Monday, September 20, 2004

MSNBC - Forecast: Song Costs May Fall Like Rain

Article from msnbc. Real has done the standard loss leader experiement in order to attract new customers. Their experiement worked. They gained new customers but more significantly. Real sold six times as much music and took in three times as much money.

Now lets put the math together. For simplicity, let's assume Real sold 6,000,000 tunes.
Real's revenue = 6,000,000 songs * $0.49 = $2,940,000

Apple in the same period, if you believe Real's CEO :-)
Apple's revenue = 1,000,000 songs * $0.99 = $999,000

With Apple the music publisher received approximately $0.70 per song therefore $700,000
With Real the music publisher received $4,200,000

Quite a big difference. Unfortunately this is a model that Real can't sustain, and the opportunity the music publisher gives up today is quite large (4.2M - .7M=3.6M)

Even if the publisher cuts their royalties to $0.20 they will still receive more cash in the above scenario $1,200,000.

Music publishers take notice. Finding a middle ground, between $0.20 and $0.40 would be better for all players, except Real. Honestly who are they fooling if all parts are equal. iTunes will win everytime if price isn't a differentiator. The one thing Real and Napster has going for them that Apple hasn't figured out quite yet, is a subscription model for services.

MSNBC - Forecast: Song Costs May Fall Like Rain: "This summer provided a clue to further harnessing the force of digital nature. For three weeks, Real Networks tried to lure new customers by slashing prices to 49 cents a song and $4.99 per album. Since Real paid the full royalty load to the labels (almost 70 cents a tune), the company lost money on every transaction. CEO Rob Glaser says that the company did get new customers, but here's the real news: Real sold six times as much music and took in three times as much money."

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