Digital Audio Insider -- blogging the economics of digital music

home

about
Digital Audio Insider is David Harrell's blog about the economics of digital music.

contact
Follow the advice of a certain Scottish band to send an e-mail.

links

music business/tech:
Ad-Supported Music Central
Analog Industries
Ars Technica
Apple 2.0
AppleInsider
Brad Sucks Blog
Broken Record
Byte of the Apple
CNET Music News
Coolfer
Digital Music News
Digital Noise
Duke Listens
Epicenter
Future of Music Coalition Blog
Hypebot
Know the Music Biz
LA Times Technology Blog
The ListeNerd
Medialoper
MP3 Insider
Music Ally
Music Machinery
Music Think Tank
MusicTank
New Music Strategies
Online Fandom
Pampelmoose
Penny Distribution Blog
RAIN
Rough Type
Swindleeeee
TuneTuzer

economics/markets:
The Big Picture
Core Economics
Freakonomics
The Long Tail
Marginal Revolution
Odd Numbers
Partially Unexpected
The Undercover Economist

mp3/music:
17 Dots
3hive
Fingertips
Shake Your Fist

archives
January 2006
February 2006
March 2006
April 2006
May 2006
June 2006
July 2006
August 2006
September 2006
October 2006
November 2006
December 2006
January 2007
February 2007
March 2007
April 2007
May 2007
June 2007
July 2007
August 2007
September 2007
October 2007
November 2007
December 2007
January 2008
February 2008
March 2008
April 2008
May 2008
June 2008
July 2008
August 2008
September 2008
October 2008
November 2008
December 2008
January 2009
February 2009
March 2009
April 2009
May 2009
June 2009
July 2009

February 01, 2006

The Digital Pricing Conundrum Part III: A New Idea for Variable Pricing
by David Harrell

The advent of online sales of individual songs has created a slew of pricing issues and contradictions -- discrepancies based on song length, the number of songs on an album, etc. (see Part I of this series). Yet any pricing solutions based on track length or popularity appear to be inherently flawed (Part II). And the issue getting the most attention these days is that the major labels are chafing over the single price for all individual song downloads. They're pushing for variable pricing that would allow them to charge more for new albums and individual songs and (perhaps) less for older catalog material.

With the caveat that the $9.99 album price at iTunes is already too expensive relative to the CD price (personally, I think the prices at eMusic are just about perfect for digital downloads), in many ways, this makes sense. As Glenn pointed out in a comment to Part II of this series, the costs to labels and artists vary greatly with each album. On new releases, artists/labels might be trying to recoup hundreds of thousands of dollars of recording and promotional costs. Older releases, on the other hand, might have been profitable for decades, so any additional revenue is pure gravy. Plus, that's how music is already priced on CD. Head over to your local retailer and you're likely to pay top dollar for the new Madonna album, while you can pick up tons of older CDs for well under $10. (That is, if you pay list price, as opposed to buying a new release as a loss-leader special at Best Buy...)

I think it's likely that the major labels will eventually convince Apple to allow a premium price for new releases, both for individual tracks and entire album purchases. If Apple agrees, premium pricing will -- of course -- spread to the other online stores. But here's an idea for a twist to the variable strategy, one that might be better for all involved parties -- labels, artists, iTunes, and consumers -- than a simple price increase for all new material:

Allow variable pricing for individual songs based on purchase order. That is, charge more for the first track a customer downloads from an album, but then charge that customer less for additional downloads from that same album.

If, as far as the major labels are concerned, the "cherry picking" of individual songs is the evil downside to online digital sales, then, in exchange for a higher profits on the first song or two purchased, they might be persuaded to accept lower profits on further purchases from that album, along with a different pricing structure for older albums. Here's how it could work:

For new releases, maintain the current $9.99 price for the entire album. From what I've read, the major labels don't seem to have a problem with entire albums being sold at that price, it's the individual sales that irk them. A "premium price" would be charged for the first two downloads from an album, but all subsequent single song purchases would be at a reduced rate.

New releases

Purchase entire album for $9.99, or
First song	$1.49
Second song	$1.39
Any additional songs	$0.89

Then, for older albums, keep the current 99-cent price for the first song, but make subsequent downloads cheaper:

"Mid line" albums

Purchase entire album for $7.99, or
First song	$0.99
Second song	$0.89
Any additional songs	$0.79

"Budget" albums

Purchase entire album for $4.99, or
First song	$0.99
Any additional songs	$0.49

For labels and artists, the increased revenue from the premium sales could be substantial. Currently, Apple keeps 29 cents of a 99-cent individual song download, with the remaining 70 cents going to the label, which then pays royalties to artists, songwriters, producers, etc. If Apple can be persuaded to maintain its 29-cent cut, a label's take for a $1.49 song sale jumps from 70 cents to $1.20, a 71% increase! And a $1.39 sale would result in a 57% increase for the label. Plus, even with the discount pricing for older albums, the labels would receive their current cut for the first song anyone downloads.

Charging the premium price on the first songs an individual buys is also a better bet for the label than trying to set a higher price for the "hits." For new releases, there's no way to predict which songs will be popular. And for catalog material, you could charge the premium price for the historically popular tracks, but that's looking at popularity in aggregate. Part II of this series noted that the least popular song on the Police's "Synchronicity" album was "Mother," the track by guitarist Andy Summers. While more people will want to download "Every Breath You Take," some Police fans are no doubt sick of hearing that song on the radio, but still listen to other tunes from the disc. For those individuals, "Mother" might very well be their first download choice from "Synchronicity." This plan allows the labels to get more for EVERY customer's favorites, not just the most popular tracks.

So how do these premium prices benefit customers? They don't, if you never buy more than a couple of tracks from newer albums. Even so, paying extra for the first two downloads from an album is certainly preferable to a unilateral price increase for ALL the tracks on new albums and entire album purchases.

But individual customers would come out ahead if this plan results in a lower average download price for all of the songs they purchase. And even if the average price for ALL download sales drops below 99 cents, labels and artists still come out ahead if the increase in download volume leads to greater total sales. Dropping prices for subsequent downloads gives customers an incentive to dig deeper into albums, and might give labels sales they'd never see otherwise.

Granted, the prices above fall apart for albums of less than 10 tracks. And the suggested premium rates are somewhat dependent on Apple and the other online retailers not demanding a larger dollar cut of the premium priced downloads. Given that Apple's real incentive is to sell more iPods, it might be content to keep 29 cents out of a $1.49 sale, other online retailers might want a larger chunk. If the premium price approaches $2, it might be enough to cause a consumer backlash. The number of legal downloads is still far less than the traffic on file sharing networks. The last thing the industry should do right now is push single-song download prices to a point that drives their current customer base away.

I wish I had some hard data on actual purchase patterns -- how many songs the average iTunes customer purchases, single songs vs. album purchases, purchase of "new" songs vs. buying digital replacement copies of tracks already on album or CD, etc. With such numbers, a more solid case might be made for this idea. But even without that information, I'm guessing that this type of pricing strategy would be better embraced by customers than an across-the-board rate hike for new albums while at the same time alleviating the labels' concerns over the cherry picking effect.

Comments are open -- please let me know what you think!

tags: iTunes eMusic

link 0 comments e-mail this post Digg this post follow DAI on Twitter

Subscribe:

RSS Feed

Add this blog to Del.icio.us, Digg or Furl

The Digital Audio Insider Twitter feed:

Looking to hire? Looking for a job? Check out the digital audio insider job board.

The Layaways (my band)

New album: "The Space Between" is now available from eMusic.

"It can't be easy to make something this basically simple sound so fulfilling; it if were, everyone would do it." -- Fingertips

"The Layaways have a unique sound with great drum fills and airy vocals that will make you tap your feet and sing along." -- VIC Radio

Keep It to Yourself - free mp3
All Around the World - free mp3
Come Back Home - free mp3

Download from eMusic, iTunes, Amazon MP3, Lala.com, or CD Baby, listen to free streams at Last.fm and Napster.

"The Layaways make fine indie pop. Hushed vocals interweave with understated buzzing guitars. The whole LP is a revelation from the start." -- Lost Music

"A wonderfully crafted recording built around tasteful songwriting and musicianship..." -- PopMatters

Silence - free mp3
The Long Night - free mp3

Download from eMusic, Amazon MP3, or iTunes, listen to free streams at Last.fm, Napster, or Rhapsody.

"These are songs that you want to take home with you, curl up with, hold them close -- and pray that they are still with you when you wake up." -- The Big Takeover

Let Me In - free mp3
Ocean Blue - free mp3

Download from eMusic, Amazon MP3, or iTunes, listen to free streams at Last.fm, Napster, or Rhapsody.

More Layaways downloads:

the layaways website

Current/Recent Reading and Listening:

Music Supervision: The Complete Guide to Selecting Music for Movies, TV, Games and New Media by Ramsay Adams, David Hnatiuk, and David Weiss

It's written as a how-to guide for those looking to become music supervisors, but I found it to be a good resource for musicians (like me) who are trying to get their music used in movies, TV, etc.