Is $0.99 music download expensive?
Saturday, February 25th, 2006Recently I stumbled on a rant by a self proclaimed digital enthusiast and real-life investment professional that goes by web alias Thomas Hawk. Mr. Hawk was particularly taken by the announcement that the iTunes Music Store (ITMS) sold over one billion legal downloads, and proclaims that everybody that buys music from the ITMS is a sucker (his words not mine) because they are locking themselves in to the Apple’s proprietary DRM format.
Brushing aside Mr. Hawk’s misconceptions such as:
- Crystal clear MP3 (dude have you heard of lossless encoding?)
- Legality of buy a CD, rip-it, return it scheme he proposes
- Apple’s DRM is awful (again, his words not mine - obviously Mr. Hawk is not aware that Apple licenses DRM in use on ITMS, thus it’s not Apple’s strictly speaking. Also, awful is an interesting way to describe a relatively seamless technology without any other relevant benchmark)
This piece prompted me to think about one real question: What is the price I am actually willing to pay for a song? To make things simple I consider only two variants: buying a song through ITMS or by going to a physical store, buying a CD, and then ripping it to a digital file or doing whatever else I want. I have covered some music subscription service issues in this blog about one year ago.
We know what the first alternative gives us: You pay $0.99 for a song, it’s in 128kbps AAC (aka advanced audio coding - a part of mpeg4 format with quality roughly equivalent of 160kbps mp3). You can burn it as many times as you want, you can transfer it to up to 5 computers, listen it on as many iPods as you want. Sorry other players are not supported, but really - who cares?
On the other hand if I go to a store to buy a CD, in addition to the price of the CD I actually have to pay cost of my time, because I really can’t use it to do something else (like spend an afternoon in the park with my son). So what’s the time commitment:
- 55 minutes to go to the store, find/select a CD, check out, come home
- 5 minutes to rip the CD
OK, so if I am an average American and I make about $39K (2002 census data adjusted by 1.5% average annual real wage growth in last 4 years), which means that one hour I spent purchasing a CD just cost me about $19.5 in lost wages. (And I am not even going to go into how much I value my free time but it’s definitely more than $19.5). Those of you with higher wages, go ahead, make the adjustment: the end numbers are actually going to be really funny.
In addition to the cost of my time, let’s say that I am an average American living about 10 miles from the mall driving an average efficient car that gives me 20mpg. Thus, I’ll consume about 1 gallon of gas during this trip costing me about $3. (I don’t have an exact statistics on this, but if you are going to beat up $3 number, remember that you are paying for a car usage, insurance, etc, and that your alternative is to take a bus or a train - if there are any - in which case you will be paying about the same).
So for an average American total looks like $22.5 plus the cost of the CD.
BUT!, you say, I am not going to the store to do only this, I am running a bunch of errands. OK, fine. Average mall store purchase is about $90 according to ICSC research, so if an average retail cost of a CD is $12 (don’t have a precise statistics for this, but I seem to remember RIAA claimed some such number recently), then my percentage of total spending allocated overhead to purchase this CD is $3 ($12/$90 x $22.5 = $3), on top of which I need to carry the cost of the CD
Masterpieces excluded, there’s only between 1 and 3 good songs on an album, so (optimistically) I am paying a dollar to purchase the CD in the store, plus 1/3 of the sales price. If we use the average CD price (my CDs somehow always end up being much more expensive than average, but hey, at least I am not average in something), the total per song is $5.
Is paying $4 differential for being locked into the Apples "awful" DRM a lot? I guess it depends. This back-of-the-envelope analysis suggests that the likely outcomes for DRMd music industry behavior are:
- Random hit songs, and experimental music (where longevity and flexibility is not an issue) will be purchased via ITMS (or alike)
- Masterpieces that have a long-term value will be purchased in a more durable format which is flexible and allows higher fidelity and portability.
And what if a brand new format comes along in 3-10 years? Well, heck, I just might spend that $1 to purchase the song again. At least I am not investing $4 in an non-interest bearing account at RIAA bank!
