Although it's tempting to assume that the evil record labels are once again trying to gouge us, there's some sense in their latest efforts to get Apple to abandon it's one-size-fits-all pricing model. A New York Times article over the weekend reported on the ongoing struggle between the labels and Apple over its fixed $0.99 price point. The labels would like to sell most new music for more--$1.49/track?-- while older or more obscure tracks could go for less.
There's plenty to like about variable pricing. For starters, it's almost always the most efficient way to maximize markets of disparate goods and customers. As Barry Ritholtz puts it:
It's a basic rule of economics: goods that have elastic demand (i..e, non essential) are highly price sensitive. Further, any item easily available for free (albeit illegally) will have an even bigger response to price increases.
Apple has argued that single-price simplicity was necessary in the early days of the service, when people were just getting used to paying to download music. But now, after 500m tracks have been sold, we're clearly past the early adopter phase. So what's the right pricing model going forward?
Most accounts of the dispute between Apple and the labels have focused on the industry's efforts to raise prices, which are undeniably a big part of their plan. No surprise there. The research we've been doing for the book shows that within the bulk of the online music business--the top 100,000 downloads--only 3.5 tracks on the average CD sell. So the record labels are getting less than $3 in revenue (wholesale) from albums when the music is sold by the track. That's less than half the wholesale price of a CD (although with none of the physical costs of making and distributing a CD). The shift from an album model to a track model is indeed an alarming thing for the labels, and it's easy to see why they'd want to raise retail prices online as a result.
But there's more to the story that that. The labels may be evil, but they're not (all) stupid. They--to say nothing of many of their artists--also see the virtues of dropping the price for lots of their music, too. For decades they've been playing with CD pricing models that range from cut-price classics to top-dollar boxed sets, and when freed of the overheads of traditional retail, they're likely to experiment more, not less. Although some of the more vocal commentators have encouraged Apple to hold the line at $0.99, there's a strong argument that introducing variable pricing might ultimately lead to a more consumer-friendly outcome.
The reason is simple Long Tail math: there's a lot more music in the Tail than there is in the Head, and labels are generally more willing to experiment with discount pricing outside of the top 1,000 than they are with their hits. Those niches represents most of the music available today, measured by number of titles, and because they're only modest sellers individually they're less likely to create channel conflict with CD retailers, who tend to only stock the hits.
Imagine, for starters, that Apple introduces a three-tiered band of
pricing: $1.49, $.99 and $.79 (that would no doubt soon expand to include
$.49, but below that the transaction costs of credit card processing
and the like start to loom large). Tiered pricing--gold,
silver, bronze--is still pretty simple for consumers to understand, yet
a valuable new dimension of demand creation.
Rhapsody, for instance, saw demand triple last year when it cut
prices in half, to $0.49. And the average usage per customer in the
all-you-can-eat subscription services is typically 5-10 times that of
the pay-per-download music stores, such as iTunes. Add to that the
potential of free music, which Apple has already paved the way for with
its podcast service and could easily be extended to music licensed
under Creative Commons, and you could grow grow the user base of the commercial music services manyfold.
Once iTunes allowed variable pricing, I imagine labels would do
pretty much what they already do with CDs: set a range of wholesale
prices depending on age, popularity and target market. Some labels will
unwisely try to jack up all their prices and will eventually suffer lower overall revenues as a result. But smarter labels will
experiment with all sorts of pricing variations, from lower prices for
bands they're trying to break to volume discounts for packages of older
music, and even higher prices for special reissues and
repackaging for hard-core fans. That's already what they do in the CD
world, where even standard retail prices range from around $9 to $18.
Apple may think it's protecting us from record label avarice with $0.99, which may be true in the short term. But long term, one-size-fits-all pricing is just constraining the economics of the industry and holding back the market. If Apple introduced variable pricing, it's not hard to see how the average price might actually fall in a year or two, thanks to the number of titles in the discounted niche/backcatalog categories vastly outnumbering the more expensive hits.
As long as prices can go down as
well as up, I'm confident that market forces will eventually reveal the
right set of models. And I'm even more sure they will confirm that no one model is right for
everyone and every song.