NEW PRICING MODELS FOR ONLINE MUSIC IN USTEAM WOWMIT StudentsAgenda• Status Quo• Economic Models & Supporting Evidence• Other Interesting FindingsStatus Quo: Digital music content is not currently freeDigital music is reaching consumers through a variety of online servicesSubscription: User periodically pays a set fee for unlimited access to digital music library (E.g. Rhapsody)Pay per song: User pays a fee for each song downloaded or listened to (E.g. iTunes)Free streaming:User listens to music for free but with limited choice and song management (E.g. Pandora)Digital music content is not currently free; end users or third parties such as advertisers acquire this content for a costOur HypothesisContentServiceOther subsidyDigital music content will eventually be free to all partiesConsumers and third parties will pay for services offered instead of contentOther subsidy and complementary products will compensate the free content model as well“Service” examples: higher quality music, better music library management, faster download speed, etc.“Other subsidy” examples: live concert tickets, star labeled products, ads., etcAgenda• Status Quo• Economic Models & Supporting Evidence• Other Interesting FindingsEconomic Model (1/2): Why Content Should Go FreeDemand for Free Information GoodsMarginal cost of Production  0Cost of Distribution  0PQ0Delta Q is significant whenP = small becomes P = 0{Image by MIT OpenCourseWare.Economic Model (2/2): How Can Service Back-upMore eyeballsInfluencing powerFreemiummodelAdvertisingmodelCross-subsidy modelExisting Examples of Free Online Music ContentCategory ExplanationExample• Online music sharing sites• Freemium + Ads. model• Provide paid upgraded subscription service, , insert ads. into the website, and profit share with iTunes when users purchase songs• Ads. Model• Insert ads. into the content, and share profits with record labels, rather than paying royalities• Pandora (free music radio)• Baidu (free music radio + download)• Some individual artists• Cross-subsidy model• Generate buzz by offering music for free, and gaining revenue from complementary goods, like live concert tickets, posters, movie shows. etc.Existing Examples of Free Online Information GoodsCategory• Some streaming media sites• Other online info. goods providers, Explanation• Ads. + labor exchange model• Users upload videos for sharing, and youtube inserts ads. for revenue• Ads. +Freemium model• Provides genuine and high quality content. Insert ads. into content and charge through subscription model to certain users• Ads. + Freemium model• Insert ads. into content and charge through subscription model to certain users. • WSJ has to go free to maintain its influencing power in the business news areaExample• Youtube, • Hulu• WSJ websiteWhat We Heard From ~10 Interviews“Music will be supported by advertising in the future” –Amazon Music employee and former record label employee“Free music content can benefit all in the industry. We don’t understand why they are not free ” – Former Microsoft Zuneproduct manager“Digital music will eventually move towards cloud services, and may one day be free” – Consultant in digital media“Online music is changing the way the entire industry thinks about making money” – Former employee of investment firm specializing in mediaWhat We Found In Literature Research“There are plenty of artists like Radiohead who understand the value of Free in reaching a larger audience of people who may someday become paying customers in the form of convert attendees., T-shirt buyers, or even-gasp-music buyers......the traditional record labels, who blame Free for their ills......but it is a mistake to equate the label’s interests with those of the music market at large......some of the smaller labels are innovating more successfully, often by using Free in some form or another “• Chris Anderson, author of “Long Tail” and “Free”“Recorded music will largely be little more than marketing collateral.”• Michael Arrington, Founder of TechCrunch“Internet services being sued will be embraced as ways to get the word out on hot new music.”• Michael Arrington, Founder of TechCrunchObstacles To Make Online Music Content FreeRecord Labels will fight hard to maintain their control over the industry, and are never willing to give free contentDistributorsUsersRecord LabelsAgenda• Status Quo• Economic Models & Supporting Evidence• Other Interesting FindingsSome Wide Thought To Clear The WayVertical Integration – one company owns both content and servicesCloud Musico Music is not owned, it is "simply there“o Subscription fees support record labels and give users access to all musico Heavily depends on reliable internet for mobile devicesQ & AMIT OpenCourseWarehttp://ocw.mit.edu 15.567 The Economics of Information: Strategy, Structure and PricingFall 2010 For information about citing these materials or our Terms of Use, visit: