Digital Audio Insider -- the economics of music and other digital content

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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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February 27, 2009

Amazon's MP3 Album Pricing Strategy
by David Harrell mp3 banner

Nothing against Opeth (or Scandinavian death metal in general) but I'm somewhat surprised that the band's Still Life album -- thanks to yesterday's $1.99 sale price -- was in the number three slot on Amazon MP3's top album chart as of this morning.

While most of Amazon's daily mp3 album specials top the chart or come very close, I didn't think a death metal release would have a broad appeal. I guess Amazon's mp3 album bargain shoppers are an extremely open-minded lot when it comes to musical genres, or maybe the prices are just too good to resist.

But whatever the factors are involving this specific album, its chart position seems to confirm my belief that the "special deal" albums account for a very large percentage of Amazon MP3's album sales. While I'd love to see a breakdown of the sales figures for regular vs. bargain prices, what I really want to know is Amazon's long-term mp3 album pricing strategy.

My guess is that -- unless Amazon has worked out some sort of promotional consideration with the labels involved -- these bargain sales are all net losses for Amazon. "Loss leader" music prices are, of course, nothing new for big retailers, but the $9.99 CD prices at Best Buy and other big box retailers aren't that much below wholesale prices. If Amazon is paying the regular wholesale price for downloadable albums on 99-cent and $1.99 specials, its per-unit losses are much larger than those associated with $9.99 CDs.

So what's Amazon getting out of all of this?

If nothing else, the specials are increasing the awareness of the Amazon MP3 store, and probably driving a fair amount of traffic to (The Twitter feed for Amazon MP3 has more than 12,000 followers.) Yet unlike Best Buy, which can use loss-leader music to lure customers is trying to lure customers to buy big-ticket items, it seems unlikely that you're going to check out the daily mp3 album deal and then buy a refrigerator from Amazon.

Also, unlike Apple, which reportedly makes a nominal profit on download sales to encourage lucrative iPod sales, Amazon doesn't sell its own corresponding hardware device. (Yes, Amazon sells iPods, but the margins for iPod retailers are quite low.) Perhaps the next version of the Kindle will also function as an mp3 player.

My suspicion, however, has been that Amazon is conducting a large-scale experiment in the price elasticity of demand for digital music, with the ultimate goal of demonstrating to labels that they can sell enough cheap music to offset decreased per-unit profits. (This 2008 Fortune article on Amazon quoted an unnamed label executive saying, "As soon as we wise up and realize that online albums are worth about $5, the music industry will be fixed.")

Yet considering the long struggle between Apple and the major labels for variable song pricing in the iTunes store -- a battle in which the labels finally got their way -- are major label-sanctioned $5 digital albums a plausible outcome?

Comments are open -- please share your thoughts about Amazon's mp3 album pricing strategy!

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


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