Rethinking the Music CD

Last Updated Dec 1, 2009 10:05 AM EST

For decades record labels earned their best profits on sales of albums/CDs. The formula went something like this:

1 hit song + 2 mediocre songs + 9 clunkers = $12 average selling price and a hefty profit margin.

But Apple changed all that with iTunes and 99 cent per-track pricing. Suddenly consumers could buy just the songs they wanted -- and that is exactly what they have done, says Harvard Business School professor Anita Elberse. As a result, labels are selling lots more individual tracks, but not enough to make up for the loss in CD sales.

"Labels typically have to sell 8 to 10 digital songs to generate the same kind of revenues as they do with one digital album -- this causes a sharp reduction in revenues over time," she tells me in an interview for HBS Working Knowledge.
So what's a music company to do? Elberse suggests a rethinking of the whole music business model, with the aim of capturing a high-enough markup on individual songs to make up for lost revenues on albums.

She has several ideas. Labels could:

  • Refuse to allow their CDs to be broken apart track by track -- the solution used by AC/DC. The problem: You won't get on iTunes.
  • Sequentially release albums and songs to stimulate more loyal and eager consumers to buy the full CD.
  • Improve the attractiveness of online CDs by cramming them with extras such as band interviews, additional track information and photos.
But the best idea may be for music companies to entirely rethink the essence of an album, or in Elberse's language, the "bundle." An album is a bundle of music tracks. iTunes has unbundled the album. Is there a way to reconfigure the bundle? Elberse says yes.
"An album with around 12 songs may be a fine format for some artists, but why would it necessarily fit the majority of musicians? Digital channels give labels great flexibility to try alternative formats. My results show that giving preference to quality over quantity and designing smaller, more consistent bundles may be beneficial."
Product rebundling might also benefit other industries with similar problems, such as book or newspaper publishers and television producers. But Elberse warns new bundles be put together with caution.
"It should be about providing real value to consumers, not about tricking them into buying something they do not want."
If you were leading a major record label today, what would you think of Elberse's advice? What is the next business model for this industry?

Please read the entire interview with Elberse, Tracks of My Tears: Reconstructing Digital Music.

(iTunes screenshot by swanksalot, CC 2.0)

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.