Warner Music is toying with the idea of charging everybody with an online connection $5 per month, and users can download unlimited music. With 150 million online households that would be ~ $9 billion per year in the US, collected by the ISPs, which can significantly improve margins. Colleges have about 32 million students – another $2 billion. At workplace, people listen to music - that's another 138 million – with 50% conversion, this is another ~$4 billion. In total, $15 billion per year that can put the music industry back on track, and that's just the US! Well, at least this seems to be the rosy version.
Ironically, a similar idea was rejected when a proposal was made in 2004 by the Electronic Frontier Foundation. The idea has re-surfaced, and with a very different music industry outlook, it certainly looks a lot more attractive to the labels than it did last time around. The concept of collecting a flat fee for unauthorized use of music is not new. The idea was developed in France in 1851 as a way of reimbursing composers whose work was being performed without permission in public venues. Nor is the idea new to the US: it has been used in the radio business since 1914 and also applies to webcasts and live performances. However, not everyone believe a flat music charge is a good idea. In fact, in many parts of the internet sector the new proposal may appear like a tax. In fact, some people might think that a dose of reality in the music sector wouldn't be such a bad thing.
The idea of a flat charge is not without appeal – and it might get some traction with the ISPs. What if you had the option to take broadband at say $30 per month with an agreement that you could only use limited P2P services but could pay $35 per month for service with unlimited P2P? The ISPs would want a cut, arguing that they would incur incremental capacity costs, but unlimited legal P2P – or even P2P that the ISP could throttle back at peak usage times – would be hugely attractive to the online public. So much so, that a large number of the users would likely go for it. The idea also lends itself easily to tiering and bundles – the cable guys' favorite. Say $5 per month extra for "managed" P2P, but $6 per month for unlimited P2P, and so forth. But if the regulations were managed well, the user would still have the choice and not be obligated to buy something that they didn't really want. Despite Microsoft's near abandonment of the DRM software that allows P2P services to exist, Real Rhapsody, Napster and Yahoo! Music are still managing. And, we must draw a distinction here between the subscription services and Apple iTunes – which is still a pay to download model.
Subscription services account for approximately 18% of the online market, and this might increase dramatically if Apple introduces a music subscription service as expected in H2 of 2008. The problem is, what happens to these services if the industry goes over to all-you-can-eat pricing? Possibly they would be able to adapt, at least to some degree but their role would change. Presumably, somebody would have to negotiate with splits with the bands, compile playlists, provide the music playing software to users etc. Apple is also rumored to be considering an all-you can-eat music service by charging a bit more for an iPod – say $100. If we assume that an iPod has an effective consumer life of 2 years, the extra amount works out to around $4 per month – not far from the suggested $5 per month by Warner Music. But given the potential pool of 115 million worldwide an additional $100 per unit would be some serious incremental cash – another $11.5 billion potentially.
At first blush, all-you-can-eat movies for a fixed price looks attractive – certainly to the consumer. But the concept is fraught with challenges. The MSOs and Telcos have invested a fortune in providing pay-per-view services of their own. And these services work pretty well too. The interface may leave something to be desired, but we can attest to the fact that Time Warner Cable has a fairly compelling movie-on-demand service. Would they forego $4.99 per movie for an all-you-can-eat package charged at the average pay-per view movie take rate? Time Warner Cable might actually like it because it eliminates billing and fair amount of customer service, but HBO probably wouldn't. Who would pay extra for a movie channel if you could have any movie any time direct from the cable provider? Provided users are not "taxed" by charging everyone in a service pool, the idea of flat rate pricing for music and possibly movies has a lot of potential. It might be one of the very few business models that could actually work online and still fit within business models of the existing players, albeit with some adjustments. The concept is not without precedent online either. Many would argue that the consumer internet was really born when AOL introduced flat rate pricing for dial-up access to the internet. AOL definitely is the one to keep an eye on , going forward.
Ironically, a similar idea was rejected when a proposal was made in 2004 by the Electronic Frontier Foundation. The idea has re-surfaced, and with a very different music industry outlook, it certainly looks a lot more attractive to the labels than it did last time around. The concept of collecting a flat fee for unauthorized use of music is not new. The idea was developed in France in 1851 as a way of reimbursing composers whose work was being performed without permission in public venues. Nor is the idea new to the US: it has been used in the radio business since 1914 and also applies to webcasts and live performances. However, not everyone believe a flat music charge is a good idea. In fact, in many parts of the internet sector the new proposal may appear like a tax. In fact, some people might think that a dose of reality in the music sector wouldn't be such a bad thing.
The idea of a flat charge is not without appeal – and it might get some traction with the ISPs. What if you had the option to take broadband at say $30 per month with an agreement that you could only use limited P2P services but could pay $35 per month for service with unlimited P2P? The ISPs would want a cut, arguing that they would incur incremental capacity costs, but unlimited legal P2P – or even P2P that the ISP could throttle back at peak usage times – would be hugely attractive to the online public. So much so, that a large number of the users would likely go for it. The idea also lends itself easily to tiering and bundles – the cable guys' favorite. Say $5 per month extra for "managed" P2P, but $6 per month for unlimited P2P, and so forth. But if the regulations were managed well, the user would still have the choice and not be obligated to buy something that they didn't really want. Despite Microsoft's near abandonment of the DRM software that allows P2P services to exist, Real Rhapsody, Napster and Yahoo! Music are still managing. And, we must draw a distinction here between the subscription services and Apple iTunes – which is still a pay to download model.
Subscription services account for approximately 18% of the online market, and this might increase dramatically if Apple introduces a music subscription service as expected in H2 of 2008. The problem is, what happens to these services if the industry goes over to all-you-can-eat pricing? Possibly they would be able to adapt, at least to some degree but their role would change. Presumably, somebody would have to negotiate with splits with the bands, compile playlists, provide the music playing software to users etc. Apple is also rumored to be considering an all-you can-eat music service by charging a bit more for an iPod – say $100. If we assume that an iPod has an effective consumer life of 2 years, the extra amount works out to around $4 per month – not far from the suggested $5 per month by Warner Music. But given the potential pool of 115 million worldwide an additional $100 per unit would be some serious incremental cash – another $11.5 billion potentially.
At first blush, all-you-can-eat movies for a fixed price looks attractive – certainly to the consumer. But the concept is fraught with challenges. The MSOs and Telcos have invested a fortune in providing pay-per-view services of their own. And these services work pretty well too. The interface may leave something to be desired, but we can attest to the fact that Time Warner Cable has a fairly compelling movie-on-demand service. Would they forego $4.99 per movie for an all-you-can-eat package charged at the average pay-per view movie take rate? Time Warner Cable might actually like it because it eliminates billing and fair amount of customer service, but HBO probably wouldn't. Who would pay extra for a movie channel if you could have any movie any time direct from the cable provider? Provided users are not "taxed" by charging everyone in a service pool, the idea of flat rate pricing for music and possibly movies has a lot of potential. It might be one of the very few business models that could actually work online and still fit within business models of the existing players, albeit with some adjustments. The concept is not without precedent online either. Many would argue that the consumer internet was really born when AOL introduced flat rate pricing for dial-up access to the internet. AOL definitely is the one to keep an eye on , going forward.
With inputs from Jeff Lindsey in NY, April 2008
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