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

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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.

30 Responses to “Why Apple's iTunes Concessions Are a Double-Edged Sword”

  1. He’s right about nearly nobody caring, and that no normal humans know or care about DRM. I’m the geeky exception, having bought precious few songs from iTunes. On the other hand, I’ve bought over 1000 DRM-free songs from eMusic. As eMusic mostly features independent artists, this has the added benefit of supporting bands that most need the money.

    Now that iTunes is going DRM-free, I’ll be able to pay a little more attention to the major labels again. Possibly to the detriment of my eMusic subscription.

  2. Introducing tiered pricing may be part of a longer term plan to better address international / emerging markets, with different price points, currencies, media consumption patterns, etc. Tiered pricing capability increases the flexibility of the iTunes platform quite a bit, making it more valuable.

    As for the record labels who may or may not be happy with the results – well – we’re all more or less waiting for what’s next… The distribution based model they’ve relied on is pretty obviously dead…

  3. Not sure that I buy the argument about conditioning users to expect a lower price. Afterall, other media follows the same pattern: movies are expensive when you go to the movie theater, then they go to the video store, and then they go to TV (supported by ad revenue). There is a time-based decline in the “price” charged for a movie. That model is similar to the price-decline model proposed by the music industry. The model seems to work pretty well for movies.

  4. Christopher Walton

    I don’t think the majority of media coverage has gotten the real value for consumers or for Apple.

    1. What this announcement means is that all of the vendors who create products that couldn’t play iTunes music before because of DRM will now be able to do so. Products like the Sonos Music System, Xbox 360, and other hardware devices not to mention a plethora of software products have always had to have a little asterisk next to their statement of support for iTunes (*only non-protected playback). Now these products will support all iTunes music. Big coup for non-apple vendors.

    2. Secondly, this announcement means that Apple and the iTunes store can now count as customers all of the folks who don’t have iPods or those who want to use their legally purchased music on other devices (without crazy workarounds). Yes, I know, iPods are everywhere, but there are many alternatives… and keep in mind that the iPod is primarily a portable player, many people listen to music in other, less mobile locations like their living room – and almost assuredly do so on non Apple devices. What this means is that the iTunes store will now be able to market their wares more broadly.

    Summary; Apple is in the driver’s seat when it comes to digital music marketplace. They have the largest store and all vendors want to support it for obvious reasons. Vendors couldn’t effectively do so before, now they can. This will not only make the vendor’s customers happy, but will increase usage of both the vendor product and iTunes as vendors market broader iTunes support. Good for Apple, Good for Vendors, Bad for other Digital Music marketplaces (but in no way anti-competitive).

    I believe that Apple will continue to see record growth with iTunes due to this change.

  5. I think what we may end up seeing is a “golden path” for record companies to start selling albums again – if the hit album on iTunes is still $9.99, but each of the 10-odd tracks is $1.29, they may be able to fake people out into thinking they’re getting better value by springing for the full album.

    But, yes, as people age, they all become long-tail purchasers, and any way you slice it, we’re all getting a $.30 discount on MOST of what we’ll be buying in the future. Kinda weird plan, music industry… You definitely had it better at $.99!

    Now my only question is, with iTunes now DRM-free, will we eventually also get additional device support in iTunes? I mean, essentially all the iPods can now be turned into storage devices… So why not add in support for flash-based “whatever” players, like the extensive camera support in iPhoto? I can’t honestly imagine people would REALLY start running out and buying alternate players, especially when the pre-eminent player of the future is going to be the iPhone.

    • @Deano

      That is a very good point — It would be great if that really happened but unfortunately the quality of albums has been going down and not up, mostly because the caliber of talent is matching the ephemeral nature of our societies. With the exceptions of a few folks like Norah Jones and Kanye West for example have the ability to shine through the entire album. We are shopping for music piece meal, and unfortunately no putting the genie back in the bottle.

  6. Marco Almondine

    You don’t get it, the major labels don’t care about the long tail. They WANT to keep their current business model, where they make a ton of cash up front, in a big spike of high-profit-margin sales driven by marketing hype. Discs or no discs, DRM or no DRM, it’s the same old scheme: hype it big, charge as much as you can, then slash (marketing) costs and prices and let whoever’s left discover it at their leisure.

    Even if they also had a legitimate long tail model that stretched all the way out to flat-rate subscription and ad-sponsored “infinite library” plans, they’d still want to capitalize on people’s willingness to overpay for things that are new, exciting, and scarce. People pay more for ringtones than they do for songs, and the difference is money left on the table. There will always be some customers willing to overpay to be the first one to have something, and foregoing that revenue is just bad business. If they could, they’d sell tracks for $5 each at the release date, then decrease the price as demand falls off, until it’s down to whatever pennies they can get for it.

    Sure it’s messier than charging $10/month for Pandora and dumping all new releases directly into the bit bucket, but if it wasn’t more profitable, they wouldn’t be fighting so hard to keep doing it that way. Every other business gets to charge more for what’s hot, why should the music industry be disallowed making profit? Piracy got big because nobody wanted discs anymore and there was no digital store. Now Apple’s raking in the money on downloads even though almost all that content is available for free on BitTorrent. The industry is just taking the next logical step – they have a legitimate business now and want to get all the profit they can out of it.

    • Marco

      If the labels want to keep the current model, great. It isn’t going to last for long. What Internet does is creates opportunities for niches and lots of niches add up to 6 billion songs. I personally think the labels are missing the point. I spent close to $250 bucks last year on the Apple iTunes store and not a single one of them was on hits. Instead it was all long tail stuff including a lot of obscure music (compared to the top 40 drivel.) I spent about $100 on Amazon because I found some songs at 89c a pop. In other words, I looked for cheaper options. I am betting many of those cheaper tracks will be precisely the songs I want.

      I think this is a near sighted move.

  7. My point is simply that by offering a lower price point, the labels are likely to condition a certain proportion of the market to expect that they’ll be able to get some of the songs they want for 69 cents instead of 99 cents. Some of those buyers may not have bought through iTunes before, but some proportion of them were probably more than happy to spend 99 cents — and now won’t be so willing to do so.

  8. What exactly is the argument being made about conditioning users to expect lower prices? Not sure if its that robust. I could potentially see a segment of penny-pinchers waiting for hit songs to “go cold” to get cheaper prices, but once the price drop comes along, the hits are forgotten and the purchases never materialize.