This afternoon I went and did a little shopping. Unlike last year, most of my relatives now have DVD players, so I went shopping for DVDs as presents. Most of my own DVD collection consists of Region 1 DVDs that I have bought from Amazon US over the internet, so I haven't really looked at how DVDs have been sold in actual shops. A wander into HMV and the Virgin Megastore led me to some thoughts about the music business, however.

Firstly, both of these stores would once have been described as "Music Shops". The great bulk of their business was selling CDs. Nowadays, the floor space devoted to DVDs and that devoted to CDs is about the same. (There was also considerable space devoted to video games).

There was lots of action in the DVD sections. There were lots of discounts in the DVD sections. Both stores were offering two for one offers for a large portion of their DVDs. Almost anything that was not a huge blockbuster released in the last couple of years was available for two discs for 20 pounds. That is, 10 pounds each for recent movies of moderate success, and 10 pounds also for huge blockbusters that were more than two years old (eg The Matrix). Classic movies of more than about 10 years old were even cheaper. (I purchased Hitchcock's "Strangers on a Train" for 7 pounds). For this price, you get a lovely transfer of the film, up to five soundtracks of great quality sound, interactive features, documentaries, etc. (Clearly the movie studios were happy with this level of pricing, because the retailers would not have been able to offer that level of discounting and still make a profit otherwise).

However, the CD section of the stores were close to deserted. There was little in the way of special offers. Recently released CDs were for sale for about 15-17 pounds, older ones for eleven or twelve pounds. Specialty items like movie soundtracks tended not to be discounted whatever their age. That is right, in most cases the movie soundtracks on CD were available for 15 pounds, and the movies themselves for 10 pounds.

The issue is simply this. CDs are an obsolete format. They were cool in 1980 when they were first invented, but what do they offer? 74 minutes of moderately good recorded sound. Ten to twenty songs from one artist. That is all. This is a technology that came from a time where capacity and bandwidth were scarce. Pressing a CD was expensive. Distributing a CD was expensive. You couldn't fit a great deal of music on it, because the limitations of electronics at the time meant that its capacity was quite limited. Therefore you have a business model where people buy 15 songs for 15 pounds.

Compare with a DVD, where you get five, higher quality, recorded soundtracks of the same length, plus pictures. On a CD you get music that cost maybe $100 thousand dollars in fixed costs to record. On a DVD you get a movie that cost maybe $100 million in fixed costs to make. On a DVD you get lots of documentaries, interactive features, and other cool things. On a CD, you get no interactive features at all, because interactive features did not exist in 1980 when the format was invented. The DVD is a format that comes from an age where bandwidth is plentiful. Pressing a DVD is cheap. Distributing a DVD is cheap. Due to advances in laser technology and compression technology, the amount of information that you can store on a DVD is large.

And somehow the music companies have not given us technology or pricing that comes from an age of plentiful bandwidth and capacity, but still want us to pay the same amount of money (in real terms!) we did in 1980 for exactly the same thing we got in 1980.

Technology has advanced since 1980. CDs are essentially a technological product There are very few technological things that we buy that have not changed since 1980. Consumers have many alternative items that they can buy instead of CDs that they could not buy in 1980. Technology for delivering and listening to music has changed since 1980. In particular, the idea of paying 15 pounds for 15 songs that all you can do is listen to is not viable in a world with so many choices.

In particular, the price per song is really not the point anymore. Ease of distribution over the internet, and also things like data compression technology (which makes it possible to put many many more than 15 songs on one CD, for instance) mean that it is possible for consumers to be able to listen to a much greater variety of music than ever before. Given that the marginal cost to the music companies of their doing this (with modern technology) is essentially zero, there is only one issue that the music companies should be concerned with. What is the price point and distribution system that will lead to the total revenue of the music companies being the greatest. It is certainly less than a pound a song. The equation today is

Music company profits = total revenue minus fixed costs.

That is it. At what price point do you maximise revenues? I don't know what the answer to this is. Neither do the music companies. It may be that the answer involves getting people to pay a monthly subscription for unlimited downloads. It may be that you charge a fraction of a penny per song. But whatever the right level is, it isn't the level of the 1980 business model.

Even so, the way in which the music industry has completely dropped the ball is striking. In the Virgin Megastore today there were no two for one offers on CDs the way there were for DVDs. Why not? CDs may be an obsolete product, but they certainly would be selling more of them (and getting more revenue in total) if they were cheaper. The industry has become so focused on worrying about piracy, and so determined to blame all its faults on the alleged criminality of its customers that it seems to have lost track of basic business practices.

The music industry will answer that piracy is the issue, and that piracy means that they will get no revenue at all, and that if people steal at a pound a song, they will also steal at one penny a song. I have two answers for this. The first is that I doubt it. People don't really like being pirates. People don't like the inconvenience of being pirates. People don't like the idea of their children breaking the law (and so will probably pay for subscriptions, if the music industry can provide them with a good product). However, people do not like being ripped off. People loathe the music industries business practices. People do not think they are getting good value for money. When I walked through the Virgin Megastore today, I spent my money on DVDs rather than CDs, partly because I detest the music industry, but mainly because I was getting more for my money.

The second reason is more pragmatic. The music industry's present business model sucks. If they attempt to continue with it, they will die. They may as well try other models, and they might find one that works. If they do, they may still die (although I doubt it). But maybe finding a new business model is better than dying as a matter of certainty.