Modular by Design — Music Industry

Yes­ter­day, I high­lighted the mod­u­lar by design approach and what mod­ules are. Today, we delve in, look­ing at the first indus­try to get impacted: the music industry.

When Nap­ster intro­duced the con­cept of shar­ing songs, it was not so much the idea of shar­ing that was wreak­ing havoc on the music indus­try; it was the fact that albums were now being sliced and diced.

Tra­di­tion­ally, the music indus­try has been orga­niz­ing around the con­cept of album sales. When devel­op­ing a new music album (which is only a com­pi­la­tion of sev­eral music tracks,) the music indus­try decided to bun­dle some good songs, along with some so-so and some­times some bad ones. The idea is that they would pro­mote a few songs in the media and use those as a way to sell albums. Where the eco­nomic break­down hap­pens is that not all songs have the same value. As a result, the idea that a hit song is worth the same amount as a B-side falls apart. So if you take the cur­rent album-related eco­nom­ics model, you end up with a prod­uct of 10–15 tracks, which retails for some­where between 15 and 20 dol­lars. Based on that con­cept, one can argue that all the songs on an album are worth about 1 dol­lar (15 dol­lars divided by 15 tracks.)

Some songs are going to be pro­moted more heav­ily than oth­ers so what hap­pens is that the sta­tis­ti­cal dis­tri­b­u­tion of prices across tracks has much more vari­ance. A hit track could be worth as much as 2–3 dol­lars while a B-side track could be worth as lit­tle as 10 cents. Online music stores, how­ever, do not work along those lines; they still price all tracks at the same level, no mat­ter what their pop­u­lar­ity is. What this does is cre­ate an imbal­ance in sell­ing music as pop­u­lar tracks are under­priced while unpop­u­lar ones are over­priced. Since there are gen­er­ally only about 2–3 hits on an album, the value of that album now falls to 2–3 dol­lars, leav­ing the music indus­try to try to fig­ure out how to make up the difference.

The eco­nom­ics of down­loaded music need to also take into account the fact that the only thing being deliv­ered is a dig­i­tal asset. This means that the music pro­ducer actu­ally reduces their cost since they do not have to deliver a medium like a CD or tape in order to make that sale.

The solu­tion to this prob­lem is to care­fully ana­lyze how all the tracks on an album will per­form and price each accord­ingly. In a per­fect world, songs should be priced based on an algo­rithm that would take into account their pop­u­lar­ity. This would reward early adopters for dis­cov­er­ing a song before it became pop­u­lar by offer­ing them a lower price (since we can assume that word of mouth on a good prod­uct will only influ­ence later sales.)

In 2000, I looked at a num­ber of pos­si­ble busi­ness mod­els for the music indus­try. While many of those have been imple­mented, there is still room for inno­va­tion in that space.

Tomor­row, we will look at how some of the dig­i­tal music stores are now fight­ing for new supremacy in the space and how their dif­fer­ent mod­els are impacted by the mod­u­lar by design approach.

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