Why Apple's iTunes Concessions Are a Double-Edged Sword

steve_jobs_ipodApple’s (s APPL) announcements at Macworld may have lacked some of the flair and sizzle that CEO Steve Jobs usually brought to his keynote, but there was one announcement that, arguably, will wind up changing the playing field considerably. That announcement is the news of DRM-free sales from all of the major music labels through iTunes, and the addition of variable pricing. As rumored during the run up to Macworld, the world’s largest online music store will soon start selling songs for 69 cents, 99 cents or $1.29 each.

The only question now, as Peter Kafka notes in a post at MediaMemo, is whether anyone will care or not — and whether it will help to fix any of the music industry’s systemic problems.

Amazon (among others) has had DRM-free songs from the four major record labels available in its online store for almost a year now, and it sells many of them at a lower price than Apple does. But so far that hasn’t helped Jeff Bezos and his team loosen the stranglehold that Steve Jobs has on the portable music market. The reality is that while DRM may be a big hobbyhorse for geeks, it isn’t really a big concern for most iTunes shoppers. The vast majority of buyers are happy to buy songs from Apple regardless of what format they come in — provided they can play them on an iPod. Anyone looking for DRM-free music can already find it pretty easily.

The more important part of this news, at least from a music industry point of view, is the introduction of variable pricing — or at least a three-tiered approach, which is as close to variable pricing as the record labels are likely to get (for now). Jobs has resisted the pleas of the industry for several years now, and Apple appears to have done a straight swap of DRM-free music in return for the tiered offerings. But as veteran music-industry observer and gadfly Bob Lefsetz describes in his latest letter, those concessions could wind up doing the record labels more harm than good — at least if the industry sees them as a solution to their larger problems. Lefsetz calls it “fiddling while Rome burns.”

The labels may be hoping they can sell the bulk of their hits for $1.29, but the reality could be very different. As Adrian Kingsley-Hughes points out in his column at ZDNet, they could easily wind up conditioning the market to expect even lower prices for most of the music they buy, apart from the mega-hits. That will make the labels even more desperate to pump up mega-brands like Britney, but the result could be an even thinner revenue stream from the bulk of their catalogues. Don’t be surprised if you see a lot of record executives thumbing through the Cliff’s Notes version of “The Long Tail,” with a fevered look in their eyes, while staring down a spreadsheet with some big holes in it.