David Pakman is Wrong on The Price Of Music (and streaming subscriptions)

Is there anyone left in the record business with common sense and a calculator?

David Pakman wrote an interesting piece asserting the problem with streaming services getting up to scale is a matter of pricing. He puts forth that $10 a month, or $120 per year is too much. He claims that the ability of these services to scale should be more in line with a monthly fee of $3-$4, or $36 – $48 a year to appeal to a broader base of the “average” music consumer. We think there are some serious flaws with this line of thinking not the least of which is that we can’t get the math to scale at $10 a month per user!

The first and most important error is that an “average” music consumer does not exist. Sure, you can average the total spending by the estimated number of consumers to find an average per consumer but no “average” consumer actually exists. Some spend many times the average, some spend far below it.

Pakman makes the assumption that music subscription services are over priced citing that the “average” consumer is only willing to spend $64 a year on music.  This completely ignores that the majority of highly active music consumers that have historically purchased much more than the average.

Those working in music distribution have always know that the most active consumers, contribute the greatest percentage of revenue to the total. In traditional terms this would be an expression of the classic 80/20 model where the top 20% of consumers represent 80% of the revenue. Conversely 80% of consumers only account for 20% of the revenue overall. This is of course an over simplification but it illustrates the point being made.

Here’s some simple math. Apple’s iTunes boasted 200 million users in 2011. Using Pakman’s own estimates at $64 per “average” consumer, the store should have generated a cool $12.8 billion in revenue. As we all know that’s not true, it quickly illustrates the problem with Parkman’s methodology of the “average music consumer.” Of course Itunes is not the only music retail outlet, and surely not all of those Itunes users were strictly music consumers. Again this is the problem with attempting to define an “average” music consumer to broader market economics.

Pakman also doesn’t fully account for the fact that while music prices dropped nearly in half from $19.98 compact discs to $9.99 downloads the volume of sales continued to decline. This is a decline that began with the introduction of Napster and has spread through the expansion of ubiquitous illegal file sharing networks such as the now defunct Kazaa, Grokster and Limewire.

The single greatest factor effecting both the price of music and the volume of sales, was and remains the illegally free supply of the exact same product available to consumers without risk, investment or consequence by those distributing it for profit without paying for the cost of goods.

But Pakman may have stumbled upon some other points of interest in his observation. First, is that the music business needs to learn how to window releases and build a transactional streaming model as the film business employs. We detailed this in our post “Spotify is not Netflix, but maybe it should be.” Second, there should tiered access on streaming services. A basic $4 a month subscription gets you the hits, say the top 200 current singles and the top 200 catalog albums. For $9 a month you get the hits plus all music more than a year old. For $20 a month you get everything available.

The narrow band thinking of music industry business people is stunning when we don’t need to look any farther than the film and tv industry to see a robust variety of different streaming products for different consumers needs and demands. The film and tv industry successfully window releases and have different pricing tiers based on access and there’s really no reason why these models would not, and can not translate to the record industry.

 

About Trichordist Editor

Trichordist Editor

2 thoughts on “David Pakman is Wrong on The Price Of Music (and streaming subscriptions)

  1. I fully agree with your views… Considering how much I invest in CDs every year, streaming seems like “a cheap buffet”.

    However, it seems that David Pakman is no longer in the “music industry”; although years ago he was once involved with on-line music retailing through a tech start-up and eMusic. In fact, on his Twitter bio he states: “I invest in internet companies at Venrock, still wish I was a rock star…” Which makes me think of this comment:

    “Rock stardom will die because nobody will make enough money any more to be rock stars.” ~ Noel Gallagher (Oasis)

  2. The film and TV industry’s practice of window releasing and tiered pricing is under serious and sustained pressure from consumers, whose ridiculous expectations are based on what happened to the music industry. The root problem here is that people are happy to value the online experience, and pay for devices that deliver it, but somehow the music and films they want have become equated with dirt, and air, and water … something that’s all around and either cheap or free. This illusion is disrespectful and highly destructive to the creative community.

Comments are closed.