A Perspective on Apple’s New Variable Pricing

Bringing an end to the age of ‘one-price-fits-all’ songs on the iTunes Store, Apple launched its long-anticipated three-tiered pricing system earlier this month. As the Internet’s foremost retailer of digital music, iTunes initiated the new model alongside the conclusion of digital rights management (DRM) copy protection on sales from the iTunes Store.
It is not generally understood, however, that the labels, not Apple, will in future be in a position to encourage demand by manipulating prices. As the article will explain, the labels will now be able to suggest tiered prices to a retailer (in this case Apple) and expect compliance. This is a first ever in the history of the record business.
The three-tier system—also known as variable pricing—is a model the four major record labels had been pushing for since the launch of the Store in 2003. This new scheme provides songs to be purchased at three different price points—69¢, 99¢, and $1.29—with the majority of chart-toppers and new releases priced at the highest tier. Older, less well-known songs may be priced at the traditional 99 cents or they may be pushed down to the new low price of 69 cents.
The hope for this new pricing scheme is that it will allow the labels to generate more revenue from popular songs (with the higher price) as well as provide incentive for customers to search for lower-priced songs they might have previously overlooked when they did not boast the appealing 69-cent price tag. A song that might have previously gotten very few or no downloads may now be in the running to become a top download.
The move to variable pricing didn’t come at zero cost to the majors, however. The three major labels that still had DRM protection on the iTunes Store—Universal Music Group, Sony Music and Warner Music Group—agreed to eliminate the copy protection from iTunes sales as well as allow for the purchasing and downloading of music over the iPhone 3G networks. In exchange for these provisions, the labels were granted variable pricing—an unprecedented retail model that could prove to be a little heavier than most people may believe.
Before the digital revolution, labels provided retailers with suggested retail list prices (SRLP), but such a price was only suggested. As noted by Dr. Peter Alhadeff in his essay “The Value of Music and the Trappings of the Marketplace, 1990-2005”, the labels were unable to push minimum retail prices to retailers for various legal and economic reasons. First, the availability of countless retailers across the country meant that all of them were carrying the newer, popular material. The music the public loved the most was ubiquitous in retail and no retailer could raise the price without losing sales. Perfect competition in the market for hits, in fact, was driving prices downward and preventing the labels from maximizing returns. Second, when the labels attempted to fix minimum prices in the late 1990s, they were met with various anti-trust lawsuits. Finally, big department stores and hypermarkets were using lower-than-average music prices to drive customers in and buy other, more expensive goods. The combination was, and has been, detrimental to the value of recorded music.
Now, and for the first time, the majors are dictating the prices of their entire catalog—from the chart-toppers to the lesser-known (and perhaps lesser quality) songs on older albums. This concept is further exemplified when it is noted that iTunes has approximately an 87 percent market share of all digital music downloads, with Amazon (the Internet’s second largest music store) at only approximately 16 percent of the market share. In the digital world, the towering importance of the Apple store, essentially a solo retailer, can at last help the labels place product and take advantage of the concept of elasticity of demand, well known in marketing and economics.
Early critics declared that this new pricing scheme would open the door to stores such as Amazon and Lala, where customers could still find songs priced at 99 cents or cheaper. However, it was affirmed within the first 24 hours of iTunes’ new model that Amazon, Lala, Rhapsody and Wal-Mart would be adopting the new variable pricing scheme, acknowledging iTunes’ change (as well as their own) as an “industry shift”. As of now, there are still songs that are priced cheaper on other online music retailers than on the iTunes Store, but it is expected that these will change in the near future.
Many industry professionals and consumers were worried, however, that the 30¢ price increase could drive customers away from buying music altogether. The manager of Nine Inch Nails asked:
“Wouldn’t it make sense to try to price it cheaper instead of squeezing the handful of people who are still willing to pay for music?”
And a lot of those critics were partially correct. A quick glance at the Billboard charts for the week of April 7th revealed that sales of songs that were priced at the higher tier indeed did go down by approximately 12.5 percent from the previous week. On the other hand, sales of songs that remained at the original iTunes price of 99 cents went up at a margin of approximately 10 percent. Overall track sales of the iTunes store, however, were higher than the previous week by approximately 3 percent. Despite the negative affect, though, total revenue was actually up from the previous week. The extra 30¢ received per top-tier song offset any sales decrease of those same songs.
It is also important to note that merely making more money off of individual track sales is not the primary goal of the record labels. With the new price structure, record labels hope that they might be able to package various singles, bonus tracks and extras into bundles that will sell at a lower price than buying each item separately, or that may be otherwise unavailable. Furthermore, there is hope that rather than spend the extra money to buy a few tracks off of an album, customers will now see the $9.99 album price (which will remain the same for the most part) as a better deal than it had been before variable pricing. These changes will provide for a model that conceptually resembles the old retail model the labels were used to before the late 1990s, based on albums as opposed to singles.
And as the onset of variable pricing settles into the minds of professionals and consumers alike, many people question whether iTunes should introduce a subscription-based service as well, effectively locking iTunes’ place as the number one online music retailer and licenser. However, many contestants of iTunes adopting a subscription service reveal that if iTunes were to do such a thing, it would merely be reintroducing DRM protection when it had worked so hard to get rid of it in the first place. Such a move would be counterproductive. Furthermore, it is understood that subscription services account for much less of the overall market than online music store sales do.
As for the elimination of DRM, customers can now purchase songs from the iTunes Store and play them back on any portable media player that supports AAC file-encoding, as well as burn unlimited copies onto CDs and various other digital data storage media. This encourages owners of other media players to purchase songs on iTunes now that there is no protection preventing them from putting the songs on non-Apple media players.
It will be interesting to see what happens the rest of the year in terms of the trend of tier-priced songs. Will customers accept the new prices? How will the labels’ new “bundles” fare in a market driven by singles and individual downloads? Will the top-tier singles continue to decline, or will the initial shock of higher prices fade away to reveal ever-growing numbers? Could iTunes have introduced the model that could effectively end all other online music retailers, or will these price changes even out the market share amongst the retailers? One thing, however, is for certain—the new variable pricing model is a watershed event in the history of the recorded music industry.
Alhadeff, Peter. “The Value of Music and the Trappings of the Marketplace, 1990–2005.” meiea. 21 Apr. 2009 .
“Apple iTunes three-tier pricing structure takes effect.” SiliconValley.com. 23 Apr. 2009 .
Cheng, Jacqui. “New $1.29 iTunes tracks provide an opening for competition -.” Ars Technica. 23 Apr. 2009 .
Home – SiliconValley.com. 23 Apr. 2009 .
“iTunes Tiered Pricing Goes Live.” Wired. .
Masnick, Mike. “Music Industry Folks Worried About iTunes Variable Pricing.” Tech dirt. .
“Now, Will Apple Do A Music Subscription Service? – BusinessWeek.” BusinessWeek – Business News, Stock Market & Financial Advice. 23 Apr. 2009 .
Peoples, Glenn. “ITunes Price Change: Sales Down, Revenue Up In Week 1.” Billboard.biz. BIllboard. .
Stone, Brad. “Making Sense of New Prices on Apple.” NYTimes.com. 23 Apr. 2009 .



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