Another déjà vu in digital music: Spotify offers discounts to university students, à la Napster 2003

Posted by in internet, mobile, music

Spotify announced today that university students in the UK who have purchased an NUS Extra Card, will be offered a 50% discount on the price of Spotify Premium — that’s £4.99 on a service for which post-college folks pay £9.99.

This sort of “price discrimination of demand” — to use a dismal term from Economics — has been applied before on music services, but in the US. Via this method, a product or service is priced based upon characteristics of the buyer not the product/service itself.  Here, students get a discount — the price is a function of the buyer.

Importantly, the wider context within which these discounts are being offered has changed significant.  And so, this time around, its likely a more positive outcome might result from this appeal to university students.

Back in 2003 and 2004, Napster began offering discounts of various kinds to University students in the US.  These discounts came in the form of (a) bundling Napster within university activity fees (e.g., Penn State), or (b) significantly discounting the streaming service down to $2 (e.g., USC, Middlebury, Vanderbilt, and others). Some of these methods were considered controversial at the time, with Napster requesting that schools not share partnership details and students, at times, complaining about the use of their fees.

Fast Forward eight years, and the dynamics in the marketplace have changed.  First, the service on offer at a discount is mobile this time around, not simply streaming only.  That means, students might actually be interested.

Second, yet related to the first dynamic, millions upon millions of mobile devices exist in the marketplace upon which this mobile service can reasonably and reliably operate.  Mobile services in 2004 could only run on a certain set of portable media devices, and the iPod was not in that set.

Third, I think attitudes have changed around paying for music on a subscription basis, such that the model “makes sense” to many people.  When I first attempted a subscription-based service, the first response from potential customers and partners: Who rents music?  Steve Jobs famously asked this same question.  Second response, “Is this a music club?”  The positive or negative opinion for licensing such a service was contingent upon how record club financials, as prescribed in record deals, were quite different for labels than for artists.

Finally, price.  I have presented research in a few venues the results of which suggest the market for music services could expand dramatically if prices were lowered.  And importantly, for every $1 in price drop the industry would gain additional customers such that the total pool of money on the table is larger overall — a 25% price drop could lead to greater than a 25% increase total dollars.

For example, Muve Music, offered by Cricket Wireless, has signed up between 600,000 and 700,000 subscribers to its service at an effective price of less than $9.99/month (the extra $10 for music includes a bump up to 3G speeds, a music service, as well as unlimited ringtones and ringbacks).  Cricket wireless has around 6 million total customers, so the service has signed up between 10% to 12% of its customer base.  If an equivalent base existed across all wireless customers in the US, the mobile music subscriber base would be between 25 million and 35 million accounts.

Only time will tell whether these sorts of discounts will expand the market, however.