$.99 is not the market rate for downloads

Some of the major indies are complaining about the per-piece rate they get for sales on eMusic vs sales on iTunes music store (iTMS). Per Reuters:

After factoring in distribution costs and other expenses, some labels receive as little as 12 cents per song in profit, sources say — far less than the 60 cents to 65 cents per track received from iTunes.

These labels are complaining that the market rate for paid downloads is the $1 price at the iTunes Music Store. And this isn’t the only place for the idea that the going rate is $1. The recent decision by the Copyright Royalty Board to quadruple the rates paid by webcasters also used the iTMS price as the marker:

The Board concluded that the rapidly escalating rate was justified as it brought the statutory services closer to the interactive services as the advertising market grows over the next few years.

But here’s the problem: people who use the iTunes Music Store don’t use it enough for their purchases there to count. They get their music by ripping CDs and by filesharing. The actual price for these users is not what iTMS charges — they don’t really use iTMS. The actual price is free, because they have opted out of the paid download market completely. If iTMS is setting the market rate, the market rate is $0.

eMusic users, on the other hand, are real customers. They spend three times more on downloads in their first paid month than iTMS customers spend in the lifetime of their device, and they probably own tens or hundreds of times more paid downloads than iTMS customers. iTMS customers spend about $3 per device, which lasts a couple years at least, and own about 3 paid downloads. eMusic users spend at least $10 a month, for which they can have 30 downloads. Over the course of ten months an eMusic subscriber has paid for 1000 times more downloads than most iPod owners will pay for over the lifetime of their device.

It’s true that iTMS supplies the vast majority of paid downloads, but their customers don’t take their product seriously, because $1 is the wrong price. eMusic’s customers, on the other hand, use the service for a large portion of their music acquisition. iTMS’ customers pay far less than $1 for music, because they hardly ever pay for music at all. eMusic’s customers spend at least $10 a month; given that they don’t download their maximum every month this comes out to an average download price a little north of $.50.

The market rate for paid downloads, then, is $.50.