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An economic analysis of online streaming: How the music industry can generate revenues from cloud computing

  • Thomes, Tim Paul

This paper investigates the upcoming business model of online streaming services allowing music consumers either to subscribe to a service which provides free-of-charge access to streaming music and which is funded by advertising, or to pay a monthly flat fee in order to get ad-free access to the content of the service accompanied with additional benefits. Both businesses will be launched by a single provider of streaming music. By imposing a two-sided market model on the one hand combined with a direct transaction between the streaming service and its flat-rate subscribers on the other hand, the investigation shows that it can be highly profitable to launch a business which is free-of-charge for subscribers if advertising imposes a weak nuisance to music consumers. If this is the case, and by imposing an endogenously determined level of advertising which will be provided by homogeneous advertisers, the analysis shows that the monopolistic streaming service increases the price for its flat-rate subscribers in order to stimulate free-of-charge demand and to capture higher revenues from advertisers. An extension of the model by illegal file-sharing reveals that an increase in copyright enforcement shifts rents from music consumers to the monopolistic provider, moreover a maximal punishment for piracy will be welfare-maximizing.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 11-039 [rev.].

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Date of creation: 2011
Date of revision:
Handle: RePEc:zbw:zewdip:11039r
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  1. Peitz, Martin & Valletti, Tommaso M., 2008. "Content and advertising in the media: Pay-tv versus free-to-air," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 949-965, July.
  2. Gayer, Amit & Shy, Oz, 2003. "Internet and peer-to-peer distributions in markets for digital products," Economics Letters, Elsevier, vol. 81(2), pages 197-203, November.
  3. BELLEFLAMME, Paul & PEITZ, Martin, 2010. "Digital piracy : theory," CORE Discussion Papers 2010060, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Alan B. Krueger, 2005. "The Economics of Real Superstars: The Market for Rock Concerts in the Material World," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 1-30, January.
  5. ANDERSON, Simon P. & GABSZEWICZ, Jean J., 2005. "The media and advertising : a tale of two-sided markets," CORE Discussion Papers 2005088, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
  7. Simon P. Anderson & Stephen Coate, 2003. "Market Provision of Broadcasting: A Welfare Analysis," Virginia Economics Online Papers 358, University of Virginia, Department of Economics.
  8. Peitz, Martin & Waelbroeck, Patrick, 2006. "Why the music industry may gain from free downloading -- The role of sampling," International Journal of Industrial Organization, Elsevier, vol. 24(5), pages 907-913, September.
  9. Duchene, Anne & Waelbroeck, Patrick, 2006. "The legal and technological battle in the music industry: Information-push versus information-pull technologies," International Review of Law and Economics, Elsevier, vol. 26(4), pages 565-580, December.
  10. Ben Shiller & Joel Waldfogel, 2009. "Music for a Song: An Empirical Look at Uniform Song Pricing and its Alternatives," NBER Working Papers 15390, National Bureau of Economic Research, Inc.
  11. Choi, Jay Pil, 2006. "Broadcast competition and advertising with free entry: Subscription vs. free-to-air," Information Economics and Policy, Elsevier, vol. 18(2), pages 181-196, June.
  12. Regner, Tobias & Barria, Javier A., 2009. "Do consumers pay voluntarily? The case of online music," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 395-406, August.
  13. Bhattacharjee, Sudip & Gopal, Ram D & Lertwachara, Kaveepan & Marsden, James R, 2006. "Impact of Legal Threats on Online Music Sharing Activity: An Analysis of Music Industry Legal Actions," Journal of Law and Economics, University of Chicago Press, vol. 49(1), pages 91-114, April.
  14. Jean-Charles Rochet & Jean Triole, 2002. "Platform competition in two sided markets," LSE Research Online Documents on Economics 24929, London School of Economics and Political Science, LSE Library.
  15. Novos, Ian E & Waldman, Michael, 1984. "The Effects of Increased Copyright Protection: An Analytic Approach," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 236-46, April.
  16. Liebowitz, Stan J, 2006. "File Sharing: Creative Destruction or Just Plain Destruction?," Journal of Law and Economics, University of Chicago Press, vol. 49(1), pages 1-28, April.
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