People Aren’t Funny

With the arrival of Beats Music on the scene last week, it’s getting pretty crowded in the category of subscription-based, on-demand music services — a field that also includes Spotify, Rhapsody, and Rdio, all of which are trying to convert customers away mainly from the MP3 purchase model offered by iTunes and Amazon.

In this recent Billboard article, my friend Sam Milkman (formerly APD of K-Rock/NYC back in the Steve Kingston era, now a researcher with a sister firm of Coleman Insights) explains why consumer spending on music downloads didn’t skyrocket with the launch of iTunes Radio.

His answer, based on interviews with consumers in Philadelphia and Raleigh, is that  it’s because iTunes Radio is used just like other forms of personalizable online radio. (It’s just as easy to use a “Buy” button on Pandora or Slacker or AccuRadio or whatever as it is on iTunes Radio.  So, no big difference.)

(Incidentally, I’m sure most webcasters could make their “Buy” buttons more effective, giving them greater prominence, supporting them with sweepers and promos, and so forth, but the record industry, not perceiving webcasters to be the promotional partners that they really in fact are, has shown little interest in working on joint promotions or otherwise incentivizing webcasters to play up those buttons.)

But the bigger question in Sam’s article is: Why were MP3 track sales down about 13% year-over-year in Q4 of 2013 (which I would guess means down about $100-million for the quarter)?

And the answer is: Because on-demand music subscription sales are up, by what I would guess is about $100-million or more.

That’s the short answer.

The longer answer has to do with the fact that people (i.e., consumers) are, on the whole, serious and rational.  They are not funny (please enjoy my Art Linkletter reference for the week) or irrational beings. With their financial decisions (especially when you get into the recurring >$100/year range), people tend to be serious.

Think about it:  What type of individual is most likely to spend $120 to $180 per year on an all-you-can-eat music subscription service?

Answer: The type of person who has been spending MORE than $120 to $180 per year on CDs and MP3s!

If the Spotify/Rhapsody product works, a subscriber to the service will quit buying MP3s and CDs.  Thus, as revenues of the former category go up, revenues for the latter categories will almost inevitably go down.

What’s more, in the early days, the financial dynamics are worst:  It’s the guy who’s been spending $500 per year on CDs and MP3s that will be most highly motivated to sign up for Spotify first.

In the long run, as many others before me have pointed out, music subscription services could be a good deal for labels and artists, assuming the mass market (i.e., the type of people who had only been spending $24 or $30 per year on CDs and MP3s) embraces the idea of unlimited access.

But given the fact that people are largely rational, it should come as no surprise that there are not magic billions of new dollars of consumer spending on music appearing instantly.