Digital Audio Insider -- blogging the economics of digital music

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

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July 15, 2008

Amazon.com's Amazing MP3 Album Prices
by David Harrell

Except for a couple songs, I don't even LIKE the Doors, but I almost bought this album this morning. At $3.99 for 20 songs, it was almost too good to pass up, even though I could simply buy the two songs I actually like for 99 cents each. (The album's now back to its regular price of $8.99.)

Amazon.com's daily and weekly mp3 album specials are clearly resulting in a lot of impulse purchases. The top album chart is usually dominated by the previous weekend's $5 specials and most all of the daily special albums make it to the top of the chart. Big-name artists (Madonna, the Police, etc.) almost always make it to the number one spot, and even relatively unknown artists like Liam Finn seem to hit the top five when given the bargain price. (Though the relative chart popularity of the specially-priced albums might just be evidence that total album download sales at Amazon are modest enough that it doesn't take too many purchases in a 24-hour period to make the top album chart...)

But the big question is -- what's the underlying math for Amazon for these sales, and what are its long-term plans for digital album pricing?

It's possible that the weekly $5.00 specials are label-sanctioned sale prices, but it seems almost certain that the daily specials, especially the $1.99 albums, are functioning as loss leaders, where Amazon builds a customer base for the download store by taking a loss on each transaction. Barring a change in the mechanical royalties law from a set per-song amount to a percentage amount, there's something of a built-in floor for album prices. Another possibility is that labels consider these sales as "promotional" sales -- like record club purchases -- and don't have to pay standard royalties for them.

While this is pure conjecture on my part, my guess is that Amazon is compiling some incredibly detailed data on how its customers respond to these specials. And, if Amazon can provide documented evidence for the existence of a price elasticity of demand for music, it will make the case for permanent album price cuts to the $5 range. That would require an increase in overall demand that more than offsets the lower profits on per-unit sales.

One thing to keep in mind, however, is that any pricing experiments by Amazon are taking place in the context of standard prices for the bulk of its digital catalog. The current impulse buys are driven somewhat because the prices are both ephemeral (24 hours or one weekend only) and relative bargains. If there's no pressure to buy today, and most albums are priced in the $5 range, there's little incentive to make an immediate purchase, and the perceived bargain disappears as well.

Anyway, if anyone has any behind-the-scene details about how Amazon is paying labels for these bargain album sales and/or its long-term digital pricing plans, I'd love to hear from you -- either for attribution or as an "off the record" source!

related: Amazon's Blue Light MP3 Special, Is Amazon MP3 Thinking Elastic?, Price Elasticity of Demand for McCartney

tags: digital music Amazon.com mp3 AMZN mp3 prices price elasticity of demand

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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.