How to go from buying records to renting MP3s

Rhapsody has a great business model. They offer unlimited (yet restricted) use of their entire music catalog for a monthly fee lower than the price of a single printed CD. They also sell unrestricted music at market prices. You may stream as much music as you like using their web site or using a recommended portable device. The trick is that once you discontinue service, any music that you did not purchase becomes unavailable to you. My guess is the record distribution companies that own the content get a flat fee for each user regardless of how much that user does or does not use. As most subscription service business models work, they account for a significant number of subscribers to be lazy and not use the full capabilities of their membership.

This is the progression of the music industry's retail model:

1. selling singles
2. selling record albums
3. selling albums on tapes and CDs
4. selling singles on the Internet
5. renting catalogs of music

The marketing of tapes and CDs is significantly different from albums because of the loss of control record companies had with the technical capabilities widely available at the time to produce near or exact duplicates. Pricing models began to compensate for this loss. Most online sites are using model number 4 with iTunes being the most popular. Rhapsody and a handful of others have reached model 5. Not only is this the "future of music", as Fortune magazine referred to Rhapsody , but it is the future of software.

This is the progression of the software industry's retail model:

1. Selling platforms to create custom applications
2. Selling generic applications
3. Selling applications plus support
4. Selling applications plus implementation and support
5. Selling applications plus implementation, support, and annual licensing
   
6. Renting platforms to create custom applications
7. Renting cloud applications and selling implementation services

Looks familiar doesn't it. Software companies used to press and release records and now they want to be in the business of renting MP3s. Just as the music industry has experienced, this is not easy but necessary. This model for music would not have existed if it wasn't for Napster showing that the customer base for this distribution model existed. The music industry just had to figure out a way to monetize it. The single most important thing for software companies that are looking to leap from traditional distribution to SaaS is how to correctly charge for their service. The next most important thing is how to get customers to stick with them long enough to collect that all important recurring revenue. Rhapsody figured out what to charge (less than a CD) and how to lock customers in (loss of music they enjoy listening to).