Labels and eMusic: Making it up on volume

Hypebot seems to engaging in a mild form of eMusic deathwatch lately, this time questioning eMusic’s apparent success in adding new subscribers and labels. At the moment the discussion seems to center around the issue of per-track payouts from eMusic vs. payouts from the iTunes Store and other digital music stores. In particular, the article quotes one label owner complaining that he gets only $0.17 per track from eMusic vs. $0.69 per track or more from other stores. Previously we heard similar complaints from Tony Brummel of Victory Records, questioning why eMusic would want to introduce new subscriber plans offering tracks at $0.25 per download. Hypebot seems to share these concerns:

…how will increasingly savvy artists and managers react when they understand that eMusic is in effect selling their art at a deep discount?

Attention label owners: May I suggest you stop obsessing about per-track payouts, and start looking at your total revenue and profits instead? You guys are worrying about the size of your penises when you should be worrying about how much action you’re getting. As noted in the Hypebot article, eMusic downloads account for a significant fraction of some labels’ overall digital music business. Suppose your dreams came true and eMusic guaranteed payouts comparable to the iTunes Store, raising its prices to make that possible. Do you think your eMusic business would remain the same? If so, please think again. People download more music from eMusic because it’s cheaper than from alternative (legal) sources. Make that music more expensive and they’ll buy less of it. If business drops off far enough then you’ll be worse off overall even though your per-track payouts are improved. This is just economics 101, folks.

Here’s a homework assignment for you: Go to Amazon and buy a copy of Information Rules. Turn to Chapter 2, Pricing Information, especially the section beginning on page 37 relating to product pricing. Note that what you are doing with your eMusic relationships is essentially a form of price discrimination: You are offering lower prices to a particular set of customers, those who listen to a lot of music, are relatively price-sensitive, and are willing to put up with the cumbersome eMusic subscription model in exchange for a good deal. By doing this you are potentially making more money overall than you would if you sold digital music under a one price fits all model. I realize that digital music doesn’t fit the ideal model for information goods because your marginal costs per unit are not zero, due to mechanical royalties and other factors. However as long as your per-track payout is high enough to cover mechanicals and other per-track costs, you should be able to take advantage of differential pricing schemes to get incremental revenue and profits you might not otherwise have seen.

Note that this applies to Amazon as well as to eMusic: I previously predicted that Amazon might want to sell digital music as an incremental add-on to CD sales, with pricing that allows people to buy both the CD and the downloadable version at a significant discount to buying both separately. If Amazon wants a lower wholesale price for digital tracks sold in this scenario then I suggest you seriously consider doing just that. I think you would see significant incremental new business with minimal or no impact to your existing digital sales.

Update: The great folks over at the eMusic message boards come through again; check out this thread for lots of informed and passionate commentary.