breaking down the cost of online music distribution

[Doom9]

I want to link to this from the news but I need some more space, that's why I'm posting it here. The RIAA's latest move to increase online music prices (http://www.theregister.co.uk/2004/05/07/apple_itunes_price_rises/) mandate that somebody does the math so here goes. Based on Billboard Magazine's numbers (probably not the most industry hostile publication you can imagine ;)) that can be seen in the pie chart, we have the following costs for online music:

Signing and producing: $1.08
Royalties: $1.99
Marketing: $2.15
Company overhead: $1.11 (no distro/shipping so 1/3rd of total)
Distribution: $0.10 (online, costs next to nothing)

Total $6.43

I left the co-op out since online advertising is cheaper and can often be gotten for free (get a song in the charts and apple will put it on the itunes frontpage anyway). This is for a $16.98 CD.. so that leaves more than 10 bucks as studio profit. Even if the whole thing is sold for 10 bucks, that still leaves $3.50. Now, maybe I should assume that Apple has another $1 overhead (generally, since the whole thing is online, the overhead should be significantly lower, and for existing albums, you can just run the CD through itulnes and get the proper AAC file so the effort is next to nothing), that still leaves a lot for the studios. And we know Apple doesn't make any money with iTunes. So a studio reaps up to 10 bucks in benefits per CD.. I don't think I'm the only one to find this a little bit greedy.

Oh, and btw.. assuming there are 15 songs on the average CD and using the $9.99 sale price per CD, that makes $0.66 per song, not $0.99 or now $1.29. And where does the additional $0.33 - $0.63 go? It most certainly isn't the artist.

Turn and twist it any way you want.. something is seriously wrong with those figures. And we know it isn't all about the artists: http://www.oag.state.ny.us/press/2004/may/may4a_04.html

[Dimpared]

First of all, I'm not trying to argue that these prices are reasonable, because theyr'e not. But, you say that it isn't all about the artist, of course it's not. I'm an audio engineer for a small label in Maine. You have to consider the costs to the engineers as well. The engineering cost is probably the most costly part of producing music. Let's face it, to produce an album that tops the chart, you first have to have good talent, or talent who's apealing to the eye, ahem Britney Spears. Then you need to have a very good audio engineer.

Let us just use Britney Spears as an example. She has topped the charts many times. Why? Well, she's "hot" and some MAY say she has a nice voice. But, it's mostly due to the overwhelming talent of Bob Ludwig, the primary engineer responsible for engineering her songs. All I'm trying to say, is that you need to take in account more than what you have, and let's face it; The music industry is a business just like any other.

Dimpared

[Nedfu]

www.loudnessrace.net (http://www.loudnessrace.net) shows a trend towards lower quality production. People still buy it.

[Wolfman]

Not to deny anybodys talent but it certainly aint the engineer.. I'd say its the songwriter first followed by the performer/s then the producer then maybe the engineer. Inevitably the engineers job will very soon be done by computer and the producer. I havent seen any awards for engineers! :rolleyes: I suspect your biased...;)

[wmansir]

Originally posted by Wolfman
I havent seen any awards for engineers! :rolleyes:

They probably hold them in a vacant warehouse like the Academy's technical awards. :D

I know very little about music production, so I can't really say how important an engineer's job is, but I suspect like most technical jobs the best ones never get any credit because "they're just doing there job".

[bb]

Could anybody please try to explain why CDs are in about the same price range as DVDs? Keep in mind that the production costs of Hollywood films often exceed the 100 Mio $ range. Music production is very cheap compared to that, so CDs should be significantly cheaper than they are nowadays. In my opinion to buy CDs means to agree to be ripped off.

bb

[Kedirekin]

Partly it's because movies make so much profit in the theaters. Top 40 makes a little bit off of radio play, but I think it's a pittance in comparison.

On the other hand, music production costs should be a pittance in comparison to movie production, even if you ignore the gouging and (probable) kickbacks in studio recording time. In the end, it's probably about a wash (movie production costs offset by theater profits vs. almost negligible music production costs).

One thing I won't argue with - CDs should cost much less than movies simply based on content value (one hour of sound produced by a few dozen people vs. 2 hours of video+sound+extras produced by hundreds). That's really saying something considering that DVDs are overpriced (IMO).

[Mug Funky]

@ nedfu:

that's a mastering problem, not an engineering problem.

apparently bob ludwig isn't all that happy with excessive peak-limiting/compression/clipping either (who would be??), but money talks. if a mastering engineer refuses to f*** up a song, then they lose the job. simple.

there is _enormous_ pressure to make a song the loudest in the CD changer, and marketing people know their demographics - spotty kids listening on mini-hifi in their rooms. if they turn it up to an SPL where they'd find the compression annoying, then their mum will run in and tell them to "turn down that noise".

in these conditions, peak limiting goes very much unnoticed.

of course, i don't condone this trend - i'm merely listing some reasons for it. (i HATE to hear a good band screwed in this way. it simply makes music boring, and can actually wear your gear out quicker due to amplifier clipping).

@ dimpared:

please provide some figures. the people of this forum (esp. doom9) have been looking for reliable figures of any kind for a long time. this is the best we've got, but if you know better, please correct us with some more reliable numbers.

[Doom9]

here's another number source I found: http://www.nypost.com/business/20309.htm According to this, Apple makes $0.10 per song, $0.20 goes for hosting and credit card companies (I wonder what the distribution is there.. hosting should be next to nothing.. so perhaps Apple should consider a better payment model like monthly fees where there's no credit card fees per song), and $0.70 goes to the studio.

@Dimpared: my statement about the artists were merely to refute the party line of the studios.. they claim it's all about the artists (and I'd expect people working behind the frontlines of the music industry, such as yourself, to be compensated even worse than your average artist) where it's really all about the Porsche, Jag and Mercedes of the studio execs (or probably: their boats and private planes).

@Kedirekin: These days movie studios make less from the box office as from other endorsements, the most important part from their revenue comes from home video sales (meaning DVDs these days). But bb makes a good point, a week ago I bought 3 DVDs (Kill Bill, Secretary and Friday after next) and an audio CD. Except for Kill Bill, the other DVDs were cheaper than the audio CD. In addition, the average price of my 3 DVDs was a buck lower than the price of the CD.

[stax76]

@Dimpared

and what is then the job of the producer, making coffee for the engineer? :D

[LB]

Originally posted by Doom9
here's another number source I found: http://www.nypost.com/business/20309.htm According to this, Apple makes $0.10 per song, $0.20 goes for hosting and credit card companies (I wonder what the distribution is there.. hosting should be next to nothing.. so perhaps Apple should consider a better payment model like monthly fees where there's no credit card fees per song), and $0.70 goes to the studio.


But bandwith does cost money, irregardless of who you are. Even if they own the actual line, they have to pay for maintance on the cable itself (when gophers eat through the cable; I'm being serious here btw), and if they don't own the line then they obviously have to pay the lease on it, then there are the servers which host the content. While servers may be cheap, there are HD failures and cpu upgrades to make, and the initial server investment to recoup, finally you have the electricity bill and any other minor expenses for hosting, and then the IT workers to keep it staffed and maintain the content.

As per the credit companies, as you already know, or will come to find out, every time you pay for something with a credit card, the credit card companies get PART of that. An example is, some gas stations don't allow minimum credit card purchases of snacks inside the store if it's under $2.00. Why? Because they are charged a flat fee on each transaction by Visa, etc. If you don't believe me, try going into a few small gas stations and buying a $.25 pack of gum with a credit card :p

[wmansir]

We covered CC transactions in an accounting class I took. At that time I think Visa/MC took 2-3% of the sale, and there was a minimum, but I don't recall what it was.

iTunes could do several things to decrease there CC costs like pool purchases of a buyer and submit them as a one-time, monthly charge. I'm sure they negotiated with CC companies to lower the minimum charge.

OT:
Amex took 5% (they may still). Also, Amex didn't pay the vendor until 30 days after the purchase, where as Visa/MC did it instantly or within a few days. These differences are why Visa/MC are accepted at more places than Amex.

My economics Prof pointed out that Amex acceptance was horrible a few years ago, but has been making a rebound lately. Not because they loosened their policies with vendors, but because they started a massive advertising campaign with consumers.

@LB:

How much can hosting/bandwidth costs be on a 3-7MB transfer? I can buy a 25GB block of newsgroup downloads for $25. 1/10th of a cent per MB, and that's not even the best price (if you get a 'unlimited' account at a fixed rate you can really clean up.) Of course, it lacks the UI, accounting, and DRM overhead. And, of course, Marketing.

[LB]

Originally posted by wmansir
@LB:
How much can hosting/bandwidth costs be on a 3-7MB transfer? I can buy a 25GB block of newsgroup downloads for $25. 1/10th of a cent per MB, and that's not even the best price (if you get a 'unlimited' account at a fixed rate you can really clean up.) Of course, it lacks the UI, accounting, and DRM overhead. And, of course, Marketing.

? You disregarded the remainder of my post.

1. Cost of maintaining the line (line gets cut in bad weather, gotta replace it, etc etc)

2. Cost of buying servers to host the website to handle so many hits

3. Cost of maintaining the hard drive full of the music

4. Cost of paying the overhead like electricity

5. Cost of paying the wages for IT people to staff and maintain the site

6. Cost of BW for samples. I don't have an itunes account since I don't listen to the crap they play over here :p , but I'm pretty sure they allow "sampling" portions of the song before you buy it right? Well that's an obvious bandwith issue there too

7. CC charges. 3% of $.99 = $.03, so since my post is only in regards to this $.10 hosting fee, which CC charges take $.03 of, the above 6 factors easily can fill that $.07 gap.

[Neo Neko]

Originally posted by LB
But bandwith does cost money, irregardless of who you are.

Quick diction check. There is no such word as "irregardless". It is simply "regardless". Think of what regardless means. Then think of what irregardless would mean if it were indeed a word. And by the time you think you have it figured out your brain will be mush. ;)

Originally posted by LB
Even if they own the actual line, they have to pay for maintance on the cable itself (when gophers eat through the cable; I'm being serious here btw), and if they don't own the line then they obviously have to pay the lease on it, then there are the servers which host the content.

First of all line matinance is not that big a deal. Second these places are generally located quite close to their ISP if they are not their own ISP in the first place. Whether or not they are their own ISP they generally have their own datacenter. It would cost them more to outsource. And once you go past a certain bandwidth prices bottom out. A company like Apple, Microsoft, or Real have such a large established web presence this would be little more than a drop in the bucket for their total costs. To prove my point with admittedly how little apple makes on music sales if their itunes hosting costs had to be covered by their itunes sales the company would be a failure doomed to never be profitable.

Originally posted by LB
While servers may be cheap, there are HD failures and cpu upgrades to make, and the initial server investment to recoup, finally you have the electricity bill and any other minor expenses for hosting, and then the IT workers to keep it staffed and maintain the content.

But it's the same situation. All those resources existed before ITMS. They only had to be redirected and slightly enhanced to handle it. Oh and BTW HD are not that expensive any more. It's not like paying a thousand dollars for a 10Mb HD back in the day. A single 100Gb hd can be had for about 60~70 dollars nowadays. Cheaper if you buy in bulk for server farms.

[wmansir]

Originally posted by LB
? You disregarded the remainder of my post.



I didn't disregard it, I said I can buy a similar service (block newsgroup access from a commercial provider) for $0.0001 per MB.

They have to run servers and buy bandwidth too. Apple has other costs in addition to that, like DRM (for remote authentication), UI (website), and a more robust accounting backend, which I mentioned.

Of course, NNTP servers have to deal with maintaining, and processing, up to a 1.5 TB/day peer newsfeed 24/7 in addition to the TBs of downloads, which iTunes does not. But the core service of data delivery is about the same.

[Sephiros]

No directly connected to music but it was to give numbers to what doom9 said about the DVD business:

http://www.factbook.net/wbglobal_rev.htm

46% of the revenues from movies come from the video/dvd sales. Only 26% of the revenu is generated in theatre.

I'd also like to point out that article:
http://www.usatoday.com/life/movies/news/2004-04-21-master-movies_x.htm

about profits from movies in theatre and DVD.
And heck, sometime you wonder WHY successes that already made profits at the box office are so damn expensive in DVD.

Im trying to get numbers on a ratio of how many movies are profitable only from their theatre release. But i suspect it's quite low.

[videofan]

Originally posted by Dimpared
First of all, I'm not trying to argue that these prices are reasonable, because theyr'e not. But, you say that it isn't all about the artist, of course it's not. I'm an audio engineer for a small label in Maine. You have to consider the costs to the engineers as well. The engineering cost is probably the most costly part of producing music. Let's face it, to produce an album that tops the chart, you first have to have good talent, or talent who's apealing to the eye, ahem Britney Spears. Then you need to have a very good audio engineer.

Dimpared

Dimpared, I tend to agree with you about the engineering cost. Unfortunately this means for me that the music industry is relying more and more rather on the engineering than on the real, native talent of the music artists in order to make money. And the audience of this music is driven by the music industry towards the point where the art of music is being replaced by the skills of the engineering staff.
This means that, when I buy music, I won't pay for the voice of the singer, but mostly for the sound engineers plus the audio and video processing hardware and software that makes the song sound "nice and soft" (plus the whole marketing machine), despite the fact that the artist(s) have less or maybe even no music gifts at all. And I personally I'm against it. I will always gladly pay for an album of Beatles but - as far as I'm concerned - Britney Spears' music values close to zero and I won't ever buy a single bit of audio data with her music. Remember - that's just a personal opinion :)

[stax76]

@videofan

I'm not much into pop music but I think with her good looks and the occasionally good production she's actually bearable (I think she sings better than Schwarzenegger acts, a computer certainly helps but it won't make her sound like Whitney Houston...)

[videofan]

personally i prefer jenna jameson for the good looking/production stuff :)