Decent thought

Below is a decent thought/idea which I had cooked up a few months ago when I had some free time.

We are all aware that the business model of music industry is in doldrums, they are desperately in search of a new business model as their classic strategy of bundling 10 songs together into a CD and selling it has got seriously disrupted by technologies like P2P/MP3 which allows user to exactly access one single song that they want to listen.

P2P has enabled people to download songs without paying many at all even for that one song. iPod/iTunes kind of offered a different kind of business model as they were able to offer/sell single songs which the customers are interested in. The iPod as player also gave a superior player experience.They created a whole ecosystem (distribution platform as well as terminal device) Theirs is a Razor/Blade kind of a model where they make money on songs( blade) as well as iPod(Razor). It is the blade that fetches them more money than the razor. But one thing that they don’t allow is one iPod user to copy music to another one.

Standard Digital/Information economics suggest that
1. digital goods have high fixed cost zero marginal costs which means by their very nature digital goods will be replicated , so trying to erect walls against will be highly very difficult. 2. distribution cost of digital goods is non zero.

I think that iPod uses the second point to its advantage but not the first point. So iPod/iTunes have done something to fix the problems in music business model but not to a great extent.

Here is a study that I read somewhere worldwide there are about 1 million mp3 mobilephone sets. There are about 1.35 million mp3 players like ipods(including iPods). By this year end it is projected that the mobilephone mp3 players are going to far outstrip the numbers of other mp3 players. Moreover in countries like ours(India), there is not going to be iPod like players but mp3 players in phones to be more predominant. See these two links
http://english.chosun.com/w21data/html/news/200409/200409050034.html
http://www.japaninc.com/newsletters/index.html?list=mmw&issue=69

So In essence there has to be a (sound) distribution mechanism to sell unbundled digital goods, embrace replication, and terminal players are required . Since the goods are unbundled there is need for a mechanism of payment( micro-payment ) for selling unbundled goods.

So here is a possible scenario( Telcom companies as music distribution companies because they have all the infrastructure required to do this)

Distribution Mechanism: Mobile Phone Networks (it is been already established , more prevalent than iPods/ITunes combination and it can be viewed as a centrally mediated p2p kind of network but highly controlled via the telcom operators)

Terminals: Mp3 handsets, going to take off big , my bet is that it will become hugely popular in India , (Here in bangalore I see people putting one their headphones from mobiles )

Micropayment – Talktime as “Currency” ( I got inspired by the Airtel Friends Recharge & concept of “Digi” in malaysia), where they allow phone to phone recharge. But actually if we think about it , “talktime” is form of currency inside a mobile virtual world šŸ™‚

The situation is that mobile companies can sell music to users on an individual song basis just like people download ringtones. They bill the users for the song by reducing the talktime in their cards ( I am assuming this scenario for pre-paid user only). Now they also encourage user to sell this song by saying that if they transfer this song to some other friend of his, the user in effect gains a little benefits ( either in kind of points or monetary) but then part of the cost goes to the mobile operator as well ( this part includes the cost of transfer of the song + say another 5%)

( This is how we embrace replication and in effect gain value for the telecom companies )

The pricing of the songs should be kept competitvely. Ofcourse we can’t compete with zero cost songs available on the internet, but let’s say what’s the next best alternative.

If not on internet people would buy pirated mp3 songs from some pirate shops. A pirate CD ( typically having 200 songs) costs about 100Rs in Paalika Bazaar. Out of it is only 50 odd songs I am interested in or trully enjoy. So the cost I incur in it 100/50 = 2 Rs per song.

So if in the pirated market a song costs me 2 Rs , the we should price the songs through this method at less than or equal to 2Rs.

So when a user downloads the song then he should get the song for 2Rs, suppose that a user wants to pass on that song to his friends, he can ask his friend for any price he wants out of which a certain %( I assumed 5) will always go to the network + the cost the network will charge to transfer the song ( which should not be way too high, more than the cost the song itself otherwise the user will not have incentive to transfer at all).

So we can have scenarios that B bought from A and sold to C , so in this case B gains some money from C and a very small part( 5%) again goes to the network. Here B and A would happy to sell because they gain money and also the network gains money.

So it is kind of a win – win situation for those who replicate and also for the music/telecom companies.

Having told this long story here is the crux of the idea. One can build a billing software for enabling such a kind of transaction ( p2p selling ) to take place. Building such a software would require to keep track of huge number of transactions going on.The other thing is to keep track of who is selling to whom and how to make sure charging happens.

What I suggest in this front is to audio watermark all the songs that are going to be sold by the telecom companies, using this audio watermark keep track of all the songs in the network. There are just going to be enormous amount of transaction going to happen but given today’s kind of technology it is very much possible.

So in a single sentence the idea is that one can “build & license a billing software for tracking audio watermarked songs sold & resold in a mobile network.”

This idea is not without its hindrances.
Technical

1. First & foremost what if user come up with a way in which they transfer songs by pointing two mobiles to each other ( thus in effect bypassing the whole mobile network in picture)
{Currently I have no answer for this except that this kind of direct transfer I have not seen}

2. What if user try to copy mp3 songs from PC to mobile and then sell/resell it to gain points.
{The songs from PC will not have audio watermarks so he cannot sell like that.}
3. Keeping track of this kind of transactions is not a joke.
{It is true but it is not impossible ,these guys handle simillar kind of transactions}

Economic
4. The financial transaction cost is going to be higher than the marginal cost gained out of the song for each song.
{ No this kind of a viral revenue generation,employing economy of scale. I have a strong feeling that mathematically it can worked out to prove that the collective marginal cost is far greater than the transaction cost for each song } šŸ˜€ šŸ˜€ šŸ˜€
Regulatory
3. Some Regulations that I don’t know about or have ignored.

If you have read this far, do let me know what you think. A couple of my friends thought it is way too complex.

Rajan

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