Longtime readers of this blog will know I'm a fan of subscription music services, and have been a Napster to Go member almost since it debuted almost two years ago. I still have tech woes -- don't get me started on the problems I had this week integrating a new Creative Vision:M -- but I love the service anyway. But when commenting to a Nick Carr blog the other day, Nick reminded me I'm in the minority in my love for music subscriptions. Subsequent commenters repeated some of the same arguments we've heard against subsciption services, namely that music needs to be owned. Perhaps I come at this differently from most consumers because I understand no end-user owns music; they have purchased a set of rights from the actual owners, in the case of a song the songwriter(s) and the performer(s).

Will subscription services survive? Nick's right, they haven't gained a lot of traction in the market. Their future will also be impacted by a Copyright Royalty Board proceeding that I'll discuss further below. But as an artists' advocate, I would note this: we hear that the digerati won't buy CDs any more because they're all about online consumption, yet the average iTunes customer is only spending $22 total. At $15 per month, I've already given Napter to Go over $500. I have over 1,000 songs on my player that I don't have a CD of, but they've all been paid for. Can the $22 iTunes customer make the same claim about all of the songs on their iPod?

"I believe artists should be paid." That's the first thing we hear before "but" when the CopyLeft talks about the music business. They want to own music, to do what they like with it. But they consider CDs a dead medium; why transport on plastic when you can download? Yet they clearly aren't spending money at iTunes, and that online store dominates the single download business. So how are these music lovers owning music they haven't paid for?

A subscription model is one way, in a free market, to fairly compensate artists. (I say "free market" because these services currently don't operate in one, as I'll discuss below.) I'm paying the equivalent of one CD a month for my service; I'm getting access to far more music than one CD, but artists are getting more money from me than they are from the "consumer" who's not paying. I'm not saying the subscription model is the only way to go, but it's one we do every day in other areas. We pay a set amount for wireless phone service every month, and increasingly pay a flat fee for unlimited content on those wireless phones. We pay a set amount for cable service every month, programming that would go away if we stopped paying. By subscribing to HBO, you get a good deal of programming every month, and HBO On Demand even lets you control when you see it. But you're not precluded from the purchase model either. If you find you can't get enough of Brother Justin, buy Carnivale on DVD.

My Napster to Go subscription lets me build my own radio station. It recommends songs and artists I'd like based on what I've already downloaded. I can pull up those artists, download the songs that have been most popular with other Napster users, and can play them at leisure. I can also download other members' playlists. Napster also creates daily playlists based on my tastes, which given my tastes are somewhat eclectic, lead to some very odd playlists indeed. To me this is one step better than XM or Sirius, because while it's commercial-free and portable, I'm the DJ.

I don't believe Napster has made a profit yet. Other subscription services are affiliated with companies in other lines of business, and they may be carrying those subscription lines. Nick is right, it hasn't taken off yet. And it may be that it's priced too high for customer demand but too low for operating costs. It's hard to know, because when these services were launched, artists allowed them to move forward without any certainty on rates. Right now these services are paying royalties for songwriters into an escrow fund, but the rates are arbitrary. A Copyright Royalty Board is currently conducting a proceeding to determine rates for songwriters. Not surprisingly, the trade association for the online services is said to want a rate significantly lower than what songwriters are paid under a compulsory license for other uses of their work, in fact possibly zero. If I were losing money I'd want to reduce costs, but ultimately songwriters must be paid fairly for any music system to work.

Songwriters individually have little leverage here but collectively have a fair amount, in a free market. While Napster to Go has somewhere around 2 million songs, a number of songs on my current playlists no longer work. A Napster executive told me recently the cause for that is almost always a songwriter withdrawing permission for use. I'm saddened by the loss of the music, but I can always pay 99 cents and buy that song if I want; I don't have a constitutional right to have it in my subscription service (I have actually done just that).

But if a mechanical license overseeing songwriters is formally extended to subscription services, songwriters won't be able to prevent their works from being used, and they'll have to live with whatever rate the Royalty Board sets. Perhaps the extension of the license is a reasonable short-term solution if songwriters get a decent rate and subscription services are able to survive long enough to find customers. But my preference would always be for a market-based solution, where songwriters individually or through third parties could negotiate rates. The middlemen over time would reduce transaction costs by offering collective licenses, assuming they had appropriate antitrust exemptions. I discussed this notion recently in Las Vegas.

Ultimately we as a society need to rethink the ownership notion of music. It's hypocritical to carry forward an ownership notion of music based on physically owning LPs, cassettes and CDs, then refuse to actually pay for any ownership rights once the music is online. Subscriptions may not be for everyone -- about 15% of the population still refuses to subscribe to cable or satellite TV service -- but to the extent anyone has music on their iPods not from their CD collection or iTunes, they need to think twice before claiming any "ownership" rights to those songs, and think about the artists who are giving them pleasure without being compensated.

posted by Patrick Ross @ 9:39 AM | Markets: Business, Investment & Innovation, Prices, Terms, and Licensing

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