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Digital Audio Insider is David Harrell's blog about the economics of music and other digital content. I write from the perspective of a musican who has self-released four albums with the indie rock band the Layaways.

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January 26, 2006

The Digital Pricing Conundrum Part II: The 99 Cent Barrier and Popularity-Based Pricing
by David Harrell
If you're the type to read this blog, then you already know that the major labels are grousing in a major way about the 99 cent download price established by iTunes. While Apple has shown some flexibility on pricing, going both above and below the $9.99 mark for an entire album, Steve Jobs is thus far holding firm on the 99 cent price for individual downloads.

The labels' beef is that while all of those downloads over the past year were great for the bottom line, they also represent millions in lost potential revenue. Their basic argument has two components: First, by making every track from an album available as a single, "full album" sales are cannibalized. A portion of those 99-cent "single" sales would have been $9.99 full album sales, if that had been the only way to obtain the track in question. Second, if consumers are purchasing one or two individual tracks in lieu of a $9.99 album, then they're probably willing to a pay a bit more than 99 cents. After all, even at $1.99 per track, it's still a bargain if you really only want one song from an album.

As a music fan, I'm obviously not sympathetic to any effort to raise prices for downloads. And I don't necessarily buy the argument that a ton of single song downloads from an album means that, faced with no other choice, enough of those buyers would have bought the whole album to surpass the profits from the single sales.

Still, I'll concede one point to the major labels: Equal pricing for all individual tracks ignores the reality that different songs have varying levels of value to consumers. That value can fluctuate based both on the artist in question (a new track by 50 Cent is worth more in the marketplace than an old Foghat song) and within the context of an album or an artist's total recorded output. That is, many casual fans care more about the "hit" song on album than its less popular tracks.

Obviously, the second point is a new reality, created by the advent of digital downloads. Music fans had favorite album tracks in the past, but the concept of relative value was irrelevant -- unless a song was available as a single, your only legit option was to buy the whole album. That's not the case anymore.

Is there a way to fairly price downloads that accounts for varying perceived value and is also acceptable to music consumers? I suspect the labels' preferred method would be to simply jack up the album/song price for newer releases. Say $14.99 for the album and $1.49 for individual tracks for new releases, and keep the $9.99/99 cent model for older catalog material. This approach is certainly logical and analogous to current CD pricing, where the list price for new major label releases can be double that of older catalog albums.

But such a change would result in prices for album downloads that would equal or even exceed that of physical CDs. Is this a feasible strategy? Last week, in an excellent column in the Chicago Reader about the possible end of the 99-cent download, Douglas Wolk made the case that at least some consumers are willing to pay a premium for the convenience of downloading digital music:
If it costs a few dollars more to buy an Eminem album as a set of protected, nontransferable files with no artwork and no liner notes from iTunes than it does to go to a record store and buy a higher-fidelity physical copy that you can sell later if you don't like it, are you crazy to go for the iTunes version? Not if it's worth it to you to get it instantly, without the hassle of driving to the store or waiting for Amazon to deliver your package.
(Here's the link to the story, with the warning that it's a large PDF file that takes a long time to load.) Convenience is clearly a factor in digital sales, even beyond the hassle of schlepping to a record store or waiting for an Amazon order. Back in 2003, 12:51, the first single from the second Strokes album made the top 10 chart at iTunes, despite the fact that a high-quality mp3 of the song was available (and can still be found) at the band's website. And I've downloaded tracks from eMusic that I already own on CD, just to save the bother of ripping a specific song to mp3.

For now, though, let's assume that any large-scale increases above the $9.99 album price would be unacceptable to the overall buying public. Without a change in the album price, is there a logical way to price individual songs?

Last week, in Part I in this series, one proposal floated for getting around the issues associated with varying song lengths was to simply price each track based on its portion of the overall album length. However,that idea is fundamentally flawed because no one equates song length with song quality, it's an issue that only comes up in the context of pricing downloads.

Consider "Revolution 9" from the Beatles' "White Album." At eight minutes and 13 seconds it's by far the longest song on the album. But if the Beatles' catalog ever makes it online, I doubt anyone would see the logic in charging more than twice the price of "Blackbird" for one of the least popular tracks on the album.

So how about using track popularity to establish market prices for each of the songs on an album? Back in December, Slate ran an article that proposed treating song downloads as a commodities and basing the price on the relative demand for each. At the time, I thought this was a rather asinine idea, given -- as pointed out by many readers of the story -- that by definition a commodity is something available only in a limited quantity.

But a modified version of this idea might be worth exploring. Instead of the Slate approach, which would price a song based on its popularity among all songs in the marketplace, this method would base price on popularity within the context of an album.

Let's take a look at a specific example, Synchronicity, the final studio album by the Police, released in 1983. According to Last.fm, the online music community and listener-tracking site, 68,247 members have listened to the Police recently and tracks from Synchronicity have been spun 44,624 times. (No doubt a very small percentage of total listeners worldwide, but it's probably safe to assume that their collective listening habits mirror the total audience for the band.) As you might guess, the hit single "Every Breath You Take" is the most-listened to song on the album, accounting for 14,281 recent listens by Last.fm members. And "Mother," guitarist Andy Summer's sole songwriting contribution to the disc is the least popular with just 1,154 listens (sorry, Andy).

Multiply $9.99 by each song's percentage of total plays for all of the songs on the album and you get a price list that looks like this:

Synchronicity, the Police, Priced By Listening Habits
Song Price $
Every Breath You Take 3.20
King of Pain 1.67
Wrapped Around Your Finger 1.41
Synchronicity II 0.90
Tea in the Sahara 0.80
Synchronicity I 0.41
Murder by Numbers 0.35
Walking in Your Footsteps 0.35
O My God 0.33
Miss Gradenko 0.32
Mother 0.26
Based on Last.fm listening statistics as of 1/26/2006

This isn't going to work. The first big problem is that the $3.20 price for "Every Breath You Take" would be unpalatable to consumers (and very likely to drive customers who would've paid 99 cents for the song straight to a file-sharing service). Also, it exceeds any price the major labels would consider for a single-song download. And for a band that was truly a one hit wonder, a single song might account for even a larger portion of the $9.99 album price. Then you have the potential problem of unpopular tracks being priced below the statutory mechanical royalty rate.

Clearly, a straight-line popularity pricing strategy isn't the answer. You might instead start with a minimum track price and adjust upward based on track popularity, or perhaps set a maximum price for the most popular track, say $1.99, and work your way down to price the remaining tracks.

Yet even with such modifications, there's another issue, a band might release a song on several albums -- on the original album, as part of a greatest hits collection, etc. While "Every Breath You Take" accounts for around 32% of the tracks plays of the Synchronicity album, in the context of the Police's greatest hits CD, it accounts for fewer spins. Popularity would have to be considered in the context of a band's entire catalog. The problem is, overall song popularity changes over time and very suddenly whenever a band releases a new album.

Finally, how could this method work for new releases? A record label might choose the "singles" from a new album before its release date, but there's no way to accurately predict which songs fans will, on average, listen to the most.

So I'm nixing song popularity as the basis for individual track pricing. Stay tuned for Part III of this series and a proposed pricing plan that would maintain the $9.99 album price, give the labels more money for the most popular tracks, yet still keep music fans happy.

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