Magnatune works

The innovative online music label Magnatune (which I mentioned once before) does things differently. They offer unrestricted streams of all their music (not just snippets), have a voluntary sliding price scale, and offer DRM-free downloads in multiple formats including patent-free Ogg Vorbis and FLAC. It’s easy to love this as a consumer, but to many business analysts it sounds untenable. Today I came across an academic paper that validates the Magnatune model:

The paper analyzes the behavior of customers of the online music label Magnatune… We develop a model that is based on reciprocal theories of social preferences pioneered by Rabin (1993) and extended by Dufwenberg and Kirchsteiger (2004)… The predictions of our model are empirically tested with the field data we obtained.

Comprehensive pre-purchase access at Magnatune supports music discovery and sets it apart from conventional online music stores. We conclude that this open contracts design encourages people to make a voluntary payment. The results of our empirical analysis validate this, as the average payment is $8.20, far more than the minimum of $5 and even higher than the recommended price of $8.