Switched On: Fixed Fees and Diminishing Returns


Several weeks ago, Switched On discussed the delights and disappointments of Napster-To-Go. Despite all the software glitches experienced using the service, I had found at least a few new artists that I liked within the first few days (and even more that I didn't), but generally noticed that my music collection had well penetrated the subgenres I enjoy.

This exemplified one of several paradoxes of the service. Subscription music services have the most theoretical value to music enthusiasts. However, the bigger one's music collection is, the less incremental value one will find in the service. The ideal customer for these services is a mythical musical virgin whore - someone who has a limitless appetite for music, but who never buys it. Napster-to-Go competes with Napster Lite, the company's more "traditional" online music store. As more tracks are purchased, the subscription value decreases.

This could become more than an academic curiosity for Napster because it�s easy to see how many consumers could burn out on Napster-To-Go. The first time they transfer a newfound track they love, they�ve won a small lottery. Hey, they got this song they would have otherwise bought for �free!� Maybe they even found more than one CD�s worth of music and really socked it to The Man. However, unless they have copious time (to explore and to listen) and exceptionally broad musical taste, most consumers will likely find diminishing returns in terms of the amount of new music they like through the service.

At that point, they may be continuing to pay every month for mostly the same music (a losing value proposition). Alternatively, they may start using the service as a new form of entertainment in itself, taking more joy in exploring what they like and don�t than in actually justifying it as a substitute for purchase. That may not work at Napster�s $15 per month price, but it might at Yahoo Music�s $5 per month price.

Of course, the amount of music available on these services increases constantly. The library of online stores grows in three ways � by adding songs from the back-catalog of labels, by adding exclusives (often live cuts and remixes), and by adding the latest product shoveled over from the pop mines. If you love the direction of the latter or just always want to be someone who is hip to the latest beats, subscription music services may be a good investment. If you�re more of an oldies fan, the service will become a progressively worse deal as the catalogs fill out. And if you�re enough of a fan to want to track down the Album Version Hutch Mix versus the Album Version Jamie Mix of 2Pac�s Thug N U Thug N Me, then you probably want to own them.

The current field of Internet music subscription companies understand part of this message. They have wisely invested in better recommendation engines and presentation than the iTunes Music Store. Unlike for Apple, where new downloads �merely� represent incremental revenue, subscription services cannot be justified unless you keep discovering and downloading new music. The value message is somewhat similar to the one that satellite radio has been successful with, but unfortunately finding and downloading music is still too much work when compared to pressing a button on an XM or Sirius receiver.

Similarly to how the limits of consumers� current libraries have made it more difficult for Apple to sell higher-capacity iPods, limits on their time and appetite for music exploration will pose challenges for music subscription services.
