First, let’s think about why it is difficult to figure out a price for music files. The current price for a music file on the distribution sites carrying tracks owned by the major record labels is $0.89-$0.99 (amazon.com, itunes). The continuing use of free, peer-to-peer file sharing networks to download copyrighted music is a testament to the fact that many music listeners think that the per file cost of music is too high. Copyright holders respond by attempting to stop users from using free P2P clients, through direct litigation against free P2P client sources and individual users. This political and legal battle goes on outside of the direct market for music, which limits the effect it can have on market price.

However, in modifying music user expectations, the presence of P2P clients has directly influenced the development of for profit music distribution models. Music users know music can be distributed for free, so they won’t accept high prices. Music users also have higher expectations for quality, and they reflect those expectations with their purchase patterns. Music user quality and price expectations were doubtless responsible for itunes’ recent decision to offer DRM-free files and to change its price structure.

The most successful alternative distribution models will incorporate what users found appealing about P2P clients, affordability and community, while compensating artists. Many admitted users of P2P filesharing networks admit that artists ought be compensated for music files, but argue that paid distribution options are inflexible, overpriced, as well as inferior to the best P2P clients. There is no lack of support for a business model that compensates artists at a reasonable market price. Nearly 70% of respondents to an online Wired survey claim they would pay $10 for unlimited music downloading every month. It is likely that many will resist purchasing music until a reasonably priced model emerges.

Let’s take a look at the alternatives to itunes/amazon model. The online music distribution business has a veritable graveyard of storefronts that did not work out, so the true test of these models is how well they stand the test of time. Here are three interesting models available or soon to come at this point.

• Rhapsody: Rhapsody has been offering unlimited streaming of its library since 2002. Rhapsody offers two subscription services. Rhapsody Unlimited, $12.99/month, allows unlimited streaming of music from the Rhapsody catalogue. Rhapsody To Go, $14.99 per month, also allows unlimited access to Rhapsody’s library, plus songs can be transferred to compatible PlaysForSure portable devices without purchase. While this service enables unlimited access to a large library, which includes tracks copyrighted by the major record labels, the user is seriously constrained by the limited options as to what she can do with this library due to compatibility limitations. Rhapsody is less popular than amazon and itunes, which illustrates its limitations. It seems many people who pay for music would rather have flexible access to fewer songs than unlimited, inflexible access to many songs.

• eMusic: A monthly subscription to eMusic costs $10 for 30 tracks. At $0.33 a track, it’s significantly cheaper than itunes and amazon.com. Its catalogue is also DRM free, and compatible with all media players. eMusic lacks contracts with the major labels, so the selection is limited accordingly. eMusic caters to individuals who purchase indie and underground music. eMusic also has a thriving user community, complete with its own wiki. Without cooperation from the major record labels, eMusic will likely remain a niche player in online music distribution, at least in the short run.
• Choruss: Choruss is a forthcoming online music library for undergraduate college students. Having Choruss would enable students to download unlimited music for free using whatever methods they choose. Universities would track the music downloaded, and pay the music companies for the student downloads. Universities would incorporate the charge for this service into tuition. However, it is unclear why such an option should be limited to college students. Furthermore, paying for and operating such a service is not necessarily a proper use of a university’s time and resources. The tax on students who do not wish to download a large amount of music, or wish to pay only for the music they do want, also seems unfair.

Paying per file is impractical for users who download a significant amount of music each month. A monetized model that avoids per-file payment is ideal for such power users. Choruss is most indicative of the recent movement towards figuring out methods to monetize the flow of music files over the internet while avoiding per file payment. Choruss would allow college music users to maintain their current behaviors, while allowing artists and record labels to get paid. If Choruss is successful, similar models could be tried for the general public. Warner Music has advocated an ISP surcharge for the ability to download unlimited music, as well as a surcharge on internet access.

This brings us back to the question we began with, in slightly altered form. How much should be paid for unlimited access to flexible music files, and to whom? What entity will play the role of the tracker and payer, if not the record labels themselves? Some, notably William Fisher, have proposed that government step in as the central music tracker and payer. The government, according to Fisher, should step in because this is a situation of market failure; music files have too many of the attributes of public goods to be priced and allocated efficiently without government intervention. But it seems inappropriate for a single government to take that role, placing the burden of paying all artists on the shoulders of a single nation of taxpayers. Furthermore, a centralized authority also would have less incentive and ability to listen to the wisdom of crowds in terms of pricing and execution than a firm in a competitive context.

The passion and ingenuity of music users has caused drastic changes in the price and distribution tactics employed by music distributors. I will continue to keep an eye on the development of Choruss, eMusic, and other paid music alternatives to Amazon and itunes. While they don’t have huge market share right now, they offer clues about where music distribution is headed.