iTunes Prices Too High
By Richard Menta
Do you know what I think? I think the prices
for paid digital music downloads are too high. I have thought
this for quite awhile, in fact I said it way back in August of
2001 - long before iTunes appeared and when Napster was a free
file sharing service - in an article titled 6 CDs a Year.
The driving statistic of that article was that
the average music lover only buys six CDs a year. That's a
fairly low number, but one that reflects the high cost of music
that existed before and after Napster made its appearance. High
prices enabled by the record cartel force us to be very choosy
over which albums we finally commit to buy.
Unfortunately, we as consumers
have been complaining about the spotty consistency of many of
the albums we buy. You know, the "two good singles the rest is
filler" complaint we have heard for years. The record industry
pushes albums over singles because they make them more money.
There also has been this "Albums are Art" concept floating
around since Sgt. Pepper's first appeared, as if singles were
incapable of producing the same. Napster and file trading
brought back the single as a preferred medium because we as
consumers have more control so quality (and therefore value) is
overall much higher.
The record industry's fear is
that reasonably priced digital downloads will canibalize
profitable CD sales. There is no evidence that this would be
true, especially since singles have always been used to promote
albums, but we're not talking about proof here, we are talking
about fear. There is precedent to say there is nothing to fear
if the record industry would just look for it.
My solution in that article was
for the record industry to sell digital downloads at compelling
prices that developed a tiered pricing system similar to what
the movie industry employs. As I wrote in that article:
Put six CDs in a customer's
hand and they'll pay $90 and be done for the year. Put 100
high quality MP3 singles in their hand and they might pay an
additional $10 a year to expand on - not replace - the six
CDs they bought. That's $700 million in additional revenue
if we just talk about Napster's 70 million former users.
$1.4 Billion if those users decide to download 200 songs,
How many people do you know see only a few
movies a year in the theater, yet rent regularly at the
local video store. At $9 per person to see a movie, the cost
forces us to be very selective over which movies we see just
like it forces us to be selective on the CDs we buy. On
video, $3.00 covers the entire family and so we supplement
our movie going experience this way. We haven't stopped
going to the theaters. That's because the wide screen
experience is superior to the TV experience just as a CD on
a stereo is superior to an MP3 playing on the tinny speakers
of our computer systems (that is how most of us listen to
The end result is this has brought
hundreds of millions of additional revenue to the movie
Today, the movie industry makes more revenue
from video/DVD sales and rentals that from the box office, a box
office that has set sales records the last 9 out of 10 years.
I quoted $0.10 as a good price for paid
downloads. Frankly, a quarter or even $0.35 would work well.
Somewhere where a 13-track albums worth of music will cost under
$5.00. This price mark is compelling.
What does the record industry charge? $0.99 a
single of which their cut is anywhere from $0.65 - $0.85
(different sources give different numbers). The problem is,
these prices are too high.
Thanks to iTunes, digital sales are modestly
successful. They certainly are profitable - as in pure profit -
for the record labels.
I say pure profit because the record
industry's costs of supplying digital music online is
negligible. In fact, all they are supplying is permission. It is
Apple and Napster and all the other services who are converting
decades of CD material into digital files to be downloaded so
the lables supply no hard product. As for music production
costs, 98% of each lable's catalog was produced before online
services appeared. All of their costs for production and
marketing were committed to sell CDs, not downloads.
Lower prices will drive more people to these
services and further deflect the competition from the free P2P
services. It will create this tiered system I envisioned.
But the record industry is getting greedy
again. They don't want to lower prices. In fact, they are now
sending feelers out through the press that they want to raise
prices. They are claiming that they introduced prices low to
stimulate this market in the first place. In fantasyland this
may be true.
In the real world it is the consumer's
perception of value that drives sales.
My personal perception is that prices are too
high and need to come down to satisfy my notion of value. I'm
sure there are many who feel the same way.
But, I say if they want to raise prices let
them. If they do, the paid download industry will stagnate.
iTunes will survive, because it makes up two-thirds of the
market, but Napster may not. The same may go for other iTunes
competitors, competiton that keeps iTunes from becoming a
They say Steve Jobs was upset at this
announcement by record executives. If there is a shake up and
iTunes becomes the only major survivor guess who will hold more
influence on paid download pricing. Yep, angry Steve himself.
That's when he demands both lower prices and a
bigger cut for Apple, because he knows lower prices will make
him more money.
In other words, the market will bring
equilibrium to all this. The record industry is an oligopoly in
traditional retail, but not online. If Grokster wins its case in
the Supreme Court it will bring this equilibrium faster.
One more note, Napster has
shifted from selling music to renting music. You pay every month
infinitum or the music you acquired disappears. This is a
business model that the record industry has tried to foist on
online commerce since Sony introduced its first Net music
service in 2000. Higher download prices may not be applied to
rental prices, giving Napster more of an edge against iTunes.
Could there be collusion to force
the rent-a-song business model at the expense of iTune's
buy-a-song-and-own-it forever model?