Brief History of Music Pricing

The music industry is composed of basically 3 structures that shape the dynamics of
this industry. Composers and songwriters create songs, lyrics and perform live on
stage. This is recorded and distributed to customers or licensed for some other use.
This structure has divided the music industry in 3 parts: the recorded music industry
focused on recording and distribution of music to consumers; the music licensing
industryprimarily licensing compositions and arrangements to businesses; and
live musicfocused on producing and promoting live entertainment, such as
concerts, tours, etc.
Music Artists earlier required the support of a record label to produce, promote and
distribute music. However the pricing mechanism was more based on historical
prices rather than competition. Artists signed exclusive contracts with record labels,
which enabled the record labels to charge retail price levels consistent with how
much a customer is willing to pay rather than the quality of the music, resulting in
consistent pricing strategies.
In the 1960s, the distribution of music in the form of albums gained ground. Record
labels created music bundles that increased its fan-following. This gave the record
labels an opportunity to raise prices for additional content. However, the pricing
mechanism for full-length albums stayed relatively consistent across albums and
artists regardless of its quality or popularity. A highly popular music album had the
same cost structure as an unpopular one. Many releases were not able to recover
their upfront production costs. Consistent pricing strategies made matters worse.
Record labels had to rely on the success of a few albums to make up the losses
incurred by a majority of unpopular releases.
The growth of digital Music
The music industry has experienced significant changes in the past decade with the
growth of internet and digital distribution. It all started with the launch of a file
sharing service called Napster by Shawn Fanning that allowed users to download
and share music without compensating the recognized rights holder. However, it
was eventually forced to shut down by music industry. This service ushered in a new
era of music digitization.
The first company that was able to create a successful online service for legal sales
and distribution of music was Apple, through its service itunes Music store. Apple
was able to convince the major labels that music consumers would buy music
legally if they were offered an extremely simple service that allowed them to buy
and download music for less than a dollar per track. The retail sales of recorded
music in United States dropped from US$13 billion in 1999 to US$10.6 billion in
2003[1]. During the same time, Apple iTunes customers expanded from 861,000 in
July 2003 to 4.9 million in March 2004 [2], signaling the popularity of digital music.
The music industrys digital revenue grew by 4.3% in 2013 to US$5.9 billion.
Globally, digital now accounts for 39 percent of total industry global revenues and in
three of the worlds top 10 markets.

Current digital Music pricing

Shapiro and Varian [7] describe three strategies for pricing information goods:
versioning, bundling, and fixed-fee pricing. Bundles of digital music tracks can be
purchased for a fixed price. These are either a full album from one artist or some
compilation of tracks compiled by the service provider. Altinkemer and
Bandyopadhyay [6] demonstrate the application of flexible bundling strategies for
digitized music based on an economic model. Different prices for different versions
of digital music have also started to surface. For example, BuyMusic from Buy.com
provides 256 kbps songs for a premium price. Also, many online digital music
retailers offer full-content or partial-content try-before-buying versions with lower
audio quality. Previously, Naxos (www.naxos.com), a leading discount classical
music label, provided full download capabilities for individuals, although recently
they have altered their strategy to only permit potential customers to download
25% of the total content. Music versioning is also being considered in the physical
CD market. BMG Germany began testing a new pricing model by offering three-tier
versioned CDs: a 9.99 low-quality version with no cover art; a 12.99 mediumquality standard version; and a 17.99 high-quality version with bonus tracks and
online extras (www.bertlesmann.com)
Moorthy and Png [3] suggest that offering multiple versions of a physical good
allows retailers to reach a market segment that may not already be served, yielding
higher profits. Riggins [4] extends their model to an information good setting with
tiered Web sites. However, the same characteristics of information-based goods that
allow for easy versioning also allow unscrupulous users to violate copyrights by
engaging in piracy activities. Wu et al. [5] have argued that it is even possible to
fight the piracy of information goods with versioning. Still, versioning may become
an effective tool in digital music pricing and marketing because it promotes selfselection.
There are two basic pricing strategies for digital music: song based purchase pricing
and subscription services. Itunes was a pioneer in song based pricing mechanism by
offering a simple service to buy and download music for less than a dollar. In 2013,
iTunes Music Store was the worlds largest music retailer (offline and online) and it
had sold more than 25 billion songs since its launch in 2003. Apart from the digital
download service provided by itunes, more radical legal music services also came
into picture. These services did not offer individual tracks at a set price, but offer
the user access to a large music library which they may listen at their leisure. The
users normally pay a monthly subscription fee that allows them to listen to as many
songs in the library as they want, how often as they want.
However, these access-based music services have struggled to convince record
labels to license their catalog to their services as well as convince users to enjoy
music without actually buying and owning a copy of the track or album. The
challenges are certainly considerable but the music service that so far has received
the most attention of the international music industry and the one that could
possibly have found the right path is a service called Spotify. It has been able to
transform the mindsets of both users and rights holders and will most likely be a

music technological milestone on the magnitude of the Walkman, the Compact Disc,
and Apple iTunes.
Spotify model was an ad-supported music service that would be free for music
listeners but the ads would generate revenues for licenses to copyright holders.
Over the years Spotify has moved from being a service solely funded by
advertisements to a more advanced version, which is funded by subscription fees
also.
Spotifys model with two or more different service versions where the most basic
version is free and the more advanced versions are offered on a subscription basis
is usually called freemiuma play on the words free and premium. Often, the profit
margin for the free version is very low, or even negative, and it is expected that it is
the subscription fees that will generate enough revenues to make the service
profitable. The logic behind a freemium service model is that users shall be willing
to use the service for free and that they while using the service gradually will make
behavioral and emotional investments in the service that will increase the costs and
efforts to switch to another service. The goal is to make as many of the users of the
free version to convert to the subscription version. In order to achieve that goal, the
free version has to have a number of increasingly annoying features (such as
advertising) or lack a few key features (such as the ability to use the service on
certain devices) that are removed/ available on the premium versions of the service.
In Spotifys case it has achieved a conversion rate of approximately 20 percent,
which means that 20 percent of the total user base is using the premium version
and pay a monthly subscription fee. Spotify has reported that 70 percent of their
revenues from ads and subscriptions has been paid in royalties to rights holders. At
the end of 2013, the company has generated more than a billion dollars for rights
holders around the world, which according to Spotify is proof that their model does
work.
Online music and videos
Another recent phenomenon in music digital distribution has been the advent of
internet radio and online streaming platforms. The surge in smartphone markets has
given a boost to this segment as well. Applications such as Pandora, Google music,
Youtube etc. operate in this segment. These services play videos and music online
based on the user selection. The pricing mechanisms involve a free subscription
supported by advertisements and a fee based subscription without ads. Youtube for
example embeds advertisements to its free videos and these advertisements are
the major source of its revenues.
Online audio distribution has further evolved, enabling its users not just to listen
shared songs but also upload, record, promote and share originally-created sounds.
Sound cloud which has over 40 million registered users and 200 million listeners is
one its kind. These applications also work on a freemium basis, providing a limited
sharing space for free and charging premium if the sharing space has to be
increased. In this way it provides opportunity to aspirating artists and musicians to
bring their sound to the world.

Current licensing Environment

The Digital services discussed above are required to license two separate
copyrights: the sound recording copyright and the underlying musical composition
copyright. The sound recording copyright is controlled by record labels, while
publishers and songwriters own the latter. The picture becomes even more
complicated considering the numerous independent labels, publishing companies,
individual performing artists and songwriters whose licenses add tremendous
perceived and actual value to a digital music service. Multiple owners further
complicate the process of obtaining a license due to disagreements among the
owners of a copyright.
This means that services such as itunes or eMusic must secure individual licenses
from every sound recording they offer. Apart from the download stores, broadcast
streams must also obtain public performances from both sound recording copyright
owner and music composition copyright owner. Each of the services discussed have
to negotiate licenses with labels and publishers in order to build a catalog vast
enough to attract listeners.
Piracy control
Tackling piracy and maintaining the shift to licensed consumption remans very
challenging in markets which have the highest potential. According to the Recording
Industry Association of America (RIAA), global piracy of music causes $12.5 billion in
economic losses every year and has contributed to a 50% decline in CD sales over
the last decade (RIAA 2009). As a result, a significant amount of effort has gone into
developing digital rights management (DRM) technologies that make copying
difficult. DRM controls how end users can access, copy, or convert information
goods, such as software, music, movies, or books. For example, the original iTunes
Fairplay DRM system restricted users from installing music on more than five
authorized computers or burning a song more than seven times, and songs
downloaded from Walmart Music can be played only on Windows PlaysForSure
licensed products (Duchene et al. 2005). Other digital goods also have some form of
DRMa movie purchased and downloaded from the iTunes store can only be played
on an authorized computer, and books purchased for the Kindle cannot be read on
any other device. All these constraints are designed to protect digital products from
unauthorized copying and distribution and thus reduce the level of piracy.
Recent Developments
Improvements in the handling of user generated content (UGC) have ben of
immense help to rights holders allowing them to grow income from YouTube and
other licensed platforms. Taking the case of Googles ContentID system (and other
systems used by other platforms), these platforms have made it easier for rights
holders to differentiate between video types, thereby allowing the streaming of nonofficial user-generated content such as mashups to be licensed and generate
revenue, rather than removed for infringing copyright. YouTubes TrueView tool for
advertising is also having a positive impact in monetising music videos. According
to YouTube, revenues generated from UGC on its platform have now overtaken those

generated by official videos. You tube, until now had an exclusive advertising
supported service, is planning to enter subscription based pricing for its content.
Internet Radio has also incorporated effective pricing mechanisms to generate
revenues from stores. For example, itunes radio service has the feature of a buy
button which directs listeners to itunes store. Artists in countries with high rates of
streaming have recognized the benefits of streaming based revenue model giving
their songs a longer life. There has now been a major focus to create music based
applications on mobile further expanding the sources of revenues

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