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August 31, 2005


Chris Gilbey

Back in the time when I was an executive in BMG in the early '90's (and prior to that, when I ran a publishing company) I became more and more amazed at the rationale in record companies for pricing.

The problem that I see with record companies setting multiple prices - for both them and for artists and for Apple, and others - is that they will still get it wrong.

The model then (and now) is that the top selling artists are discounted aggressively in order to establish sell in and sell through. New and emerging artists were sold at the full price. Catalogue was sold at a discount.

So the back catalogue that had the capacity to produce the most margin with the least marketing had its margin cut in order to discount and create volume sales - so creating margin leakage in order to deliver revenues fast. The products that needed the most discounting in order to create buy in were sold at the highest price. And the hits that had already at that time become more marketing driven than talent driven had the highest amount of marketing expenditure, the lowest margin, because of enormously increased royalty agreements with artists and the least likely opportunity to become classics....

I don't see the record companies being able to get their heads around the concept that they probably would be better off totally closing down all physical goods sales, which would enable them to get rid of a whole raft of operating costs, and make a commitment to electronic distribution only. They need to move totally to the publishing model where there is no manufacturing and distribution. Instead there is licensing and content acquisition. This requires a significant culture shift. They have got it with ring tones and ring back tones now, but it remains to be seen whether they can really deal with the sort of counterintuitive reasoning that is required in the new century.

By the way please feel free to visit my blog too - its at www.perceptric.com

Barry Ritholtz

I'm not against variable pricing -- I simply believe that the Labels have priced music too high relative to their entertainment competition.

Too often, I find the CD soundtrack of a film costs more than the Film DVD itself. Which polycarbonate disc does the consumer than buy -- the 45 minute audio disc, or the 2 plus hour audio/video/out takes/ interview version?

Both Variable and Dynamic pricing makes sense -- but the industry needs to recognize the value proposition music has relative to other forms of entertainment.

Does it make sense to price digital downloads -- with no physical cost to press, ship or warehouse -- the same as CDs?

See these two discussions for more details:
Dynamic Pricing: DVD versus CD Strategies

Are CD Prices Getting More Dynamic?

Loren Davie

"The Labels" that set the pace are four multinationals that have had no qualms about engaging in price-fixing in the past. I somehow sense that the average price of tracks would rise if the labels took control of pricing. This could harm the viability of online music in general. I think that Apple would be wise to retain control of pricing.

David Palmer

Interesting insight above from Chris as to how labels think about their pricing structure. Seems like the corporations that own the big music labels are, in fact, pretty dumb, since they seem to neither know or care much about music, or about their customers. For them music is just another commodity, like pork bellies. At least Apple has an understanding of their customer base, and they seem to actually care somewhat about the music. In spite of Long Tail economics, I think Apple has it right. The only thing the labels can be trusted to do is to screw things up.

Julian Bond

"$.49, but below that the transaction cost of credit card processing and the like start to loom large" This is easily solved by buying credits. Then you have a single $25 transaction bearing credit card costs followed by 100 (!) single track transactions.

Which brings to mind a business plan that I and others have suggested before, based on what AllOfMp3 are doing.

1) Digitise everything you can get your hands on using a lossless codec. That's the entire back catalogue. Anything and everything that's still on tape (or other format) somewhere in the archives. In your terms, service the long tail.

2) Setup a search and distribution site that converts on the fly from the lossless archive format to the customer's choice of codec and bitrate with no DRM.

3) Charge on the basis of bandwidth used because that's your biggest variable cost. Set the pricing as follows for a typical 192Kbps VBR MP3 of a 3 minute track.
- $0.50 for the first 3 months after release.
- $0.25 for the next 9 months.
- $0.10 thereafter.
Or to put it another way, $10 for a 10 track album in lossless format. ie, the same price as a CD for the same product except that you didn't have to absorb any shipping or distributor costs.

The net results are:-
1) Take advantage of the "must own the latest track now" imperative to charge higher prices.
2) Blow file sharing out of the water because it's just plain easier to spend $0.10 for a properly encoded, named, tagged track than to get the same for free.
3) Make it all back up on volume. (So, 1999!) You want to bet the volume wouldn't be at least a factor of 10 bigger than iTMS, perhaps even a factor of 100?

John "Z-Bo" Zabroski

I think the record companies are beginning to change. If anyone caught wind of the Aspen Summit recently, there was a couple of big speeches on DRM. Given that this blog has been discussing DRM consequences a lot lately, it would be good to mention there is finally some forward thinking by content producers with regards to DRM and piracy.

Choyon Manjrekar

Nice observation Chris, but I looked at this from another Long Tail perspective. With other music download sites, podcasts, streaming sites and music publishing technology sprouting up, the online music distribution industry is positioning itself into a long tail formation.
Apple is at the head because of its pioneer status, the others form the tail.
I think Apple is trying to consolidate itself at the head, because it can afford to be a price setter because it is the biggest buyer of music and in essence, can dictate how much its rivals pay for music.
The way I see it, i-tunes is a hegemony that could fall apart if the longtail has its way. It needs the price to remain constant without being undercut by the rest. Its a case of the head in danger of being swallowed by the tail.

Arun D

Yep - I think multi-tiered pricing makes sense, especially if it means going both sides of 99c.

Another avenue towards a similar destination would be by 'bundling' a few tracks together if you were going to charge more for them. This is actually closer to a 'digital' single than the 99c download. I've got some B-sides from CD singles that I'm pretty fond of! The record company can charge $2.49 by bundling the 'hit' with a b-side/remix that probably wouldn't sell much on its own.

Essentially this is a way to address the problem that will come from big price rises - raising the price, without raising the value proposition AT ALL.

A next logical step for iTunes, would be to have downloadable .mov files of music videos. Perhaps a bundle of the music video and mp3 could warrant more premium pricing and delivering that important increase in customer value.

Chris Gilbey

Here is an additional thought/observation about labels and distribution we have been discussing at perceptric ... not sure whether it is long tail or not... I was reading on the BBC site and blogged about this too - 21 year old Chinese woman, records song on her laptop, edits it on same laptop, posts song to free download distribution site in China, receives 1 Billion downloads - gets signed to a label, sells 800,000 CD's.... Her name is Xiang Xiang.

This is what the labels should be watching. Maybe this is a reverse long tail. Get all those freebies in the marketplace, then sell stuff.

I do hear that some of the labels are considering quite actively DRM based downloads to your computer - they have finally woken up to the fact that there is cost to manufacturing and distribution that they can move out of their cost structure and on to the consumer.


But now, after 500m tracks have been sold, we're clearly past the early adopter phase.

There's your syllogism. We're nowhere near past the early adopter phase. There's 10 million accounts (that's from a population with access to Itunes Music Store of what, a billion?) who've bought on average 50 tracks each. Most iPods don't contain bought music - it's peoples' own music.

Ergo, online music buying is not past the early adopter, and isn't yet mature enough for variable pricing.

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The Long Tail by Chris Anderson

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