NY Times: Music Sites Ask, ‘Why Buy if You Can Rent?’

By Saul Hansell
Published: September 27, 2004

Long before Sir Richard Branson dreamed of becoming the latest billionaire with a reality TV show, before he started his cellphone company, his airline and his record label, he sold music from the Virgin Record Shop on Oxford Street in London. When he began in 1971, of course, music was presented as grooves pressed into a vinyl disk.

Today, Sir Richard starts a new music store, VirginDigital.com, this time selling music as streams of bits to be downloaded from the Internet. Virgin, a unit of the Virgin Group, becomes the first major music retailer to enter the download market, which has been dominated by Apple Computer and other technology companies.

What’s interesting is that Virgin is putting its biggest emphasis on its subscription service, rather than on selling songs one at time for 99 cents a track, as Apple and Microsoft do. It is betting that new customers will join its Virgin Music Club for a $7.99 monthly fee to listen to an unlimited amount of music from Virgin’s one-million-track library on their computers.

A premium subscription service that will allow those tracks to be moved to a portable music player, for a slightly higher monthly fee, will be introduced soon.

Several years ago, subscription services were seen as the music industry’s best response to illegal song downloading, and several services were introduced, including RealNetworks’ Rhapsody; MusicNet on America Online, which is owned by Time Warner; and a legal revival of Roxio’s controversial file-sharing service, Napster. But Apple’s simple à la carte store where customers can buy single songs has proved to be far more popular with consumers.

Jupiter Research estimates that 2.1 million people pay for music subscription services, including the cheaper Internet radio services. By contrast, 8.5 million people have paid to download a music file. (All of that is still dwarfed by the 23.4 million people who said they downloaded files free from sharing services like Kazaa in the month of July, according to a survey by the NPD Group.)

That track record does not scare Zack Zalon, the president of Virgin Digital. “Two or three years out, subscriptions will overtake à la carte because it is a much more interesting proposition,” Mr. Zalon said. “It has just been difficult to articulate to consumers what it is.”

Of course, the difficulty of explaining subscription plans to consumers is exactly why Apple chose the path it did. “Consumers have been buying music for 50 years,” said Eddy Cue, the vice president of Apple in charge of its iTunes online music store. “They want to replicate that experience online.”

Mr. Cue said that Apple might consider a subscription service in the future, but it has no plans to do so now. “Customers are speaking loudly with their wallets.”

Though that may be true, it is far more profitable for online companies to offer subscription services. Typically, an online store pays 65 or 70 cents to the record companies for each 99-cent track sold. But with subscription services, the online services split the fees 50-50 with the record labels after deducting certain expenses.

That fee-splitting cost structure is leading to what may turn into a price war among music subscription services, which generally cost just under $10 a month. AOL offers a subscription service to its members for $8.95 a month. Now Virgin is $1 cheaper than that.

And in the next few months, several other subscription services will be introduced at prices as low as $5 a month, said Ellie Hirschhorn, the chief operating officer of MusicNet, a company that provides the technology and music licenses for the subscription services of AOL, Virgin and, soon, several other companies.

Mr. Zalon said that Virgin did not plan to compete mainly on price. For example, it is selling tracks at 99 cents, not matching Wal-Mart’s online music store which sells songs for 88 cents. Rather, he said, Virgin seeks to differentiate its online store and subscription service with content and merchandising.

Virgin will emphasize less popular genres like jazz, blues and classical music, he said. And it will provide features like “ask the expert” to give users the old-fashioned experience of talking to a veteran record store employee. Site users can send questions by e-mail and get responses from staff members hired away from Virgin Megastores.

One big question for Virgin and others is how to set prices for subscription services that allow users to move songs from their personal computers to their portable music players. Until now, the only legal way to put most songs from major record labels on a portable player has been to buy them from stores like iTunes or to convert them into MP3 format from CD’s.

New technology from Microsoft, which is being adopted by most major electronics makers like Samsung, Rio and iRiver (though not by Apple) will allow devices to play songs downloaded in a special format from subscription services.

The songs will be programmed to expire on a set date, but that date is automatically extended when users connect their players back to the music software on their computers. If the user does not continue paying the monthly subscription bill, the songs will not play.

The music industry has argued that the price for being able to download songs – even temporarily – from subscription services should be substantially higher than simply listening to the song on a computer.

“There is an increased functionality and there should be an increased value to that,” said Ted Cohen, a senior vice president for digital development and distribution with the EMI Group.

He said that while the music industry initially felt the best way to fight piracy was through subscription services, it had been pleasantly surprised at the popularity of download sales.

Currently, the only subscription service with the ability to allow songs to be downloaded to portable devices is a test version of a Napster service called Napster To Go, which uses the Microsoft technology. (A new legal subscription service bought the Napster name after courts shut down the original.) It costs $14.95, compared with $9.95 for the regular Napster subscription service.

Chris Gorog, the chief executive of Napster, said the record industry is pushing for a price closer to $20 a month. But he argues that the record industry will be well served by keeping the price affordable.

“The portable subscription is the single greatest defense against piracy because it most replicates the illegal experience of unlimited access to music,” Mr. Gorog said. Moreover, he said research showed that the average revenue to record labels from an active CD buyer was $4.82 per month, less than they would receive from a subscription service sold to consumers at $15 a month.

Then again, as with the first version of subscription services, consumers may not find these new portable services as attractive as the specialists think they will.

Sean Baenen, a managing director of the consumer research firm Odyssey, said surveys show that people are wary of subscription services for music because they are angry at the music industry for charging so much for CD’s.

“I already think I am paying too much and getting too little, and I don’t want to subscribe to something,” Mr. Baenen said, referring to what might be a typical consumer response. “I want to buy the single I am looking for, then get out.”

Others in the industry point out that surveys a decade ago said that cable subscribers preferred pay-per-view movies to subscription channels like HBO, but the channels turned out to be far more popular.

Moreover, Richard Wolpert, the chief strategy officer of RealNetworks, which offers the Rhapsody subscription service, says the idea that people buy music once and own it forever has not held true over the last few decades.

“I bought the Eagles ‘Hotel California’ on vinyl,” he said. “Then I bought it on 8-Track, really, then on a CD, and now I’ve bought it as a download.”

“What I really wanted,” Mr. Wolpert added, “was to be able to listen to the album wherever I wanted, whenever I wanted.”


Posted by Ted • Monday, September 27, 2004 .