Are the Record Companies Right?

Record executives have been pushing to move the iTunes digital music service, which sells songs for $0.99, to a demand-based pricing model, where hit singles would cost more, and rarely bought tunes would cost less (or perhaps they just want to raise prices). Now I’m a big fan of segmented pricing, but when Steve Jobs calls your pricing aims “greedy”, it’s time to listen. Legal digital music downloads are relatively new. iTunes is now one of the top 10 music sellers in the country, but it’s still a nascent market. They key aim is now to grow that market (even at the expense of the old channels, since this one is more profitable for everyone except the record stores). Any pricing aim that slows profitable growth should go to the back burner. (The music industry’s inability and unwillingness to go digital might leave them at the mercy of Apple, who will surely know how to milk profit when the time is right.) Right now, $0.99/song is a simple, easy-to-understand price point, which seems fair, even though in many ways it’s quite high.

That said, there’s an interesting article over at Slate about using demand to set prices. While this concept is intriguing, and may be viable in a few years, I don’t think it’s right right now. Penenberg does bring up the important concept of “The Long Tail”, or what he refers to as an “Embarassment of Niches.” iTunes can stock more music than any record store ever could.

What record companies should be doing, rather than trying to jack up the price on hit singles, is figuring out how to exploit their deep catalogues. This is content that’s already produced, doesn’t require million dollar promotional budgets or trendy videos. In a purely “rational” world, the way to stimulate demand for the 90% of the music that accounts for only 10% of the sales would be to reduce its price. However, that would create the impression that the cheaper music is lower quality, further discouraging people from purchasing it. Instead, companies could promote certain songs by certain artists as free (even free for a certain time, then they’d disappear of your hard drive). Apple has a limited program of this type now, but much too limited. If I could subscribe to a “Free Music of the Week” list, aligned to my prefered genres, matched to my ratings of other songs, I would discover a lot more music than I do just by listening to KGSR. This would stimulate the purchase of songs on “the Long Tail”, at a cost of essentially 0, since no one is buying these songs anyway. (I’d love to get data on how many songs have never been purchased at iTunes.)

While it’s much easier to play these types of games with digital offerings, you can do it in the real world as well. Supermarkets offer samples of new products to drum up interest, for example.


  1. Scott Sehlhorst

    One challenge with variable pricing is that it becomes a point of leverage between the studio and the artist – “Do horrible thing X, or we’ll put your new song in the bargain bin on iTunes”.

    Maybe a model that takes diminishing returns into account – the first million copies are $0.99, the next four million are $1.49, etc. That would keep it real, while providing for extra profits on the most popular songs (as determined by actual purchases).

  2. MasterP79

    I think the one-price-fits-all approach is great, because it treats every song the same. Music is a piece of art, a song shouldn’t be sold for less just because it is old or performed by an lesser known artist.

    Now, the large back catalogue is a different kind of problem. But there has been an improvement on this, because with iTunes the large back catalogue is actually available for searching and purchasing along with the new and famous stuff.

    Prior to iTunes the main problem with back catalogue was that no record store had enough shelve space to sell all the stuff, which was the reason why it became back catalogue in the first place.

  3. Reuben Swartz

    Scott– Thanks for the note. Joel on Software makes a similar point. I think he’s very insightful on software (including software pricing), but I think he misses the mark here. Studios and artists already have plenty of places to disagree here, such as the CD clubs (“Buy 12 CDs for the price of 1”) which don’t pay royalties, “bargain bin” CDs, promotional budgets, etc.

    The music industry, like movies and pharmaceuticals, relies on blockbusters. These bestsellers fund the search for more blockbusters, as well as providing the profits. The easiest mathematical way to boost profits in these industries is to improve the profit on blockbusters. However, these industries also suffer from overpromotion (and consequent underdelivery of blockbusters). The digital medium represents a threat to this business model, but not to the industries that currently practice it who have built up massive content reserves but have not been able to profitably serve smaller customer segments until now.

  4. Scott Sehlhorst

    Reuben – thanks, I think you make a great point about relying on blockbusters to fund the works with lower returns. That was one reason I thought a gradually increasing price point would benefit the studios, by deriving incremental revenue (the premium for heavily-purchased items), but without creating a perception of inferiority in the other products.

    It might even serve to stimulate (or at least accelerate) demand – as people rush to get the bargains. Dell regularly promotes coupon codes that are only valid for the first X-thousand users. I felt a tangible sense of urgency around a monitor purchase that I made recently, because of this tactic.

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