The math behind Free Napster
This may be interesting from the consumer's standpoint but I'm not convinced it's wise from a business standpoint.
I don't have all the details, but I've heard the "normal" on-demand streaming royalty per track is $.01, subject to some sort of minimum, presumably based on revenues. So this free, on-demand streaming of up to 5 plays for any given track in the Napster library becomes a component of Napster's customer acquisition cost. If I ignore, for simplicity, the ad revenues that would help offset these royalties, and also the other marketing costs (advertising, etc), I can estimate how much of a "bite" this initiative will take from lifetime customer value (LCV).
If we assume Napster's average revenue per user (ARPU) is ~$16 (which seems high, esp given the university subscriptions they offer, but which is what I get from $26m revenue for Jan-Mar, divided by 3, divided by 550k average subscribers over the period) and a churn rate of 6% (thus an average subscriber "lifetime" of 17 months), then average lifetime revenue is $260. Based on their 2005 annual report, direct costs consume roughly 80% of this total (I'd imagine 50% for royalties, perhaps 20% for bandwidth, and 10% for credit cards and other), leaving ~$50 for LCV.
While I don't know how Napster's minimums are calculated — or whether they are close to them based on average usage — you could map a few scenarios against this $50 LCV (again, ignoring for the moment all other acquisition costs and new ad revenues). So assuming (1) free streaming *does* cost Napster at the margin, (2) the average free user listens to 10 tracks, and (3) 1 in every 200 free users converts to subscription, the increase in customer acquisition cost — aka the incremental "bite" out of LCV — would be $20, or roughly 40% of LCV. This is expensive, assuming my numbers are OK.
There may be another big flaw: it would seem easy to sign up as a new user with a new email address once I've worn down my allotted streaming usage. Many users won't bother, but I'd expect some number will take advantage of this, driving up the average subscriber acquisition cost.
Filed under: valuation, ventures | 1 Comment