PRICING

Coping With Fury at a Price Hike

When eMusic raised prices, customers grumbled and threatened to leave. Was it too late to go back?
Mo Money, Mo Problems eMusic CEO Danny Stein felt that prices had to go up. Thousands of users felt otherwise.
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Stupid, stupid, stupid. Adios to your service," griped one customer. "Boo, hiss," wrote another. "What the hell is going on?" demanded a third. And these were some of the more timid missives that were flooding the message boards at the online music retailer eMusic last June.

The fury stemmed from two big changes eMusic had just implemented. First, it had raised its subscription rates -- as much as 100 percent for some subscribers. But that wasn't the sole source of the outrage. Founded in 1998, eMusic had become the nation's second-largest download site by touting itself as the best place to discover independent artists -- that is, those not affiliated with major record labels. But eMusic had just signed a deal with one of the majorest of the majors, Sony BMG. The deal promised to add a million new songs, by the likes of the Clash, Michael Jackson, and Bob Dylan, to the site. But many longtime users saw the addition of mainstream artists as a slap in the face, a betrayal of the cool, alternative space eMusic was supposed to be. And they weren't shy about expressing their fury.

Danny Stein, the company's CEO, had anticipated "the very unpleasant probability that we'd get some hate mail from very impassioned users." Still, the volume and ferocity of the response were unnerving. Stein was convinced that the Sony deal was a winner, both for users and for the company. He was also certain that prices had to go up. But there was little question that the company could have done a better job of explaining the changes, which took place last June, to eMusic's core audience. And now he had some serious fires to extinguish.

Pricing had been a contentious issue at eMusic since Stein and his partners in the private equity group Dimensional Associates acquired the service from Vivendi in 2003. One of the first things the new owners did was to abandon the site's price structure -- $9.99 a month for unlimited downloads. Instead, they offered customers a number of monthly subscription plans. Old subscribers griped, but the new monthly rates -- under which songs ended up costing about 25 cents each -- were still a bargain compared with the prices at iTunes, which sold tracks for about 99 cents each. By 2007, the number of eMusic subscribers swelled to some 400,000.

Unfortunately, many of the record labels supplying the site with songs were ambivalent. On the one hand, eMusic was a great outlet, with an audience of passionate music fans eager to discover new artists. But lower prices for users meant lower payments for the labels and their artists, sometimes less than 15 cents a track. Indeed, in 2007, several prominent labels, including Drag City and Tzadik, pulled their catalogs from the site, citing the low payments.

Stein knew there was only one way to prevent even more labels from jumping ship: raise prices for subscribers. He also knew that eMusic couldn't get away with another price hike without offering something in return. He sought ideas from his executive team and eMusic subscribers, and he held a series of focus groups. All the feedback pointed in the same direction: eMusic needed to broaden its catalog. And given that eMusic had nearly exhausted the universe of independent labels, Stein says, "It was pretty obvious that in order to take a big swing, we needed to start working with the major labels."

That conclusion once would have seemed unthinkable. But the digital music landscape was changing fast. For years, eMusic was unique among music sites -- at least legit ones -- in that it offered songs as unencrypted MP3s. In other words, once you bought a song, it was yours, and you could burn it to as many CDs or listen to it on as many different players as you wanted. On iTunes, by contrast, music files were sold with digital rights management, or DRM, protection limiting how and where they could be used. Such protections were added at the insistence of the major labels, which were struggling to discourage piracy online.

Stein had been speaking with the majors since 2003, but the conversations rarely got past the intractable DRM issue. But by 2008, all four of the major labels -- EMI, Warner, Universal, and Sony BMG -- had agreed to make at least some of their catalogs available in an unrestricted format. And Sony was open to putting its back catalog of one million songs on eMusic.

So now that eMusic knew it could bring on a major label, the question was whether it should. After all, its identity as the Web's top independent music store remained a unique selling point. But Stein was convinced that most customers cared more about an artist's musical sensibility than which record label it was on and would be happy to pay more for access to more music. He also had grown tired of would-be customers leaving the site after being unable to track down any artists they had heard of.

A tougher issue was how to deal with the many eMusic customers whose 2003-era subscription plans had been grandfathered through subsequent price changes. These tens of thousands of users were now paying legacy prices that were far lower than those paid by newer customers, dragging down revenue. Was it time to finally get them up to date? "We knew this was the area where we were susceptible to taking the biggest criticisms," Stein says. Was there any way to soften the blow? Stein wasn't so sure. "At some point," he says, "we just had to take our medicine."

The Decision On May 31, 2009, Stein announced the addition of the Sony catalog on eMusic's blog, 17 Dots, in a post with the cheerful heading "More of the Good Stuff." Touting the addition of artists including the Strokes, Bruce Springsteen, and Leonard Cohen, Stein focused on the imaginary divide between indie music and major labels. "People love all sorts of music," he wrote, "and our goal is to present all of it in a way that creates a community not only of music buyers but of music lovers." He did not, however, mention eMusic's new pricing. Customers learned about that later, via e-mail or through a subtle notice posted on the website's front page.

The reaction was fast and fierce. Over the next couple of weeks, Stein received more than 1,500 comments. "Good luck with your new major label 'friends,' " read one. "They will teach you so much more about screwing your customers," offered another.

Over the summer, eMusic staff members worked to cool down the message boards and promote added-value features of the new pricing plan, such as album pricing, which allows customers to buy many complete albums at a discount on the regular per-track rate. The company also dispensed a flurry of virtual Band-Aids -- giving customers "booster packs" of free downloads and offering them free songs in exchange for rating or reviewing albums.

By fall, the dust appeared to have settled. Despite the uproar in the blogosphere, the site's subscription base held steady, rather than dipping slightly, through the traditionally slow summer months, and by year's end it was growing again. Among new subscribers, first-month turnover, or churn, was down 7 percent by early fall and has continued to decline.

Stein is optimistic that higher prices and Sony-driven growth in the subscriber base will make the indie labels happy, too. Indeed, when final numbers are tallied, the price per download for the final quarter of 2009 looks to be the company's highest ever. "We're hoping for higher payouts," says Ryan Fox of Omaha-based label Saddle Creek, home to artists such as Bright Eyes and Cursive. Indeed, there has been no sign of indie labels bailing. Meanwhile, in mid-January, eMusic added more than 10,000 new albums from Warner, Atlantic, Rhino, and several other labels. The company also was said to be in merger talks with Best Buy and Rhapsody -- rumors that Stein dismissed. "There is no impending sale," he said.

Despite the occasional unpleasant moments -- "It doesn't feel good to be called names," he says -- Stein has no regrets. "Whenever you make big changes, there are lessons to be learned," he says. "We've learned that transparency is good and to try to get out there and to try to explain as much as possible -- for the next time that we have to go through this."

The Experts Weigh In

MAKE NO APOLOGIES

eMusic acknowledged a core reality of doing business online: If a company is to exist, there has to be a bargain, a give and take, between the service and its users. This is particularly true in an industry like music, where free, illegal alternatives are so close at hand. My general advice to companies dealing with these issues is to be very straightforward, fair, and unapologetic. You do those three things, and let the market do what the market will do. In eMusic's case, it seems to have turned out OK, and arguably moved them to a much better long-term position.

Tim Westergren
Founder
Pandora
Oakland, California

GET THE USERS INVOLVED

eMusic has a few things going for it. Its customers are loyal, and they think that music is worth paying for. Given that customer profile, eMusic could have been more open about why it was raising prices and done more to involve customers in the decision through its blog. It's true that some people would have complained anyway. But if eMusic had been more open, it could have identified some of these users earlier and controlled some of the damage.

Sonal Gandhi
Digital media analyst
Forrester Research
Cambridge, Massachusetts

DON'T FEAR THE FRICTION

Managers need to expect that any bold shift in policy will generate friction. Stein seems to have understood this. He made a fairly risky move. It's never desirable to alienate your customer base, especially when people have the option of getting the product for free. But I think the "one fell swoop" approach was the right one. The PR aspects could possibly have been managed more effectively, but the important point is that Stein had the guts to make a bold strategic move, even though he knew it would be difficult in the short run.

Alan Sorensen
Associate professor
Stanford Graduate School of Business
Palo Alto, California

Correction: A previous version of this article stated music files sold on Amazon.com featured digital rights management protection, limiting how and where they could be used. Amazon has never sold music with such protection.

IMAGE: Timothy Devine
Last updated: Mar 1, 2010

ADAM BLUESTEIN

Adam Bluestein is a frequent contributor to Inc., writing about health care, innovation, and new technology. He lives with his wife and two children in Burlington, Vermont.




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