Is free music the solution to pirated music?

That the music industry is in disarray is a huge understatement. Their sales have been diminishing constantly since 2003 and although digital sales have picked up some of the slack, they have not been able maintain the level of business, never mind growing it.

The problem, of course, has been the appearance of a number of technologies that allow users to share music, and in short, fill their music libraries by simply “borrowing” tunes form a “friend.” When the “friend” is anyone from a network of 60 million people, all happy to put their libraries to the disposal of each other, it is clear that if anyone buys music is due to an internal sense of well doing. And the issue in this case, of course, is buying music, not a CD. Why would you buy a CD to rip it into your PC and then transfer it to you portable player if you can buy directly from your PC a digital version? Well wrapped, a CD will make a much nicer Christmas present than a gift card form iTunes, provided that you still have a CD player, of course, but not much more.

Perhaps riding the wave of its extremely popular iPod, Apple and its iTunes store rule the sale of digital music. Although there is no exclusivity in digital music retail, and there are hundreds of digital stores, iTunes is not only the leader in the digital space, its dollar sales in music are larger than the brick and mortar stores selling CDs, lead by Wal-Mart. This dominance upsets the record labels, which would like to increase the price they get from Apple, currently reported at $0.6 per tune, while Mr. Jobs has repeatedly said that the $0.99 iTunes offers its songs is a great price that allows him to run the store without loses and still gives the labels their traditional margin. And accounting-wise, Mr. Jobs seems to be right; $0.6 is comparable to the average margin labels used to get in the good times by selling CDs, computed by subtracting all of their costs from their revenues and dividing by number of tracks sold at the time.

Stuck in this situation, the music industry is looking for a way to increase its revenue, and has found another industry that is looking for solution to its blues: the smartphone manufacturers. Except Apple, who is selling its iPhone handsomely (ZDnet reports today that they are close to having sold 10 million units of its 3G version already) and in the process gets up to 10% of the revenues its users pay to the telecom carriers, the other manufacturers are struggling to maintain their margins and keep their top customers. These manufacturers, led by Nokia as the indisputable market share leader with 53% of the shipments in Q4 2007 are trying to entice customers by adding some services specific to the handset, and music seemed to them to be hooker. Connected to Nokia’s mobile services store Ovi Nokia is bundling with its new top of the line phones the concept “Comes with Music” CWM, that basically provides the user, for a year, unlimited music downloads to the device from Ovi. After the year, the user can keep the downloaded tunes but if he or she wants more, it will have to buy a subscription form the Nokia store.
This business looks interesting for both parties, as Nokia is providing added value to its customers and the labels are getting some revenue from their music libraries. The structure of the contract between Nokia and the labels is not public, but is extremely unlikely it provides the labels $0.6 per tune, or even a variable amount, that would put Nokia in a terrible financial risk. Ericsson is reading a service called PlayNow that will also provide its customers unlimited music downloads.
The “all you can eat music” is not specific of handset manufacturers. Orange in France and TDC in Denmark offer unlimited downloads from their sites to their broadband subscribers. If these moves generalize, clearly downloading music from your “friends” in the P2P network will not be an issue; you will we able to get as much music as you want from either your carrier or your handset manufacturer, or both! What remains to be seen is if these moves will help either of the parties.
If all manufacturers offer the same catalogues, which is the most likely scenario since labels will not license exclusively to a manufacturer, they will be stuck to competing in price, and with P2P software in the computers of all users, labels will not be able to extract much rents form this move, because if they tried, users know how to retaliate. In short, the somewhat rosy forecasts of mobile music business, might be simply that, too rosy.