Changes Is Good

Back in February I attended a panel discussion with the always humorous, Chief Digital Officer of MTV, Jason Hirschorn. One of the many provocative questions he threw out to the audience was "what are people filling their iPods with" given that only a billion songs have been sold for the 43 million iPods in circulation. Thats less then 25 songs per iPod! Great question Jason.

With all the expensive consultants and overpaid MBA's roaming the halls within media companies you'd think that a few of them would be able to figure this out. Alas, its not to be. Given, that I was once an underpaid consultant and I'm now an inexpensive MBA roaming the halls of a media company, I figure it wouldn't hurt anything if I gave it a try. After "running the numbers" (spreadsheet here), I came up with a couple of answers. One is that the music industry has lost roughly $40 billion dollars in revenue from not aggressively pursuing digital distribution.
You may be thinking that $40 billion is a really big number and is the result of either shaky logic or poor excel skills. While I have exhibited both of these traits at various points in the past, this doesn't appear to be one of those times. Sure we can debate the logic of my model but the basic, hard to explain, fact remains that there have been only 1 billion songs sold over 40 or so million players with the average capacity to hold roughly 2900 songs.

There are several possible explanations for why Apple has sold far fewer songs via its iTunes music service then the volume of sales of its iPod music players would suggest. Everything from people ripping their CD collections and getting CD's or MP3's from friends to downloading from the many services available on the Internet. It could also be that people are using their iPods more as fashion accessories then digital music jukeboxes and allow them to remain virtually empty.

Making Some Assumptions
There are few hard numbers to play with so I made some assumptions (like any good consultant/MBA). If you want to make different assumptions or have more data and skills here is the excel file I created, feel free to modify and send me any changes or ideas. There has been somewhere between 37 and 43 million iPods sold since 2001 when they were introduced, and just over 1 billion songs have been downloaded from iTunes. If we assume, and this is a big stretch, that the distribution of songs over iPods is even, then every iPod currently on the market would have around 24 songs on it (1.1 billion songs divided by 40 million iPods). Weighting these numbers would make things more accurate but who has time to dig that deep into the data. The average hard-drive capacity of an iPod is just over 16GB and lets assume that the average file size of a song from the iTunes store is 5MB, then it follows that on average an iPod is on using 1% or so of its available capacity for music from the iTunes store. So whats on the other 99%?

Given the recent surge in iPod sales, most folks probably haven't filled their digital music devices to capacity and are only using a fraction of the space they have available. I did a quick survey of my friends and found that their iPods ranged from 10% to 85% full, with most folks around the 40% mark. My friends tend toward the geeky side of things and so lets discount this number a bit and assume that the average hard drive should be about 25% full and only 1% of that is from iTunes.

Do the Dollas make Sense?
To get to $40 billion in lost revenue with the above assumption is really easy, all you have to do is calculate how much money would the industry have gained if they could have charged for the 24% of music that is on the average iPod that wasnt purchased through iTunes. This cumulatively amounts to over 780 songs per ipod, that could have been sold but wasn't. At ninety-nine cents a pop, multiplied by the 50 or so million digital music players on the market and you get to $40 billion.

I'm not the first to suggest that the music industry has unnaturally constrained itself to its meager $33 billion dollar global market value. Back in 1999, Forrester uber-analyst, Mark Hardie, was fond of saying that the global music industry was "$100 billion dollar industry stuck within a 30 billion dollar business model". So $40 billion isn't as outlandish an idea as it might sound at first.

Even when adjustments are made to the model for the number of players (40% of market vs 100%) and the price point ($.12 instead of $.99) the revenue missed by not embracing the digital format and working to fill all those players getting out on the market still amounts to more then $1.8 billion. Even if only 40% of the iPod market paid to digitally download 50% of their songs at 12 cents per song the market would still generate an extra billion dollars in sales. Given the steep decline in the sales of non-digital formats highlighted by estimates put out by the IFPI last month, labels might want to consider taking any extra sales they can.

The End?
Its seem pretty clear that the amount of music on an average MP3 player is an indication to the true market size for digital music. So you can figure out how much money should be made based on different scenarios and assumptions about user behavior and demand. Holding on to a false, but comforting, beliefe that the market is only that which you can capture and monetize is not only wrong but foolhardy for an industry in a tailspin.

Besides, since I did the numbers in excel and had the model peer reviewed roundly criticised, by the learned Pholks on the Pho list, I declare it to be scientifically valid and statistically correct.