Rooting For Amazon

The Wall Street Journal broke the news yesterday that Amazon is getting into the digital music business with both a music service and a new music player in an attempt to compete directly with iTunes and iPod.

I am rooting for Amazon bigtime because I believe the market for digital content needs a strong competitive dynamic and Apple has a stranglehold on music and its using its dominance there to start doing the same with video content.

The rumors are that Microsoft will also launch a combined player/service offering this year.  I will be rooting for them too if that rumor is true.

I like a lot of what I've heard about Amazon's plans.  First they are going with a combined service/device offering.  Apple has shown that is what it takes to make it in the digital music market.  The solutions that have required the consumer to buy a device from one party and the service from another have not taken off.  Simplicity rules and the turnkey offering from Apple has won the day.

Second, I applaud Amazon's choice of a subscription service like Rhapsody and Yahoo! Unlimited.  I am a paid suscriber to both services and love both of them.  Subscription is the best way to consume music digitally.  For a flat fee per month, you can listen to whatever you want.

The problem has been that subscriptions services have never been well integrated with devices. Apple doesn't offer a subscription option which is one of the many reasons I have come to dislike iTunes.  Rhapsody To Go works with a bunch of windows media devices but I have never been compelled to buy any of them.

I am rooting for Amazon to come out with a killer device that is simple to use, looks great, has a good form factor, and works seamlessly with their subscription service.  If it's anywhere close to what I expect from them, I will buy the service and the device and leave Apple altogether.

Finally, a word of advice for Amazon.  The big objection to subscription services from consumers is that they are uncomfortable not owning the music.  They hate the idea that if they stop paying for the service, they lose the music.  That is basically true with music bought in iTunes and played on the iPod as well, because of the fairplay DRM, but that fact seems to escape most consumers.

My advice to Amazon is to offer a "buyout" provision to consumers as part of the subscription service.  Market it as "rent to own".  When and if you leave the service, you get to keep a certain number of songs.  And make that number go up every month that you remain a member.  And use the popularity metrics based on listens to create the default suggestion for the songs you would keep, but let the consumer modify it when they want.  And allow the consumer to select whatever format they want the music in on their way out the door.

Then consumers get the best of both worlds.  A flat fee for all the music they'd ever want to lsiten to for as long as they are enjoying the service.  And the ability to keeep the music they most want to own on their way out the door.

I hope Amazon does this.  Because they have the opportunity to level the playing field in digital music (and other forms of digital content) and popularize the subscription offering in one fell swoop.  I can't wait until they come to market.

BTW - The picture of the device at the top of this post is probably fictitious. I scraped it from Slashgear.

Comments

[hank williams]

The problem with the idea of allowing people to keep some percentage of the songs they have if they leave the service is that the economics of the deals with the record companies may not allow it to work as you might imagine. Of course if it is only a few songs they could do it, but a real, full, mechanical rights transfer is expensive. So I fear, without having actually done the math, that they might only be able to do something like one song every month or two. Again, like I said, I havent actually worked out the math - its quite complicated - but I just fear that the margins might not allow something that would impress you.

[Peter Forret]

"That is basically true with music bought in iTunes and played on the iPod as well, because of the fairplay DRM, but that fact seems to escape most consumers."

I know Fairplay DRM puts restrictions on # of times you can burn a song and # devices that can play the song. But since I don't pay a fee per month, I cannot 'stop' paying.
Are you referring to the fact that the AAC format locks you in on the iTunes player?

[fred]

yes Peter that is what i was referring to

sorry to be so vague

[David Dundas]

I like the concept of rent to own, but having extensive knowledge of the digital music space, licensing and reporting model would be a nightmare.

This is why Microsoft walked away from the table initially with their talks with labels, and decided to partner up with Real again.

So knowing how mobile music subscriptions work, with the labels having two pricing structures for ala carte vs. subscriptions that would be an absolute nightmare. That is likely why services like yahoo allow you to purchase outright songs for $.79 each. I am actually very happy with that set up. Now if only I could find a decent device...

[Dave]

Fred,

I have to admit I'm a little surprised here, based on what I've previously read on your blog about music and DRM.

How is it that a subscription is better than the iTunes model?

You don't own the subscribed contents do you?

From what I've heard of iTunes DRM scheme, it's easy to bypass.

[Stewart]

Dave, You're shortening the long tail if you don't get your music by subscription, you should try it. I've paid about 120 pound for 80GB of songs that I can put on my player anytime i like...

[Matt]

Fred,

I couldn't agree more. For someone who has been a Netflix member since 2000 I think "content rental" is a great model and recently became a Yahoo Unlimited subscriber as well. If you are looking for a good Windows portable music device - check out the Zen Vision:M. I just got it and it is great for music, videos and pictures.

- Matt

[Jay]

"The big objection to subscription services from consumers is that they are uncomfortable not owning the music. They hate the idea that if they stop paying for the service, they lose the music. "

You have generalized here as THEY and CONSUMERS...is it because you feel that way and you think others maybe? OR you have the statistics with you.

[james governor]

love the "rent to buy" idea.

if you want to check out something ludicrously promising - see this http://podbop.org/ via programmble web. delicious delights for the future of going out management?

see you are going in hard on the boycott itunes theme...

[pwb]

Matt, rental is fine for movies which most people watch once or twice. But it's not great for msuic which people listen to multiple times over several years.

I predict that if Amazon does not tie up with iTunes, it's digital music offering will go no where.

Hooking up with Apple would be the obvious call. Integrate their one-click checkouts. Insert buy buttons next to tracks and albums. And have Apple cut them in on 8 cents per track and 80 cents per album. Done. 100% margins on large volume with little set up costs.

Instead Amazon will put out Yet Another Online Music Store that will attract few customers and less buying.

[ekc]

pwb, you are right on the money about the difference with dvd rentals. I have some albums that I can barely go a week without listening to, not the case with movies.

The problem I have with the subscription services is that, even though you could get enough music to fill up an 80 GB player, it would take you months of using your player non-stop to actually listen to all of that. That's why I dont really see the value in saying that you have access to millions of songs. The value of a subscription service should be based on how many tracks you actually listen to every month and how often you switch different songs into you pmp, which is different for every person. I don't know how to make the calculations, but I see the subscription services being great for people who switch in new stuff every week. In the long run (over the course of years) I can't see how it helps those people who like to listen to certain albums a lot, which I think is most people. I would be interested to find out the relative costs per song over a 10 year span of a subscription service versus buying each track you listen to from the iTMS. I would bet that you would eventually come out ahead (meaning you would spend less) using iTunes.

It's good to have something for everybody's tastes, but I don't see how Amazon is really going to distinguish themselves much other than having an integrated solution. Who knows, myabe that will work. I think they're a little late to the game though.

All that being said, I still buy cds, I like having the cover art.

Hope you post this despite not wanting to give my email address

[Erik Schwartz]

"And have Apple cut them in on 8 cents per track and 80 cents per album. Done."

I think you are somewhat overestimating the amount of margin apple has in music.

Music retail is, and always has been, a crappy margin retail business.

[Jimmy]

While all those ideas listed sound great for the consumer, I find it highly unlikely that Amazon will gain the Big 5 Record Companies approval unless they have some sort of DRM built-in.

I would love to see them innovate, but I don't think they will be the ones to do it.

[Reg Muffet]

The thing is, Apple has said all along that it's the customers who have steered it towards pay per song, rather than subscription.

If these other services did become popular enough for it to "see the light" (hey, they're not stupid!) then it would be a fairly simple matter to flick a switch and have iTunes/iPod support subscription too.

According to its financial briefings, the iTunes Store operates at around a break-even margin, and is mainly there to provide an incentive to buy iPods, which is where their 20% margin comes from.

I can't see how they'd care that much if they switched to subscription as it's unlikely to discourage people from buying iPods, if that's what people actually want. (Might even increase the number sold, if the fans of subscription are more numerous than the research indicates.)

By the way, a few inaccuracies:

1. FairPlay has no restrictions on the number of portable devices used to play songs, as long as they're iPods and loaded from the same copy of iTunes. That is, your wife, 8 daughters and 13 sons could be playing the same single song that you'd bought.

2. Up to 5 different COMPUTERS can be authorized to play any given song. These computers can be located anywhere.

3. The burn restriction applies to playlists, not the song itself. Apparently that's meant to stop large batches of custom CDs being burnt with the same track list. However, if the order of any given track is changed, the burn limit is effectively infinite.

4. To play back on a non-iPod device (such as my PSP), burning to a CD-RW then ripping back into an unprotected track is a straightforward process.

[Reg Muffet]

The thing is, Apple has said all along that it's the customers who have steered it towards pay per song, rather than subscription.

If these other services did become popular enough for it to "see the light" (hey, they're not stupid!) then it would be a fairly simple matter to flick a switch and have iTunes/iPod support subscription too.

According to its financial briefings, the iTunes Store operates at around a break-even margin, and is mainly there to provide an incentive to buy iPods, which is where their 20% margin comes from.

I can't see how they'd care that much if they switched to subscription as it's unlikely to discourage people from buying iPods, if that's what people actually want. (Might even increase the number sold, if the fans of subscription are more numerous than the research indicates.)

By the way, a few inaccuracies:

1. FairPlay has no restrictions on the number of portable devices used to play songs, as long as they're iPods and loaded from the same copy of iTunes. That is, your wife, 8 daughters and 13 sons could be playing the same single song that you'd bought.

2. Up to 5 different COMPUTERS can be authorized to play any given song. These computers can be located anywhere.

3. The burn restriction applies to playlists, not the song itself. Apparently that's meant to stop large batches of custom CDs being burnt with the same track list. However, if the order of any given track is changed, the burn limit is effectively infinite.

4. To play back on a non-iPod device (such as my PSP), burning to a CD-RW then ripping back into an unprotected track is a straightforward process.

[mike simonsen]

It seems to me that subscription music (especially sans "buyout clause") is doomed to nichedom because the costs are just so steep compared to mass market buying habits.
I don't have any stats but my hypothesis is that most people buy a couple of albums per year. The patterns definitely aren't like cable TV where a family of four might watch 10-15 person/hrs per DAY.
I put the TAM calcs this way: subscription services costs are a little less than 1 album purchased per month. So if I'm on a 10+album/year curve, then it's break even. But how much cost incentive do I have to get to motivate my consumption-style shift? Add in the significant risk of pay-it-or-lose-it and how good does the deal have to be? In my experience demonstrable 10x savings gets buyers over the disruptive hurdles.

At 100+ albums you're talking a few 18-25 y.o.s and afficianadoes and that's about it. Granted the market grows some because it's all you can eat. But part of the fun of a music collection is the collection.

Without the buyout clause, I predict A) subscription stays in a niche and B) piracy.

[David G]

Maybe the story here is the world's first e-tailer *finally* gets into the online music business.

For Apple, having direct competition that copies their (walled garden?) model exactly could validate their leadership position and expand their market size. Apple have been battling to convince

For AMZN-investors, it's odd that at a time that the company is reporting increasing tech spend and eroding margin growth, they'd embark on a technically spendy, and (according to apple), squeezed margin business.

It's a bold move in the sense that the e-tailer stocks 200++ brands of mp3 players (besides the ipod) from manufacturers and distributors who they will now will be competing with.

As an amazon customer, I own an iPod, and that's where I want my music - if they do that, I'll probably shop there, if not, I won't. I see no need and some risk for Amazon to go with the player - digital music is a must - they should do a better-than-itunes-community-software-thang, but why the player?