Blog Post

Ding-dong, DRM Is Dead — But Here Comes Variable Pricing

Digital Rights Management (DRM), at least as it relates to music, is finally taking a dirt nap. Apple’s iTunes Music Store is now 100 percent DRM-free. This morning, when I upgraded to the latest version of the iTunes software to buy the new album by Midival Punditz and Ursula 100, it seems all music is now DRM-free. Apple first announced in January 2009 and said it would introduce DRM-free iTunes in April 2009, starting with 8 million tracks and eventually making the entire library overtime.

All songs I buy from iTunes will play on most of my devices. Such as my Sonos Digital Music System. I think it’s a brilliant and much needed move, though I’m not sure I’m going to spend hundreds of dollars to upgrade to DRM-free version of my tunes. I mean I paid for them once; why pay again? Why not just make existing files DRM-free without making us pay up. It shouldn’t be that difficult to do.

The DRM-free iTunes however has its downsides, because with it has come with variable pricing, which includes paying $1.29 for some songs. These songs don’t have anything special about them, like special artwork or a higher bit rate. They just cost more because music industry executives say so. Hypebot, an excellent music industry blog, sums it up best:

Variable pricing has come to iTunes; and once again, the four major labels failed to use the opportunity that the long anticipated change provided to repair its damaged relationship with consumers. Instead of delivering more value in the form of additional content along with the higher price, the major labels upped the price of their most popular titles almost 30% just as many consumers began getting comfortable with paying for downloads and in the middle of the worst economic downturn in decades.

Variable pricing and DRM-free music have been available for a while, but since Apple dominates the digital music download business the way Microsoft dominates the desktop OS business, these new changes in in iTunes offerings have a larger industry wide ramifications. I think many (if not all) digital music download stores are going to be challenged in face of competition from Apple. Amazon (s AMZN) is one company that I feel will be able to withstand Apple in the marketplace.

18 Responses to “Ding-dong, DRM Is Dead — But Here Comes Variable Pricing”

  1. Variable pricing is not uncommon in entertainment (or for that matter, in any industry). Retailers like Wal-Mart and the likes always sell DVDs with different pricing. On the extreme end, the eBay model is all about variable pricing…it’s actually auction. I hope we don’t see mp3s being auctioned on iTunes, although that’s a selling model too, where buyer bids and pays what he/she likes.

  2. ol' yeller

    consumers generally prefer flat rate pricing schemes. examples: dial-up ISPs, broadband, and wireless services. exceptions always exist and obviously not *everyone* prefers flat-rate.

    when real competition does not exist and firms have monopoly or duopoly power do they try to force metered usage (a.k.a. per song pricing). witness the music industry trying to keep their archaic model intact.

    i don’t want to pay for mp3s with low bitrates or previously proprietary codecs, nor do i want to order actual cds, so i suffer through one of the balkiest and worst UIs i’ve ever used – rhapsody – in order to listen to most anything i like. on an ex-MSFT guy could keep such a great underlying concept and service completely hamstrung with a horrible web and desktop client UI.

    apple will go subscription at some point. only a matter of when, not if.

  3. Mike Raphone

    I might be looking at this matter from the wrong point of view, but in 1969 Dollars one could have purchased a new Ford Mustang for from $2,900.00 to $3,900.00 depending on how it was equipped. Now a Mustang costs from $29,000.00 to $39,000.00. In 1969 a 45 RPM Single costs about $1.00. I know, the purchaser actually received two songs but the one on the B Side was usually blah. I guess based on inflation iTunes is a great deal or consumers should be paying from $9.90 to $12.90 per song.

  4. 30 cents is worth it for DRM free music, and given a choice between buying a song with DRM for 99 cents and without for a premium, I’d pay the premium. This is the opportunity for the market to show the cabal that this is a good idea, because if nobody buys the new product, then the producers are justified in saying the people want DRM. All the anti-dRM talk is just academic if the market doesn’t respond.

    As for the spectre of ‘variable pricing’, everybody knows that the premium priced stuff is going to be hot pop properties like whatever the Pussycat Dolls do next, not a Vladimir Horowitz recording from 1949.

    If music people are smart, they will realize that the real money is to be made through Guitar Hero and Rock Band re-issues of old properties. That’s the one place I’d sell my soul to become a deal making IP attorney. Any idiot can just *listen* but a million consumers will pay big bucks to *play*. Nobody complains about DRM for video games. Nobody. And there are no XBox titles on Pirate Bay. In fact, the market for 3 year old XBox titles has now gone one way because demand is so low. GameStop stopped buying XBox titles in February, so your used games are worthless. But nobody is complaining.

    It is and always has been about value. The value of DRM free music is high. Thanks Apple. Now fix your memory pig of a player.

  5. I agree that, from a consumer’s perspective, a subscription service makes sense in the U.S. In countries without the payments infrastructure (or copyright enforcement), ad based models like Google’s recent China deal may work.

    What’s unclear to me is how, when fully implemented, these models work for the artist. Presumably music companies allocate artist royalties based on the number (and percentage) of plays on a given service, but with a fixed subscription or ad revenue model the upside capped. Therefore, the outcome is fundamentally distributive. That is, one artist’s hit effectively takes money from other artists.

    Further, while it’s true that once you have a digital master, the marginal distribution costs for DRM-free music are near zero, the terms between an artist and his/her record label are a significant driver of any given song’s cost structure. If the top line is fixed across subscription services, record company A&R managers lose flexibility when contracting with and motivating talent.

    I think that, while they currently enjoy a cross-subsidy from CD and online pay-per models, subscription services are unsustainable. I suspect that pay-per (streamed and/or downloadable) will eventually dominate, but record companies are going to have to get a lot more sophisticated about pricing. Getting back to Om’s post, now that DRM is effectively dead, dynamic, not variable, pricing will be the key enabler.

  6. I love the cheaper pricing for older music, and the lack of DRM is cool too. $1.29 I think is too much for newer music; it will eat into that market I think. A change back to 99 cents for these wouldn’t be a shock.

  7. Well of course they need to charge 30% more for the songs, after all now that they stopped paying for all the DRM technology they have a lot of money to make up… or wait… hmmm, if I save money by not doing stuff, do I charge consumers for my savings? Guess so!

  8. I have wondered about the DRM thing for so long. There are so many ways around it, like burning a cd of the tracks and reimporting them. Granted, not the best solution, but a cheaper alternative to paying more for music that is already overpriced.

    On another not, I agree with Adrian about the music subscriptions. They really offer a much stronger/ethical model to purchase music. I personally think eMusic has an excellent DRM-free model. They just need to offer more music!

  9. This kind of pricing doesn’t really matter long term – monthly subscription is where its going to go. You know this Om, since you have Sonos, so I imagine you must have tried out Rhapsody or Napster. Once you use a music subscription you never look back.

    • “Once you use a music subscription you never look back.”

      …until you change devices, the service shuts down, etc. At which point you have nothing to show for all the money you sank into it. I don’t think music subscriptions are going to surpass DRM-free music downloads for that reason. Even the Zune Pass which makes it sound like you get to download 10 songs to keep each month on top of the unlimited streaming, hides this at the bottom of their FAQ:

      “If I cancel my Zune Pass, can I still listen to the music I’ve downloaded?

      Music you buy using the song credits included with your Zune Pass is yours to keep. Your Zune Pass must be kept current, however, to continue to play the music downloaded as part of your subscription. Zune Pass downloads automatically expire if you don’t renew your Zune Pass.”

  10. I thought one of the “selling points” of iTunes conversion to DRM-free music was that the bitrate was doubled for all of the affected songs?

    • yes and while that is true, charging extra 30 cents don’t make much sense. anyway for now i am going to watch my pennies and also try and go for amazon as a likely source of music because it is cheaper.

    • If demand is infinite, then you should *definitely* charge more! I don’t see any problem with this, the spread difference between new and old songs is still much tighter than brand new DVDs vs bargain bin at your local BestBuy.

      That being said, while hot new music is less price elastic, its also abundantly easier to pirate. If I were them, I’d spend time coming up with an algorithm for *rareness* and price that stuff up.

  11. This really opens the door for Amazon to start digging into iTunes share of the market. Amazon already has something like 16% of the market and simply put – their prices are more affordable. Amazon also has lots of great deals which I don’t think iTunes does or not quite as well. A lot of my music collection is from Amazon’s MP3 Daily Deal which is a complete album download for ‘usually’ under $3 (not today!). I following the daily deal using the following page and gadget: