Amazon predictions, part 1: The future of online music stores?

4 minute read

When considering the possibility of Amazon buying eMusic, one of the things I think is most interesting is the potential impact of having a single major online music store sell both CDs and DRM-free digital tracks in an integrated way, and how that might affect the way both CDs and digital tracks are sold and perceived. (Smaller services such as Magnatune have provided such a combined offering already; however, with all due respect they’re not Amazon, one of the top five music retailers. Also, both Wal-Mart and Best Buy sell both CDs and digital tracks online, but not in an integrated manner.) I’m also excited by the possibility of bringing Amazon’s many industry-leading features (reviews, recommendations, etc.) to the digital music market. Although the rumored Amazon/eMusic deal may never come off, it’s still fun to speculate how it might lead to new sales and pricing models in the music industry.

(Note that I’m assuming here a relatively incremental model of change, as opposed to the sort of wholesale revolution like that envisioned by people like Bob Lefsetz, e.g., in his recent April Fools Day post. However many of the changes I’d like to see will likely require changes to the complicated world of music licensing, including minimizing payment of double royalties when a given customer purchases a given work in multiple formats.)

Traditionally CDs and digital tracks have been seen as competing products: Someone who downloads a digital track (via a paid service or P2P) is supposedly one less CD buyer, and someone who buys a CD will presumably rip digital tracks from it on their own and not pay for them separately. Thus the perception arose that a rise in digital sales inevitably accompanies a decline in CD sales, leading ultimately to the death of the CD. However I don’t see this as inevitable at all. I see CDs and digital tracks as two different but complementary forms of the same product, with a given customer buying either or both. What I do see as doomed are the traditional pricing schemes and sales models for CDs and digital tracks.

Let’s start by putting aside the views of music labels, publishers, and retailers, and instead adopt the view of the customers (who after all will ultimately drive the direction of the music industry). From the customer’s point of view digital downloads are attractive for their convenience and immediate compatibility with digital music players: You can buy a digital track or digital album, download it, and transfer it to your iPod or other device, with the whole process taking just a few minutes. On the other hand CDs are attractive as mementos (especially CDs with more elaborate artwork and packaging) and for their usefulness as a tangible backup of the same music in digital form: You can keep a CD for use if you ever need to have the digital music in a different format (e.g., MP3 vs. AAC vs. FLAC) or in case you lose your digital copy entirely, e.g., due to accidental deletion or a total disk failure.

Buying a CD doesn’t preclude wanting the same album in digital form, or vice versa. Indeed everyone buying a CD and ripping it is an example to the contrary, as is everyone burning a CD from digital tracks they’ve purchased. It’s simply that customers purchasing music in one format are not paying for the other format, in large part I think because the current business models for selling music make it too inconvenient and expensive for customers to do so.

Next, consider the fact that CD prices and digital album prices are converging: As noted in a Digital Audio Insider article, for many releases Amazon CD prices are comparable to or even lower than iTunes digital album prices. You still have to account for the cost of shipping, but this matters less than one might think. For many people this makes it hard to justify paying for a digital album vs. buying a CD and ripping it, and will likely lead to pressure to lower the prices of digital albums. (Of course eMusic customers already live in this world, where typical albums cost from one to five dollars depending on the customer’s subscription plan and number of tracks on the album.)

Finally, the one size fits all pricing model of the iTunes Store and other services seems to be breaking down, with the introduction of variable pricing for different formats (e.g., $0.99 for DRM-protected tracks on the iTunes Store, vs. $1.29 for higher-quality DRM-free tracks), to be possibly followed in the future by variable pricing based on other factors. Steve Jobs to the contrary, I think customers are perfectly able to understand variable pricing schemes and perfectly willing to accept them as a standard business practice. After all, they’re prevalent in practically every business people are familiar with. (For example, people who buy DVDs know that they’ll pay more for a current hot movie than for something their parents watched while they were in high school.) At the same time customers don’t want to be ripped off by pricing schemes that in essence force them to buy the same thing twice.

Based on the above thoughts and others ideas about how Amazon could leverage its existing features and technologies, I’ve come up with a number of blue-sky predictions for a hypothesized Amazon/eMusic offering. (Of course Amazon or even some other digital music store might do this in any case, eMusic acquisition or no, but this is an eMusic blog so I have to bring it in somewhere!) Note that this is all fevered speculation and nothing more; I do not have any inside information about a possible Amazon acquisition of eMusic, nor about other future plans of Amazon or eMusic.

For reasons of length I’ve split this article into multiple posts; my next post predicts how Amazon might sell digital tracks, digital albums, and CDs as complementary offerings.