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

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  • Thomes, Tim Paul

Abstract

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.

Suggested Citation

  • Thomes, Tim Paul, 2011. "An economic analysis of online streaming: How the music industry can generate revenues from cloud computing," ZEW Discussion Papers 11-039 [rev.], ZEW - Leibniz Centre for European Economic Research.
  • Handle: RePEc:zbw:zewdip:11039r
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Sebastian Felix Schwemer, 2014. "The licensing of online music streaming services in Europe," Chapters, in: Richard Watt (ed.), Handbook on the Economics of Copyright, chapter 9, pages 141-164, Edward Elgar Publishing.
    2. Godefroy Nguyen & Sylvain Dejean & François Moreau, 2014. "On the complementarity between online and offline music consumption: the case of free streaming," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 38(4), pages 315-330, November.

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    More about this item

    Keywords

    Advertising media; Music industry; Online streaming; Piracy;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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