By Richard Menta 9/30/02
Ipsos-Reid came up with some interesting findings this week in their continuing research on digital music. The results have significant implications on the market viability of fee-based online music services as the company set out to measure the potential buying habits of people who actively download music from the Net.
Ispos-Reid measured the attitudes of file traders under two scenarios, the first under present conditions with P2P services like KaZaa and Morpheus operating unencumbered. The second had free peer-to-peer services removed from the simulated market. Data for this release was collected between July 19 and August 2, 2002, via a U.S. sample of 690 downloaders aged 12 and over.
In the first scenario, Ispos-Reid found that 27% of file-traders indicated a preference for obtaining music through a fee-based online offering over others as their primary way to obtain music, including over the free P2P services. Furthermore, of those who prefer the pay online offerings, more than two-thirds prefer a pay-per-download scheme v. one-third for a subscription scheme. The results are as follows:
Simulated Market #1 - Free P2P services exist
47.9% - Free P2P service
24.8% - Traditional Retailer/E-Tailer
19.2% - Pay-per-download option
8.1% - Paid subscription download service option (split among 3 types of subscription services)
Ipsos-Reid next took the same scenerio, but removed the pay-per-download option for purchasing online files. The result, the proportion of users willing to pay for digital downloads dropped from 27% to 12%.
"With all of the recent media attention surrounding the market viability of recently launched fee-based online music services, these findings indicate that many downloaders will indeed pay for online music, but prefer a transactional payment structure over one that is subscription-based," said Ipsos-Reid senior research manager Matt Kleinschmit in a company press release. "Perhaps a pay-per-download service best represents the ownership and portability they are accustomed to in current peer-to-peer offerings, and a subscription-based service is too radical of a paradigm shift in the way these individuals think about acquiring music."
What these results show most importantly that even with the availability of free music on the Net vis P2P, there is a healthy proprtion of file traders who would consider paying for digital downloads too. So how come the subscription services like Listen.com and PressPlay have floundered so far? Part of it may be explained by the fact that they are subscription services and thus may need to shift their strategies to a pay-per-download scheme. I suspect the other part has to do with the mediocrity of their offerings.
Why should consumers pay for digital downloads if a) the price is to high, b) the music selection is too limited, c) what users can do with the files once obtained are too restrictive, d) the process of aquiring the files is inconvenient, e)the quality of the actual music file obtained is no better that what the free services offer, and f) a myriad of others issues and complaits that make these services less compelling? What the data above states is that there is a great potential to make some significant revenue if the pay music service would only compete directly with free P2P services, leveraging their limitations.
Pricing in itself could make up much of that ground. Some site have already gone the pay-per-download direction, charging $0.99 a single for the music they offer online. For a 12 song CD, that price comes to just under $12 dollars, quite a bit less than the $19-$20 list price of today's CDs, but about $4.00 more than what you can buy a used CD for. I use the used CD example because the sonic quality of a CD is superior to that of an MP3 or WMA file. $0.99 a single may sound reasonable, but I say at that price it misses an opportunity.
I say that for a couple of reasons. Last year in an article called "6 CD's" I suggested the music industry use the pay-per-download scheme as a way to create a tiered pricing structure ala the movie industry and video rentals. When you see a flick in the theaters you pay $8.00 a person. At that price all of us are pretty selective about how often we see movies this way in a given year. For $3.00 you can rent the tape and have the whole neighborhood watch it with you. The low price structure allows us to broaden the array of movies we see by making it more affordable to watch flicks in volume. It also reduces the risk of monetary frustration when we find ourselves paying for a product that turns out to be a stinkeroo (like some of the CDs we spent $20 on). The end result is that video rentals bring in greater revenue to the movie industry than theater revenues because they offer a second chance for those movies who didn't make the "theater" cut.
Past research shows that a significant portion of file traders purchase the same, if not more, music than non-traders and use the free P2P services to mostly sample music before they buy. One of the biggest complaints of CD's by consumers comes when they buy a CD based on what they think is a great single, only to be disappointed by the rest of the music on it. A cheap online download price reduces that risk, both because users can make their purchase by the single and because the cost of picking (and paying for) a bad song is minimized.
Reduce shopping risk and you can entice buyer to your wares. So how much should that figure be? Back in that article that I wrote last August I suggested about $0.10 a single:
Put six CDs in a customer's hand and they'll pay $90 and be done for the year. Put 100 high quality MP3 singles in their hand and they might pay an additional $10 a year to expand on - not replace - the six CDs they bought. That's $700 million in additional revenue if we just talk about Napster's 70 million former users. $1.4 Billion if those users decide to download 200 songs, etc.
Simulated Market #2 - Free P2P services made unavailable
48.8% - Traditional Retailer/E-Tailer
37.6% - Pay-per-download option
13.6% - Paid subscription download service option (split among 3 types of subscription services)
Take away the free services and file traders have no choice but to pay. What is interesting is that about half would choose paid online downloads services over CDs. Ipsos-Reid estimates that there are 40 million active file traders in the US alone. That is a big slice of the music buying audience.
"This clearly demonstrates that while fee-based online music services (and pay-per-download models in particular) can certainly lure some downloaders into paying in the current market context, these services could truly flourish if the presence of peer-to-peer websites were eliminated or greatly diminished in the market," said Kleinschmit. "And a low-cost pay-per-download service that offers a robust music catalog and file ownership will be well positioned for this market scenario."
Piracy is not the number one reason why the record industry wants to eliminate the free P2P services. New CD sales have dropped, that's true, but marginally. Used CD sales meanwhile have skyrocketed.
The truth is free P2P services are not competition to CDs as they seem to serve a role more akin to radio in promoting music. What they are is competition to a potentially lucrative new pay-download mechanism that the record industry hopes to own for themselves. If digital downloads are to make up a significant portion of sales, the writing is on the wall.
Think if the record industry owned all the paid radio mechanisms, like cable and satellite radio, and found they could shut down all the free broadcast radio stations. In their eyes the free radio stations would shift from a promoter of their wares to a competitor. Eliminating free radio would drive listeners to the pay services just like eliminating free P2P will - if Ipsos-Reid is correct - drive file traders to paid download services. Detroying free radio would become a record industry directive as revenue would almost surely increase - as it usually does when choices are limited.
The radio industry is too powerful for that fantasy to happen, but a nascent industry like Net music is quite susceptible. The record industry has already made significant strides in controlling Net radio, raising the barriers of entry making it prohibitally expensive for all but well-funded corporations like AOL-Time Warner, a company who also happen to be one of the big five record labels. The free P2P services are a much more mobile target than Net radio, but vulnerable nonetheless as the shut downs of Napster and Madster will attest to.
Look for the record industry to spend even more time in the courts and in Washington to bust up the free P2P services. If Ispos-Reid's methodology is accurate, the stakes just went up.
You can see graphs of the results here
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