's going to be, you know what the encoding rate is, you know that all of the tracks were encoded with a quality encoder.

“Just giving you the keys to a big warehouse full of music is not good enough,” Grady continues. “And that's what the peer-to-peer networks do. If you know exactly what you're looking for, you don't really have a problem. A lot of what we're offering is a discovery service: a way for people to find new music that matches their interests at a low cost.”

Some services position themselves as offering everything for everybody, from the casual shopper who might buy a handful of CDs a year to a new-music junkie who is scouting out the latest unknowns and obscure acts. pressplay currently boasts 250,000 songs from the Big Five and 100 indies. “It's for the power user to the novice,” says Seth Oster, pressplay's VP of corporate communications and public affairs. “All of the music's in there, it's extremely easy to use, it's extremely easy to find, it's extremely easy to stream, download and burn.” Added values include six decades' worth of Billboard chart data and prereleases of exclusive tracks. “Right now, we're offering four songs exclusively from Celine Dion's new album,” says Oster. “You cannot get them in stores right now, you cannot hear them on the radio, you can only go to pressplay.” Other features include permanent downloads for less than $1 and unlimited streaming for $9.95 a month.

As sites have developed during the past year, it has become obvious that the quantity of content is of prime importance. Why would consumers visit six different sites to get six different tracks when they could conveniently go to one site and get everything that they wanted? Possessing licensing deals with the major labels and indies has become an important selling point to attract consumers away from the free file-trading sites.

Listen.com's Rhapsody was the first online subscription service to host titles from the Big Five. It offers a variety of subscription options (including a seven-day free trial), with added features such as CD burning and Internet radio access. And to make the experience more user-friendly for paying consumers, sites are partnering up with other companies, i.e., hosting various players. RealNetworks recently invested in Rhapsody, offering its technology to bring the subscription beyond a user's PC. This strategy follows a year-long activity for Listen.com: partnering with consumer electronics companies to bring Rhapsody into consumer's homes, such as connecting a PC to a user's home-theater system. The key is convenience: Consumers want the ability to find music easily, go mobile with their music easily and pay easily.

MusicNet is unique among the services in that it is based on a business-to-business model, providing custom content and programming for its distributors via a software developer's kit; meaning, a site may “feature MusicNet,” but MusicNet.com is not a destination for music shoppers. “We're responsible for acquiring content from the labels — the five majors — as well as key independents,” explains MusicNet's general manager/executive VP Ellie Hirschhorn, “protecting it in DRM [digital rights management]; programming our service, not only making tracks available but also providing editorial; reporting back on the usage to our label partners, as well as our distribution partners — all this non-consumer-interface enablement of the business.”

In what may be the biggest mass-market test of music services so far, MusicNet recently partnered with America Online. AOL's 27 million members are now offered “MusicNet on AOL” as a tier of service integrated into their AOL accounts. “That takes a deep level of customization, which our software developer kit approach allows us to take,” says Hirschhorn. “We also are integrating into the trusted and familiar AOL customer service and billing.” This way, MusicNet is built right into a monthly ISP statement, making payment for the service a relatively transparent (read: easy) experience.

MusicNet also works with individual labels to provide custom artist promotions for its partners. “Much of the content released by labels is proprietary but nonexclusive,” says Hirschhorn. “So they give first looks, first listens, content that comes out before radio, or tracks that didn't make it onto an album. It's not always exclusive, but how we promote it may be very different than how other people do it. So, if AOL Music, for example, is doing an ‘Artist of the Month’ with Faith Hill, we may be able to extend the ‘Artist of the Month’ to an additional window of time [i.e., extending the promotion for an additional month] or we may be able to get related content that isn't available to other distribution partners.”

While many Internet companies are drawing from record-label marketing and promotions expertise to design a profitable and legal digital downloading business, one company has strayed from this line of thought. Last January, Echo was formed through a consortium of mass-market music retailers (including Best Buy, Hasting Entertainment, Tower Records, Trans World Entertainment, Virgin Entertainment and Wherehouse Music) and Echo Networks, a defunct site where users once streamed music files with other users. Unlike most other services (yet similar to the MusicNet model), there is no Echo.com: The individual retailers' Websites will each host their own download service.

According to the founder of Echo Networks and current CEO of Echo, Dan Hart, the agreement allows the retailers to set their own prices, while Echo's mission is to license the best possible wholesale prices from the labels. Hart approached retailers because their marketing capabilities and long-standing relationships with consumers and labels would provide a solid base to enter the market. “The concept is really simple: to try to finally make a legal digital music market work for the mass consumer. For these companies, 10,000 subscribers and 100,000 downloads is not interesting. What is interesting is tens of millions of subscribers and billions of downloads: truly a mass-market phenomenon.”

According to Hart, retailers make approximately 800 million paid CD transactions a year. That translates into 800 million opportunities for a cashier to tell someone about the digital music service and put a starter kit into a checkout bag. “If you've got a million subscribers, hypothetically paying in the $5 to $15-a-month range, you've got anywhere between a $60 million and $180 million annual business,” Hart says.

While Hart sees the dollar signs, he cautions that there are still hurdles to overcome, mainly with content. “Even in the case when you license from all of the labels, you have individual song publishers who haven't cleared their songs. There are still ways in which [the major labels] can go further to embrace the consumer to a greater degree. Maybe the timeline is going to happen faster than they would ideally like, but I think they see it coming. It's a choice of do nothing online and let free file swapping destroy your business, or embrace online and save your business. It's an obvious choice.”

GETTING THE WORD OUT

In the online world of music services, the subscriber is king. While there are plenty of opportunities to pull in secondary sources of revenue — from paid song placement and ad sponsorships to audio-hosting services — most services are banking on subscriptions to pull in the real money. To do that, they need to reach a larger public. Some services say that the best indicator that people are willing to pay for music is the high number of upgrades from free trial to paid service. pressplay, for example, cites a 60% conversion rate. “We've been fortunate that the press coverage of this space has been extremely high, and then word-of-mouth adds some value,” says Oster. “We will be doing marketing this year, not only online but offline, and that includes various forms of media in different parts of the country. It's a revolution of sorts taking place, where the music industry is recognizing that they have to find new ways of marketing themselves and selling their product.”

Listen.com partnered with Lycos Music to offer a “Free Access Week” in February 2003, allowing consumers to test-drive the service. Customers received a 50% discount off of their first three months of service. According to Katie Rae, VP of product marketing for Terra Lycos, which powers the Rhapsody service, “The number of subscribers who have signed up for Lycos Rhapsody has far exceeded our expectations in their willingness to pay for high-quality, value-added services. This promotion makes it even more convenient — and more affordable — for our users to try.” Listen.com also recently dropped its 1-track download cost to $0.49 from $0.99 to compete with other services and to draw in more new users. Dave Williams, VP of product management for Listen.com, says, “More than 75% of people who try Rhapsody become subscribers, so we know that our users are satisfied with the service. Offering $0.49 CD burning lets us reward existing subscribers and provides a great incentive for new people to try Rhapsody.”

The response to MusicNet's AOL partnership (with 27 million potential subscribers) could prove to be the strongest indicator of consumer readiness to join a music service at the terms offered. “Broadly speaking, we believe that the launch on AOL for MusicNet was a huge milestone for us because we got in front of a mass audience with a powerful brand and marketing apparatus attached to it,” says Hirschhorn. “It's the first milestone for the industry: getting in front of a big audience and seeing who's going to pay for this. We're very encouraged by the AOL launch so far: All of those numbers have been skyrocketing, and we really will be able to get concrete data and usage and mapping out of pricing and conversion. But so far, not speaking just for MusicNet but for the whole industry, it's really hard to speak with a great degree of certainty because there's such a limited sampling and time period over which to analyze.”

Of course, the AOL/MusicNet deal is still in its beginning stage, but MusicNet is already setting its sights even higher to expand its distribution base: “We started with AOL and Real [Networks]; we plan on expanding to a variety of other distribution partners that might be outside of the ISP space; in retail, OEM agreements such as with PC manufacturers, cable broadband, media companies and the like.”

NOW, OR IN FIVE YEARS?

What will it take for music sites to succeed in such uncharted territory? In the future, will there be some monolithic, “getall yourmusichere.com” one-stop shop for the entire online music community? Or, will many sites thrive in a competitive marketplace that offers a variety of services for discriminating music fans? Will long-term anti-piracy campaigns ever make a big enough dent in the peer-to-peer file-swapping traffic? It's anyone's guess at this point. But most agree that someone will be cashing in. pressplay's Oster says, “It's very early on, and once we start marketing, there'll be a much better sense of where our customers are. But we know they're out there, and they're out there in a very large number.”

Emusic's Grady muses that this isn't the first time that an existing model's been challenged by new business, “and most of the time, the result is a new revenue stream; in many cases, it's bigger than the old revenue stream. I think that if you're optimistic and you believe for the most part that customers are willing to pay for things that offer them value, then there's a lot of money to be made out there by somebody. So we hope it's us, but I think it's not going to be just us. I think that there's going to be a lot of people that make a lot of money in this area, and consumers are ultimately going to benefit greatly.”


The Sarahs are Mix editors.

MP3.COM: The Musician's Network

As more and more sites join the party, MP3.com continues to do what it has done during the past five years: provide a place for independent artists to set up shop and promote their music. That is where MP3.com differs from the other services: Its business model is built around the artists — 10,000 of them active subscribers — with a variety of services to help musicians get their music out without the costs and hassles in dealing with a major label.

“By the nature of our domain name — our Web address — and all of the content features that we have, we get a lot of traffic, about 20 million visitors a month,” says MP3.com's VP of marketing Mike Matey, who recognizes that value to potential advertisers. “We can target females or teenagers or males over 35 years old; if you want to slice-and-dice the database, we can do that. And there's the e-commerce services, such as selling CDs and artist subscription programs. Our sister site is Emusic [both sites are owned by media conglomerate Vivendi Universal], so we send a lot of customers over there to become subscribers.”

MP3.com has always operated under the philosophy that it is important to have multiple revenue streams by “not tying your cart to one business model,” says Matey. “We've always sold advertising on our site, we've always had e-commerce. We've focused a little more on the e-commerce side because the ad market's been tough lately. But for the most part, that is still a healthy part of our business.

“We know what our active artist base is, we know how many have already subscribed, we know what brings people into the program,” he continues. “We just continue to target the top tier of prospects through our e-mail newsletters, through advertising and through the artist admin area. There's a couple hundred thousand that we're marketing to — to convince them that they need to upgrade. And that is a focus of our marketing efforts, obviously, to increase that subscription base. But we still care about free artists because they provide a lot of value to our Website. They put content up, they tell their friends to check it out, they increase our audience size.”

The site is also building its subscription base by hosting CD-listening parties and recently launched an Internet radio service and an instant-messaging service.
Sarah Jones and Sarah Benzuly

Learn more about the major players in the online music subscription world






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