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Saturday, August 27, 2005

iTunes and pricing

Worth a read in today's NY Times is this piece about record labels chafing against Apple's blanket 99 cents pricing plan at its iTunes Music Store. The central question is whether the 99 cent price tag on everything (well, not really everything - books on tape and some spoken word programming is priced higher) is what helps bring consumers to the service... and whether a range of prices would somehow drive them back to illegal downloads. Sony BMG Music Entertainment and Warner Music Group are the two major labels that are squawking the loudest about Apple's uniform pricing.

Jeff Leeds writes:

    The divide among the four record companies reflects a broader philosophical argument about whether the fast-expanding digital market is stable enough to bear a mix of prices, particularly a higher top end, while millions of consumers still trade music free on unauthorized file-swapping networks.

    "I don't think it's time yet," said Jimmy Iovine, the chairman of Interscope Records, Universal's biggest division. "We need to convert a lot more people to the habit of buying music online. I don't think a way to convert more people is to raise the price.

    "I believe that he really feels that everybody isn't hooked yet into the whole concept," Mr. Iovine said, referring to Mr. Jobs. "You make it affordable, at a reasonable price, so they can learn about it. It's not an unreasonable position."

Apple has become the main market-maker for digital music - with about 75 percent of all sales. Still, isn't it natural to let the marketplace define what consumers will pay for digital music (and eventually, TV shows and movies)? It'd seem obvious that some older material from the vaults might be priced at 49 cents - or less - and that a highly-anticipated new song might go for $1.49 or $1.99, especially if it's accompanied by additional material, like music videos.

Whether Apple will get in the business of selling movies and TV shows has been the subject of a lot of speculation. This friction between Apple, Sony, and Warner could have an effect on whether owners of video assets (like, um, Sony and Warner) decide to work with Apple.


  • ...and once again, the music industry shoots itself in the foot.

    I seriously doubt that "older material from the vaults" is going to go for any less than $0.99. It's already been established that consumers find the $1/song model quite palatable, even the record companies aren't stupid enough to settle for less. Rather, this is about calculating demand for a peaking artist/song and milking the limited-time opportunity for every (extra) penny.
    Hence, my foot-shooting comment. There is a fine line between acceptable pricing model and rampant piracy.
    Apple got it right the first time, it's a shame that the labels are bound and determined destroy that marketshare and run the entire industry into the ground with archaic business practices and strong-arm tactics.
    It's worth noting that could just be the labels trying to show Apple that they run the show...

    Matthew Jeppsen

    By Blogger freshdv, at 3:19 PM  

  • Well, I think this is more about yield management - who will pay how much at what time.

    Regardless of whether one considers it evil or not, it is a staple in business that to best maximize profit (and hey, that's what everyone's in business for, especially publicly held companies) you look for opportunities to charge each person as much as they'll pay at any and every given point in time.

    The Internet just brings new twists to it. It's not complained about too much when new subscribers to a service, be it cable TV service, NetFlix, Wine of The Month or whatever get a discount for signing up - people understand that it's being done to lure new customers.

    But when it starts getting new and different on the Internet, hackles rise. Remember when got caught, excuse me, found out, that they were charging steady customers higher prices than new customers? Or NetFlix was giving new movie delivery preference to new customers over returning ones?

    New models, new forms of yield management.

    If the studios feel they can get customers to be willing to pay more for new releases at peak demand, from a business perspective that is valid - somebody's willing to pay more, so charge them more. Older songs that aren't selling for $0.99? If they price were to be dropped, sales of those tracks are likely to increase.

    The real question is to whether it is time to do so or not. I tend to agree with the Apple motif - roughly a buck a piece. While iTunes/iPod has been very successful, it is not ubiquitous yet, and it takes time for consumer behavior to chage, and even longer to stabilize into habit. While in San Francisco the other week I noticed a 50 year old guy in dorky dated suit walking along with white earbuds and noted to my girlfriend "There's proof iPod has definitely gone mainstream." But it truly hasn't entirely - look at the ratio of CD sales to online sales.

    I still think it'll take some time to solidify consumer behavior, and if $1.50 or $2.00 a song comes along, it's going to drive folks away.

    While I like the "Gimme Now" convenience of iTunes, part of me is still annoyed at the crappy economics of it - I don't have a hard copy, it is inferior in sound quality to a CD, and it is DRM limited such that I can't move it about as freely as I'd choose, especially including the fact that I can't resell it.

    At $1.49 or $1.99, the benefits get even worse.

    So bag that.

    Pardon long post.

    Mike Curtis
    HD For Indies

    By Blogger Mike Curtis, at 3:10 PM  

  • By Blogger Lorraine, at 7:44 AM  

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