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The economic case for “it’s the user experience, stupid”

posted by Jason Kottke   May 20, 2003

Gareth Lloyd offers up an economic analysis of online music (mit graphs!) using consumer theory in How to make money from internet music (and make everybody better off in the process):

Moreover, I hope to show that despite our present gains, the internet retains great untapped potential. Apple’s new iTunes Music Store is, I believe, an important precursor of what is to come. The strength of Apple’s business plan lies in reducing search costs below those of the best file sharing software. If other record companies embrace internet distribution, they can do the same, and music listeners will gain access to a huge library of music. I will show that this gives a way for music companies to make money from the internet while simultaneously increasing the welfare and satisfaction of their customers.

The conclusion seems to be that music listeners have a very bright future. The only way that companies can succeed is to stop trying to exploit search costs and make their customers better off. In addition, a general reduction of search costs will lead to important secondary effects. By making it easy to search for new and better music, the internet will force companies to pay close attention to listeners and improve their products. They’ve long been able to make large profits on inferior products, but once listeners can find better music with minimum effort, the output of major record labels will have to improve in order to maintain market share.

That’s a pretty hopeful view; it would be nice to see it come to pass, if only partially. I wonder if the music companies are doing any of this kind of analysis?