December 29, 2004

A Look At Online Distribution Economics [3:32 pm]

From IEEE Spectrum Online - Selling Music for a Song: Online music stores make at most a dime per track — where does the money go?

Who’s getting all the cash? Back in November 2003, Apple CEO Steve Jobs said the then 7-month-old service was falling shy of merely breaking even. He explained that out of the 99 cents that Apple charges for a song, about 65 cents goes to the music label that recorded it. Another 25 cents goes for “distribution costs”—mainly credit card charges, but also for the servers, bandwidth, and other expenses needed to operate a large online service. Marketing, promotion, and the amortized cost of developing the iTunes software itself eats up the rest. In the first quarter of 2004, the iTunes Music Store finally made a “small profit,” Jobs claimed recently.

Other online digital music retailers aren’t minting money either. This summer, RealNetworks Inc., in Seattle, quickly sold a million songs at a promotional rate of 49 cents. It’s clear, though, that even at its regular price of 79 cents per song, with about 65 cents going to the music label, the service cannot be profitable. Others, such as Musicmatch (recently purchased by Yahoo! Inc. to invigorate its own music service) and the now commercial Napster, fare no better.

[...] NOR ARE MUSICAL ARTISTS getting rich from online sales. Industry experts believe that those who have signed with a major record label end up with only 3 to 5 cents of the 65 cents that the iTunes Music Store and others pass on. That’s about the same as what they get per song when a CD is sold. Even as they complain about digital “piracy,” the record labels seem to be using the new technologies to propel their profit margins toward the stratosphere. After all, they’re getting about the same revenue, with much lower costs.

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