iTunes Prices Too High

By Richard Menta

Do you know what I think? I think the prices for paid digital music downloads are too high. I have thought this for quite awhile, in fact I said it way back in August of 2001 - long before iTunes appeared and when Napster was a free file sharing service - in an article titled 6 CDs a Year.

The driving statistic of that article was that the average music lover only buys six CDs a year. That's a fairly low number, but one that reflects the high cost of music that existed before and after Napster made its appearance. High prices enabled by the record cartel force us to be very choosy over which albums we finally commit to buy.

Unfortunately, we as consumers have been complaining about the spotty consistency of many of the albums we buy. You know, the "two good singles the rest is filler" complaint we have heard for years. The record industry pushes albums over singles because they make them more money. There also has been this "Albums are Art" concept floating around since Sgt. Pepper's first appeared, as if singles were incapable of producing the same. Napster and file trading brought back the single as a preferred medium because we as consumers have more control so quality (and therefore value) is overall much higher.

The record industry's fear is that reasonably priced digital downloads will canibalize profitable CD sales. There is no evidence that this would be true, especially since singles have always been used to promote albums, but we're not talking about proof here, we are talking about fear. There is precedent to say there is nothing to fear if the record industry would just look for it.

My solution in that article was for the record industry to sell digital downloads at compelling prices that developed a tiered pricing system similar to what the movie industry employs. As I wrote in that article:

Put six CDs in a customer's hand and they'll pay $90 and be done for the year. Put 100 high quality MP3 singles in their hand and they might pay an additional $10 a year to expand on - not replace - the six CDs they bought. That's $700 million in additional revenue if we just talk about Napster's 70 million former users. $1.4 Billion if those users decide to download 200 songs, etc.

How many people do you know see only a few movies a year in the theater, yet rent regularly at the local video store. At $9 per person to see a movie, the cost forces us to be very selective over which movies we see just like it forces us to be selective on the CDs we buy. On video, $3.00 covers the entire family and so we supplement our movie going experience this way. We haven't stopped going to the theaters. That's because the wide screen experience is superior to the TV experience just as a CD on a stereo is superior to an MP3 playing on the tinny speakers of our computer systems (that is how most of us listen to our MP3s).

The end result is this has brought hundreds of millions of additional revenue to the movie industry.

Today, the movie industry makes more revenue from video/DVD sales and rentals that from the box office, a box office that has set sales records the last 9 out of 10 years.

I quoted $0.10 as a good price for paid downloads. Frankly, a quarter or even $0.35 would work well. Somewhere where a 13-track albums worth of music will cost under $5.00. This price mark is compelling.

What does the record industry charge? $0.99 a single of which their cut is anywhere from $0.65 - $0.85 (different sources give different numbers). The problem is, these prices are too high.

Thanks to iTunes, digital sales are modestly successful. They certainly are profitable - as in pure profit - for the record labels.

I say pure profit because the record industry's costs of supplying digital music online is negligible. In fact, all they are supplying is permission. It is Apple and Napster and all the other services who are converting decades of CD material into digital files to be downloaded so the lables supply no hard product. As for music production costs, 98% of each lable's catalog was produced before online services appeared. All of their costs for production and marketing were committed to sell CDs, not downloads.

Lower prices will drive more people to these services and further deflect the competition from the free P2P services. It will create this tiered system I envisioned.

But the record industry is getting greedy again. They don't want to lower prices. In fact, they are now sending feelers out through the press that they want to raise prices. They are claiming that they introduced prices low to stimulate this market in the first place. In fantasyland this may be true.

In the real world it is the consumer's perception of value that drives sales.

My personal perception is that prices are too high and need to come down to satisfy my notion of value. I'm sure there are many who feel the same way.

But, I say if they want to raise prices let them. If they do, the paid download industry will stagnate. iTunes will survive, because it makes up two-thirds of the market, but Napster may not. The same may go for other iTunes competitors, competiton that keeps iTunes from becoming a monopoly.

They say Steve Jobs was upset at this announcement by record executives. If there is a shake up and iTunes becomes the only major survivor guess who will hold more influence on paid download pricing. Yep, angry Steve himself.

That's when he demands both lower prices and a bigger cut for Apple, because he knows lower prices will make him more money.

In other words, the market will bring equilibrium to all this. The record industry is an oligopoly in traditional retail, but not online. If Grokster wins its case in the Supreme Court it will bring this equilibrium faster.

One more note, Napster has shifted from selling music to renting music. You pay every month infinitum or the music you acquired disappears. This is a business model that the record industry has tried to foist on online commerce since Sony introduced its first Net music service in 2000. Higher download prices may not be applied to rental prices, giving Napster more of an edge against iTunes.

Could there be collusion to force the rent-a-song business model at the expense of iTune's buy-a-song-and-own-it forever model?

Stay tuned.