About a Business Model

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For Assignment 2, my essay was about promoting music via live performances in Second Life. I also argued that the issues surrounding music sharing would eventually self correct as generations that come of age never knowing a non-Internet world choose alternatives like Creative Commons. In response, Elizabeth and Steve wrote that they would like to see more detail on the business model. Now that our blog is up and running, I have a little time to explore a possible alternative using the open source model.

In open source software, much of the code is available as a free download. It is literally given away, so the money is not made in software sales. Companies have built their business models around hardware appliances, maintenance, and services that they can charge for. A good example is a firewall appliance or DNS server that uses embedded Linux, Apache, Bind or IPTables, that can be plugged in to a network and easily configured with a web front-end that the company builds. The company can sell the appliance and charge an annual fee to keep it patched and updated as needed.

In this vein, a company could design an MP3 player that will hold a number of songs. The company could research independent bands and labels that allow the artist to retain their rights to the songs that they compose and record. For commercial use, a licensing scheme must be negotiated.

For the math:

Say the MP3 player with a custom logo wholesales for $20 in bulk. At a negotiated royalty payment of $.25 per song, per player, 50,000 units sold would look like this:

MP3 Player 512mb $20
100 Songs @ .25 $25

Total Unit Cost $45

50000 Units Sold @ $59.99 $2 999,500
Cost of Goods Sold $2 250,000
Gross Profit $ 749,500

This player could also be offered in conjunction with a subscription service that refreshed the songs on the player for an additional monthly fee. You would have to move the current songs to another hard drive first. The gross profit of the unit will get eaten up by R&D and promotional costs, but the payout to musicians is still $1.2 million, or $12,500 per song (bands that go through Magnatune must split 50/50). A major label band that gets $.10 per song must sell 125,000 songs to make the same amount of money AFTER they are square with the label.

Marketing for this product could be done via Second Life. The bands could perform live at “festivals” or individually in SL venues. Objects linking to a web page for ordering could be widely distributed at the SL Magnatune location and around towns. Other avenues for promotion would be the artist’s web sites, college radio stations, etc. Cheaper models with a selection of fewer, royalty-free songs could be given away at real-life concerts as promotional items. Promotional versions could have a browser interface to provide more information on the full version and links to the bands’ web sites.

Would people buy it? That would take more market research than I can do in the allotted time, but marketed to the right audience, it might arouse interest in DRM-free, independent music. The value added is in a service that makes it easy to supply the consumer with “podsafe” songs that they can use without fear of lawsuits. By most standards, $.25 per song is a bargain, but the music buying public is quite fickle. The key to success for this type of product would lie in the sexiness of the player and the selection of music. In other words, to get this really cool MP3 player, you have to buy the music. That type of customization may drive the price past the point what the market would bear, but the “loss leader” business model works well for devices like printers and cell phones, where there is an ongoing cost for supplies or maintenance. Ultimately, the device may have to sell for the price of the songs.

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