Friday, November 18, 2005

Price competition on iTunes

Apple is likely to introduce differentiated pricing on the iTunes music store. Instead of offering everything for 99 cents, some songs will cost more, and others less.

Joel Spolsky argues that the labels are clamouring for this so they can signal to the market what's good and what's bad, and use this signalling ability to negotiate better deals with artists.
Now, the reason the music recording industry wants different prices has nothing to do with making a premium on the best songs. What they really want is a system they can manipulate to send signals about what songs are worth, and thus what songs you should buy. I assure you that when really bad songs come out, as long as they're new and the recording industry wants to promote those songs, they'll charge the full $2.49 or whatever it is to send a fake signal that the songs are better than they really are. It's the same reason we've had to put up with crappy radio for the last few decades: the music industry promotes what they want to promote, whether it's good or bad, and the main reason they want to promote something is because that's a bargaining chip they can use in their negotiations with artists.
I don't buy the signalling story. Labels make editorial decisions about what songs they think are good all the time by deciding who to sign, how much to invest in artists and bands, and how heavily to promote various albums. I can see how variable pricing may increase this, but I cannot see the impact being large. Moreover, the bargaining power an established label has over an unknown artist is huge, I don't see how iTunes has changed that, and I also can't see how variable pricing (or anything) could possibly increase it further.

Let me put forward another idea: the labels think they can charge more money for songs and not impact how many of those songs people will buy, thus increasing their profit. I'm guessing that Apple gets a flat fee per download and everything above that is gravy for the labels. I'm also guessing that a few songs vastly outsell the others, and that this number probably will not go down much if the price goes from $1 to $1.29, After all, people who buy on iTunes are paying $1 instead of downloading the song for free off some P2P service, so its a safe bet to assume they are fairly price insensitive.

If Apple keeps 50cents on every song, increasing the price from $1 to $1.29 increases the labels profits by about 60% on maybe 80% of the volume sold of iTMS. Stretched across 600M downloads, that's an extra ~$150M the labels reckoned they've left on the table so far in profit (not revenue). Those are big big numbers.

Personally, I like the idea of price competition on iTMS. In particular, I'm interested in unknown artists using it to build a new marketing and distribution channel -- something that will erode the power of the labels. I would like to see them offer songs for free as part of podcast -- iTunes New Music Thursday only plays tiny song clips and is therefore far inferior to KEXP's excellent podcasts. I'm also interest in seeing budget labels come up and fight the big guys. Remember -- in an efficient market the price should be close to the marginal cost, and for an mp3 online that's pretty close to zero. Flat fixed pricing kept it at 99cents, but it's not clear whether price competition will move the average price up or down.

(Thanks to WC for the link!)


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