Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Friday, February 04, 2005

iPod vs Napster

The Reg has a long piece on Napster vs iTunes/iPod, concluding that (surprise) Napster sux. The analysis basically breaks down Napster's new subscription model vs iTunes pay-per-download model.

"...Let's take a look at consumer A. This consumer goes to and does a search for Creative - one of the Napster supported music device makers - and picks up a 20GB player for $249.99. Let's assume he keeps the device for three years, paying Napster all the time. That's $538 for the Napster service, bringing the three-year total to $788.19.

Consumer B types iPod into the search engine and finds a 20GB device for $299. Apple doesn't offer a subscription service, so this customer has to buy songs at the 99 cent rate or at $9.99 per album. Subtracting the price of the iPod from the $788, consumer B would have $489 left over for music. That's roughly worth 489 songs or 49 albums.

...The big difference here is that after the three years are up, Consumer B has something to show for his investment. He still owns the music. If the Napster customer stops paying for the service, his music is all gone. He's paying $179 per year to rent music. This isn't high quality stuff either. It's DRM (digital rights management)-laced, low bitrate slop."

There's kind of a big problem with this analysis - it's a good example of how not to think strategically. Consumer B (iTunes/iPod) also 'owns' something else that Consumer A doesn't (Napster) - a big fat opportunity cost. He owns the music he buys, but he loses out on costlessly being able to switch to new music he might like.

That's the obvious benefit of a subscription model - what we usually call bundling. Now, the real question is this: on average, are the gains minus the opportunity cost of subscribing greater than the gains minus the opportunity cost of owning?

If they are, people will subscribe. If they're not, people will own. When might the equation be tipped in favor of subscribing? Well, when the market's heterogeneous on some dimension - when different people have different preferences, or when the same person's preferences change (often).

Napster's play - I'm not saying it will work - is quite clearly predicated on these simple microeconomics. To ignore them misses the entire competitive dynamics in this space. There are plenty of reasons to think Napster's gonna buy it...but this article doesn't talk about 'em.

-- umair // 1:39 PM // 3 comments


This debate about subscription vs. purchase misses the point that the music consumer is unlikely to make a binary choice to subscribe or buy. They will do both, which will be good for both models. Personally I see a good parallel example in the growing popularity of DVD rental subscription services which offer the ability to consume a very large and variable quantity of movies, TV, etc at a fixed monthly cost. The effect for me has been that I a) watch a greater volume of films b) am more likely to take a chance on ordering films that are outside my typical range c) which, mostly significantly, has the effect of prompting me to buy a larger volume of DVDs (usually from the supermarket these days) overall as I want to keep the really great movies permanantly to hand.
// Blogger James P // 3:55 PM

Think also of the cost to the artist. How much money are they going to make and lose. If the artist releases the song to napster and itunes at the same time. He's going to get more back from Itunes. Both up front and in the long term. At first the subscription model will attract people looking for the 10,000 tunes on their player. Divide 14.95 by only 1,000 tracks to find out how much Napster gets per song per person. 1.5 cents per song . From that I guess they would have to pay rights holders, the record company, Napster and finally the artist. So the artist may be getting .3 (20%) of a cent per month for each track. Assuming you have 100,000 people down load you track you as an artist make $300 from the deal per track/month. Over a year you make $3600 per track from 100,000 people. Or 36,000 per year for an album (10 songs).
Please someone tell me my math is wrong. I don't believe it. I've got to be missing something.

And that artist has essentially stopped that person from buying the album because he's heard the song. and may only end up buying one song. there's still pride of ownership. . And then the subscriber stops and says to himself why am I paying to sample music when radio, internet radio, music television and tons of other promotion is free. And these are the legal ways of doing business.
While your article asks what's in it for the consumer please write another article about what's in it for the artist. I've got to be wrong
// Anonymous Anonymous // 4:08 PM

To me the subscription model seems more to the benefit of Napster in that they maintain a steady revenue stream from subscriptions than to the benefit of the consumer who could potentialy wind up with nothing from his or her investment (of both time and money)if either (a) she no longer maintains her subscription or (b) a software and/or computer glitch causes her subscription to lapse or get canceled and everything she has rented up to that point is gone. Digital downloads are fine for the diposible crap that sometimes goes for music these days but owning the physical CD, or being able to burn my digital files that are unecumbered by DRM that I have paid for to CD to me seems to make much more sense.
We shall see how it all plays out this year.
// Blogger Mark // 5:56 PM

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