eMusic's Pakman: Does he think the iPod is holding back overall music sales?

Posted by: Peter Burrows on December 21

We’ve gotten scores of comments in recent days regarding a BWOL story called Apple May Be Holding Back The Music Biz, and a related interview on this blog with Napster Inc. chief executive Chris Gorog. The vast majority of you roundly bashed Gorog’s argument that Apple was hurting overall industry growth by refusing to embrace the subscription model and by refusing to open up the iPod to rival services. Many of you predicted that concerns about download growth will evaporate on Dec. 26 once all those new iPods and iTunes gift cards are unwrapped. But sprinkled in the comments were a suprising number of references—mostly glowing ones—to eMusic. So I figured I’d check in with eMusic CEO David Pakman to get his thoughts on the topic.

eMusic is interesting in this context for a number of reasons. For starters, it is the best-known subscription service that is clearly riding on the iPod’s coat-tails. As such, Pakman doesn't have any particular bone to pick with Apple. That’s because eMusic sells a catalog of over one million songs from indie labels in straight MP3 format, and MP3s play just fine on iPods. Also, eMusic's business model places it smack dab in the center of the a la carte download versus subscription service debate. That’s because eMusic’s approach is a bit of both. It charges a monthly fee, a la Napster or Real. But rather than “rent” the use of music—meaning it is no longer yours if you stop paying the bill--eMusic’s subscription gives you the right to download songs outright, just like on iTunes.

So what does Pakman think? To be sure, he admires Apple’s success and the quality of its products. But he agrees that the industry would be better off if Apple tweaked its business model. “If you want to buy songs from the majors, iTunes makes it easy," he says. But Apple's refusal to move beyond a la carte downloads or to make the iPod compatible with rival offerings "is absolutely having a negative effect. As an industry, you want as many people selling as much music in as many ways as possible.”

Pakman does emphasize a factor that is very much in keeping with the dominant theme in your comments: that the music industry would be far better off if it dropped its demands for DRM entirely. His evidence: that eMusic sold 4 million songs in November and 60 million in the past eighteen months. That’s nowhere near Apple’s 800 million or so sales figure, but it's not bad for a company without Apple’s brand. “We’re a distant second to iTunes, but they spent $100 million on advertising last year and we didn’t,” Pakman says. By the way, he believes eMusic sold more songs downloads in November than Napster, MusicMatch, Yahoo and Microsoft combined.

The lesson, he says, is that customers tend to buy more music when there are no restrictions on it—whether its DRM schemes imposed by the major labels, Apple’s restrictions on what portable devices iTunes downloads will work on, or the fact that the music delivered via Napster or Real’s subscription services will only exist so long as you keep paying their fee. He argues that this is why his customers are willing to buy an average of 31 songs per month, versus just two or so from iTunes, according to his analysis. “If you sell music that is universally compatible and without restrictions, consumption goes up,” he says.

One intriguing bit of advice for the majors: strip out the DRM from the vast majority of songs that are no longer selling briskly. “Maybe you want DRM for the latest Eminem CD. But why wouldn’t you experiment with the rest of it by making it available without DRM. You're not selling much of it anyway."

In all, Pakman isn't looking to throw stones at any particular competitor. He thinks Apple is clearly satisfying hordes of customer and doing a great job of serving its shareholders' interests. He praises Real's Rhapsody service as a quality offering. But his overall point is that no single company, including eMusic, will be able to provide all consumers with all the possible means they might want to have to get music. For example, he admits that only a portion of the populace is ready to pay $100 per year for an annual subscription to eMusic. So the best approach for the industry in the long-run, and for Apple, would be to get rid of any usage restrictions to make digital music a risk-free proposition for consumers.

In one key way, he puts Steve Jobs and Chris Gorog in the same camp. He says both are for the most part just transferring the major labels’ hit-obsessed business models into the digital realm. Apple and Napster may both offer over a million songs, but they focus their promotion efforts on the hottest, trendiest performers. “iTunes is recreating Walmart, Kmart and Best Buy. There’s nothing wrong with that. But it doesn’t necessarily help the [music industry] grow,” since mainstream fans were likely to buy this music anyway.

Instead, he says the real key to industry growth is getting consumers to pay for music they aren't currently buying. That means helping them discover new artists, or making it so easy, affordable and risk-free to buy old favorites that people just go ahead and do it. He believes eMusic is doing a good job on that front, as evidenced by the fact that 87% of the songs in its eclectic portfolio were sold last quarter. "We don't have a long tail; we are the long tail," he says, referring to technology consultant Mark Anderson's theory that Internet technologies create a vast market for older or less popular content than was previously thought. “I challenge Apple and the others to disclose what percentage they sold,” he says.

And eMusic's sales are likely to get another bump come Jan. 9, the day before Steve Jobs' Macworld keynote. That's when eMusic will launch its first TV ads. The multi-million dollar campaign will target the 28-and-older crowd, particularly those who are not interested in the latest pop sensations. "There’s a whole lot of customers that are turned off when they log onto [services] and see Ludacris and Kelly Clarkson," he says. “The only problem with emusic is that no one has heard of it. That’s about to change.”

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