Blog Post

The Problem With Variable Pricing


How quickly we forget the way things used to be. It was only in early April when Apple (s aapl) introduced variable pricing in the iTunes store, and already we’ve learned to accept that nearly every “popular” song costs $1.29.

If you’re not familiar with the subject, here’s the issue in a single sentence: The Big Four record labels put the screws on Apple and forced them to hike up their prices. (The Big Four, by the way, is industry parlance for Warner Music Group (s wmg), EMI, Sony Music Entertainment (s sne) and Universal Music Group (s umg).)

Now, it depends on your level of cynicism as to how you interpret the details, but those who feel generous suggest that variable pricing is necessary in order to cover the cost of making iTunes music available to customers DRM-free. Critics feeling less generous argue that Apple bowed to pressure and now customers are getting screwed.

How so? Well, before April, every track on iTunes cost the same amount: 99 cents. In retail, that’s a sweet spot. Customers don’t think of it as particularly expensive, and it means old products that have depreciated in value can be sold at a higher price.

99 cents, it seems, suited everyone but the record labels, which — let’s face it — are dying. They’ve always been horribly short-sighted and slow at reacting to the digital age. First they tried to block digital downloads. Then they insisted on locking up digital media in what ultimately became poorly thought-out and unfairly implemented DRM protocols. (Remember Sony’s rootkit fiasco?) Finally, they grudgingly joined forces with online distributors but it took them years to make all their popular music available for download, and they were never happy with the one-price-for-all model favored by the likes of Apple, Amazon (s amzn) and Wal-mart (s wmt).

So committed to variable pricing were they that back in 2007, Universal Music Group refused to renew its long-term agreement with Apple, opting instead for an “at will” agreement that provided greater flexibility and influence in the label’s dealings with other distributors. This was basically a pay-as-you-go agreement that allowed them to change their mind and bail at any time. Not good news for Apple, nor any other online music retailer treated similarly.

Now that the few remaining record labels are faced with their lowest profits in decades, they’ve finally agreed to take digital distribution seriously by removing DRM — but at the same time insisting distributors set very specific, varied prices. The labels loosely describe their prices as “geared to the popularity of individual artists.”

Former EMI executive Ted Cohen said of variable pricing, “This will be a PR nightmare. It is for the music industry what the AIG bonuses are for the insurance industry.” Nine Inch Nails’ outspoken Trent Reznor, meanwhile, said, “Wouldn’t it make sense to try to price it cheaper instead of squeezing the handful of people who are still willing to pay for music?”

So what? So some of the music costs about 20 cents more than before, but most of iTunes’ 10 million songs are still only a dollar. Why the outcry?

The Myth of Supple and Demand

Well, much of the furor is focused around the misconception that the prices are set by the record labels according to the economics of “supply and demand.”

In a report by Dawn C. Chmielewski in the LA Times, Russ Crupnick, a senior analyst for NPD Group says the variable pricing is the mark of a mature market that saw digital music sales top $1 billion in 2008. “If you’re not drawing new people and your spending isn’t growing, it’s a natural part of the product life cycle.”

While Chmielewski suggests the change in pricing reflects the natural condition of supply and demand in the market, critics have argued the iTunes store has an unlimited supply of music. As long as the Big Four keep renewing their contracts with Apple, any perceived lack of supply is entirely artificial and completely fabricated by those labels. So if the supply and demand reason is a misdirection, what’s really going on?

Valuable Junk

Another, far more duplicitous idea is floating around the Internet. It suggests that the Big Four strategically price tracks not, as you might expect, according to artist popularity (thereby maximizing revenue on the most-downloaded tracks at any given time) but instead use variable pricing as a means for influencing customers’ perception of value.

This means that a label can promote whomever they wish, irrespective of whether or not that artist is currently trending well in the charts. A contractually inexpensive artist could be promoted at the full $1.29, creating a perception of quality and value in the minds of customers. Conversely, an older, contractually expensive rocker who’s pushing for a bigger share of royalties or music publishing rights can be stopped in their tracks (no pun intended) with the death threat of “economy” pricing in online stores. Certainly the notion many customers have of 69-cent music is that it’s pretty rubbish. Particularly if the latest tracks from some unknown newcomer are appearing at full whack.

If this is true, variable pricing appears to be less about raw profit and more about maintaining control and influence over content producers in the music industry.

A Little from Column A, a Little from Column B

So which is more likely? Bare-faced price-fixing to squeeze every remaining penny out of customers? Or political wrangling in order to maintain control over artists? I suspect it’s a combination of both that makes variable pricing so appealing to the record labels.

What’s so sad is that the Big Four still don’t appear to have figured out that their customers aren’t the same people who, once upon a time, parted with hard cash to pick up a vinyl record. Customers know there’s a compelling alternative to unbalanced pricing — it’s called zero-cost pricing, or, more commonly, piracy. It’s immoral, unethical, illegal…and fast and easy. Random (and often ridiculous) prosecutions from the RIAA haven’t dissuaded a great many people from getting their music by less-than-legal means. As long as the labels insist on finding ways to manipulate and disrespect their artists and customers, illegal music downloads will continue to thrive.

We can only hope that the success of super-distributors like Apple will endow them with the financial and political might to force the labels to rethink their strategies. Steve Jobs’ open letter to the record labels certainly helped push them into DRM-free distribution far sooner than they might otherwise have managed under their own steam.

Variable pricing is still reasonably new, but already common at the iTunes Store, Amazon MP3, Lala, Rhapsody and Wal-mart (to name a few). It will take something significant to change it now — be that a mass slowdown in customer spending, coordinated pressure from online distributors or just the collapse of the few remaining major record labels. I suspect all of these things will happen, sooner or later.

7 Responses to “The Problem With Variable Pricing”

  1. I bootlegged my first song in years because I couldn’t find it priced under $1.29 anywhere… Amazon, iTunes, RhapsodyMP3… and it felt good. Not because I was blocking money from the artist or anything, but just because this is the first time I, who I consider to be pretty reasonable and passive, have demonstrated against the RIAA in my actions, even though they’ve never really ceased pissing me off.

    As a musician, I think the last thing I would ever want to do is sign up with a major label. I know it’s blasphemy, and I sound like I’m on a high horse, but the cons have finally outweighted the pros on an undeniable level. ‘Cause if, by the grace of God, I generate a “hit”, it will be $1.29, it will be a flash in the pan, and the strings my bosses pull will alienate any fans that fell in love with my actual music. Either I futilely pursue mainstream success as if it can be a constant source of income, or I exercise creative control, meaning which my commercial failures will be blamed on me and I will be dropped. My label will own my unreleased second record and refuse to sell it back to me so I could do so myself.

    I see it happen to artists I love every day and none of them ever seem to learn.

  2. Will W

    This is nothing other than a producer raising its prices to its distributors. The unfortunate thing is that the quality of the product, nor the expenses associated with producing it (aside from advertising) have not gone up 29%. So this is just one more example of the music industry over pricing lack luster product and wondering why people don’t like it. It still boggles my mind that I can go to the store and buy a DVD of a movie that cost 100M to make for $15, whereas if I want to buy that same movie’s soundtrack at a store, it will cost $17-20. The movie industry seems to be dependent and responsive to its consumer, although I see it starting to follow the same over-blown advertising trends and force-feeding that the music industry does.

    When I was a kid the cliche in the music industry for any producer not wanting to hire a band was to say,”Sorry, you sound too much like so and so.” Nowadays not only do they want you to sound like someone else, they only seem to want one song that sounds like some other popular artist.

    Pfff. I am completely opposed to pirating music, but as this article pointed out, if my choice is ridiculously over-priced tracks or acquiring it for free, there really isn’t a choice. Although since most of the music I like is older and not “popular” perhaps I will see the cost of my purchases go down. Yeah right. Never happen.

  3. Jannis

    I find it hilarious that the removal of something costs the consumer in effect more:

    in order to cover the cost of making iTunes music available to customers DRM-free

  4. Eddie_W

    For only $15/month, we bypass *all* of this nonsense by using the Rhapsody subscription service. For the 50 or 100 new songs and albums we download and listen to every month, we save quite a bit of money. Yeah, sure, the songs have DRM, but who cares? We can load the music onto three different computers and onto three different players (more than enough for our household).

  5. Pakitt

    If people stop buying 1.29$ tracks and get only the 99$ ones, the whole variable pricing effort of the labels would be useless.
    But let’s face it – people *do* really want to hear *now* that latest hit from Britney Spears/Madonna/Lady Gaga/write here your own preferred artist – do they?
    DRM free music is now available because people were not buying enough music online and were not buying CDs either, not because they were buying more music….