Admittedly, he has his own vested interest in the topic but MP3Tunes honcho Michael Robertson has an interesting perspective about why label-approved digital music services fail in this article from the Register. The problem he sees is that the labels make such high financial demands that it's almost impossible for any music service to recoup enough money to stay in service. He's got a good point there. Even though iTunes is the number one music retailer out there (for the U.S.), Apple makes its money from selling iPods, not from the thin profits they get from selling songs (that's part of the reason that they don't want to unlock those little gadgets and give other players/manufacturers the chance to hone in on their biz). Similarly, big box retailers like Best Buy can deep discount their CD's and put them in the back of the store because they also are trying to get you to buy more expensive items once you walk into their store (i.e. stereos, TVs, fridges).
What Robertson misses as part of the argument is that the labels aren't the only players in this game, as he should well know. For a digi service to offer up music, they need also need the consent of the publishing companies and artists (assuming they have contracts to cover this). After they all take their share, the services offering up music have even less money coming in from music sales.
Robertson goes on to say that the remedy for the problem of starting a legit digi music business is the courts- once they provide guidance and set precedent, everything will be peachy-creamy. Obviously, that's not gonna cut it. It'll take years for the courts to sort things out and it's far from guaranteed that they'll come up with anything final, much less come to a decision that's totally beneficial to digi services.
Instead what has to happen is that digi services have to take initiative and negotiate contracts with labels/publishers/artists where all involved can survive financially. And what would that include? As they say, if I had the answer, I’d be a rich guy by now. But… we can still guess at what needs to be done. Most importantly, the digi biz would have to get a bigger piece of the pie (aka music sales) to survive. Obviously, the other labels/publishers/artists (aka LPA) wouldn’t be thrilled with this. They’d point out that they’re doing much better with other digi-biz’s so why should they take less money? The brash new digi-biz would need to have a convincing answer for this. If they can’t offer as much dough, maybe they could offer… stock options, some ad revenue?
Another way that this imaginary brash, bold digi-biz could rake in enough dough to survive would be to pick up ideas from other services as they attract consumers (and eventually money) other ways. As with publications, ad money is important and the digi-biz would have to be creative about the packages that they’ve offer to be attractive. Also, offering some music, video and interview exclusives would draw in users and with higher web traffic, the digi-biz can wave this in front of advertisers and try to turn that into revenue.
Mind you this is coming from a non-MBA but you get the point. The digi-biz’s are gonna have to get creative and strike up deals that are more beneficial to them. If anything I said does help our your biz and provide beneficial, don’t feel embarrassed to give me a gratis account to your wonderful new music service…