Music Needs a Business Model
by Gerald Trites, FCA

Since the early years of the Internet, the music industry has been a focus of the kind of business model problem faced by many online businesses. They have had great difficulty finding a viable business model. In the very early days, Napster rocked the industry with its free music sharing service, essentially robbing the industry of the music. Over the years, numerous court cases have found against Napster and they were forced to go "legitimate". Then iTunes came along and has experienced a great deal of popularity. It had the closest to a viable business model of most of the other online music sites. They sell single tracks for 99 cents, and take in some advertising revenue as well. Now, however, they are raising their prices for single tracks to $1.29, perhaps launching a trend that could be its undoing. Other services, like Ruckus and SpiralFrog have had to close down.

Many other music sites have gotten themselves into the bind of offering music for free and having to pay the music labels for their music - a business model with no future. One of the basic principles of business that seems to have been lost with some cyber entrepreneurs is that a retail business must buy goods and then sell them at a higher price in order to generate a profit. Advertising can augment the revenues and lead to a bigger profit, but is not necessarily going to be enough to lead to a profit in the long term by itself.

Consumers are both naive and short-sighted to think that they can get good music for free. It costs a great deal to produce modern music and someone has to pay for those costs and provide some kind of return on investment to the providers of the music - the musicians, producers, labels, etc. That is simple economics.

The music industry has been going through a restructuring since the Web took hold. After more than ten years, it is still struggling to come to terms with it. Hopefully there will be some progress to be made in the next couple of years. See this article for a good summary of the current changes going on in the industry.