I must agree with Asylum on the interpretation. If you want less than the entire CD, and you’re paying less in total dollars for it, you’re getting what you want.
I was thinking about the pie chart that was linked to, and came up with this notion. Let’s assume that the values from the chart are true. Of those costs, they are either fixed or variable, and they are either present in both methods of marketing, or are present only in physical retailing.
Retail Markup: Not really a “cost of goods sold” - though I’ll consider it as such for simplicity - and is present in only the physical model.
Overhead, distribution, shipping: Fixed/Variable. Partially represented in both marketing methods, as overhead would still exist, distribution and shipping would not, but there would be a cost associated with delivery of the product via electronic methods, however smal.
Marketing and Promotion: Fixed. Both.
Royalties: Variable. Both.
Signing/Producing: Fixed. Both.
Co-op Ads/Discounting: Fixed. Physical only.
Pressing and Printing: Variable. Physical only.
Profit we’ll deal with separately.
I made the assumption that 1M copies of the album were sold. This would mean that of the $16.98 cost of the album, $16.39 was the cost of goods sold, leaving $0.59 per unit (or $590,000) as profit.
I then assumed that, instead of any physical retailing, it is sold only in electronic form. The Overhead and some amount of distribution cost would apply in this model, as would Marketing and Promotion, Royalties, and Signing/Producing. Since I assumed that Overhead (which I’ll include at a rate of 50% of the physical model to account for no longer having distribution and shipping costs), Marketing and Promotion and Signing/Producing are fixed costs, we’ll say the total of these costs is $4.9M ($1.67M + $2.15M + $1.08M, respectively, based upon the calculations from the pie). I then assumed that the same 1M people purchased an average of 4 songs each, at $1 per song. This means revenues of $4M. Royalties, if paid on the same percentage, would be ($4M *0.06%) $240,000. Total cost of goods sold would total $5.14M, while revenues would be only $4M, leading to a loss of $1.14M to the label.
Obviously, there’s some physical retailing still going on to bolster sales, and my assumptions may be drastically incorrect, and there’s no question that my account above is horribly simplistic and my math might even be wrong. But it appears to me that $1 per song is probably not out of line, in that they want to be able to produce the same profits while charging significantly less from the end consumer. Yes, they’ll have some reduced costs, but some are fixed and cannot be reduced, while it can’t be questioned that they are ultimately generating less revenue on the entire investment.
So, I’ve gone way off topic from the OP, and I’m no supporter of evil, marrauding, gutless and opportunistic labels, but I hereby declare $1 per song download to not be out of line.
