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Can Internet Music Startups Master the Monthly Subscription Model?

While the music industry continues to face the reality of declining revenue from pre-packed media sales, a new group of Internet entrepreneurs are looking at subscription-based online services to challenge the pay-per-download approach of iTunes.

How badly has the music industry been decimated by changes in consumer habits? A quick look at the numbers for pre-packaged, hard copy music sales speaks volumes. The Chicago Tribune has reported that no less than 115,000 albums were released in 2020. Of those, only 110 sold more than 250,000 copies. Another 1,500 topped 10,000 sales, and fewer than 6,000 even managed to reach 1,000 sales.

Remember when new albums would reach "Platinum" status on a regular basis? Not too long ago, "Gold" albums were so common that popular bands were almost disappointed when new releases only reached that level of success. For an album to be considered "Gold" it needs to reach at least 500,000 sales.

How about the Internet? Are Internet download sales filling the revenue gap left by declining sales of packaged media? The problem that the music industry is facing, beyond piracy, is a glut of new legal services that are driving down the cost of downloads. Some companies like MySpace.com are even rolling out free music services.

Writing on Billboard.biz, Glenn Peoples summed it up nicely: "Give consumers a way out of spending money on music and they're going to take it."

At the moment, iTunes dominates the sale of music online. But when iTunes started to roll out slightly more expensive songs in 2020, at $1.29 as opposed to the traditional price of 99 cents, more expensive songs dropped on the charts immediately. 40 songs from the "Top 100" list that were priced at the new $1.29 rate lost an average of 5.3 places in just one day.

On the one hand, small drops in sales volume will be offset by the higher price point - and could still result in an increase in revenue in the short term. On the other hand, chart positions are extremely important to musicians and their individual success. Additionally, lower sales volumes could mean more consumers are switching to "alternatives" to legal download services in reaction to attempts to drive up prices. The set 99 cents price point was likely a key factor in Apple's success in luring music fans away from illegal downloads in the first place.

Still, to date the per-song download format has proven to be the only model that has enjoyed any real measurable level of success with consumers in the online music industry. What hasn't worked so far for music sales online is the monthly subscription model - at least, not in the United States.

Rhapsody.com is a music service backed by Real Networks, and Best Buy now owns the formerly infamous Napster.com; both services offer an "all you can eat" approach to music sales. For a monthly subscription price in the $15 range, subscribers can stream all the music they want. But according to the New York Times, both sites muster only a few hundred thousand subscribers and have seen poor growth numbers, meaning neither are a threat to iTunes and the many millions of active customers who use it.

But the Times is reporting that despite the challenges faced by music subscription models in the past, a new group of entrepreneurs are nonetheless targeting that same business model, but for new services likely to make their debut in the American market in the near future.

Do the names Niklas Zennstrom and Janus Friis sound familiar? They should, because they're the principals behind Kazaa.com, the P2P file-sharing network that many music execs believe helped lay waste to their business. They also started Skype.com, the increasingly popular VOIP service that's taking a bite out of the traditional telecommunications companies. But the duo has now turned their focus from file-sharing and voice services to legal music sales, no doubt armed with insider information about the intense popularity of music with Internet users.

And, they're looking directly at the monthly subscription model.

What we do know about the new service is that it will be called Rdio.com, but the Times has called the startup "secretive" and Zennstrom and Friis themselves have said little. It's website currently offers only the simple message that "Rdio is coming" plus a chance to join a mailing list to be notified as more develops. The Times has reported that Zennstrom and Friis are currently negotiating with the music labels that fought a bitter legal battle with Kazaa.com, and expect to release Rdio.com to the American market in the not too distant future - though they probably won't beat the European-based Spotify.com to the American market.

Like Rdio.com, Spotify.com will compete for American dollars with a monthly subscription service. But Spotify.com already has a year of experience under its belt in Europe, where it offers a paid subscription service plus a free ad-supported service. The free service isn't winning fans with the American music industry executives.

"We like Spotify as our partner in Europe, but we would like them to move more toward a paid subscription environment," said Thomas Hesse, president of global digital business at Sony Music.

And in another indication that entrepreneurs see promise in the monthly subscription model for music, yet another new company, Berkley-based Mog.com, plans to offer a subscription service this year; Mog's prices will start around $5 per month. Mog founder David Hyman calls it "radio without restrictions" because it allows users to create their own playlists.

Mog.com currently focuses on music-related blogs and news, but the new "all access" service should be released sometime around Thanksgiving.

All this activity should have sellers of digital media keeping a close watch on the music industry for clues about whether Internet consumers can be convinced by well funded online marketers to abandon the iTunes format and embrace a recurring monthly subscription plan in exchange for access to large quantities of digital audio content.