Labels Losing Money With iTunes Variable Pricing

from the shot-yourself-in-the-foot-again,-did-ya? dept

Tue, May 5th 2009 8:36am — Mike Masnick

Right before Apple finally implemented variable pricing in iTunes it wasn't hard for many to predict that it would backfire badly on the major record labels as they tried to jack up prices. So, it should come as little surprise to find out those predictions appear to be entirely accurate. New reports say that the major record labels are losing revenue from variable pricing. Unit sales are dropping to the point that revenue is less as well. That's just bad business no matter how you look at it -- and totally preventable if they knew their own business. Plenty of people made it clear that sales would drop with higher prices, and it's amazing that the execs were unable to accurately predict how much.

Sometimes when we question the motives of entertainment industry execs, people say that we're being unfair in questioning the "intelligence" behind those moves. We're told over and over again that industry execs are much smarter than we are, and they know better than we do. And yet, almost everything that has been predicted has come true... over and over again. The industry keeps doing things that at least make it appear that it has trouble understanding the long-term implications of almost every move it makes. Perhaps they are smart. And perhaps it's all part of some grand plan. But, to date, the only evidence we've seen is that nearly every move made by the industry has backfired, and resulted in less revenue coming in, while those who predicted alternative and embraced alternative business models are finding tremendous success. At what point do we stop assuming that the legacy industry execs "are smarter" and recognize that they seem too focused on the old way of doing business to recognize how to competently change course?

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Filed Under: itunes, variable pricing
Companies: apple, riaa

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Chronno S. Trigger, 5 May 2009 @ 8:55am

I guess people just started getting their bills?
I thought they were making more money. I guess people didn't look at the prices after the initial change. Now that people are getting their bills they see the higher than expected total and started paying attention to the prices again.
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Matt Bennett, 5 May 2009 @ 9:01am

The things is, I would typically agree that Record Execs are smarter than people give them credit for too. Assholes, but not stupid. You don't get to be the exec of much of anything by being stupid. But you'd think that understanding price sensitivity (or the lack of it, depending) would be a very basic part of their job.
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- PhilD, 5 May 2009 @ 10:38am
  
  Re:
  I have worked long enough in and at really big business to realize that a certain percentage of people will always manage to fail upwards, and the first one will bring other incompetents up with him (or her). Once that process begins in a company, it spells certain doom as the execs that recognize the problem try to fight it, fail and move on opening their positions for less qualified individuals to fill.
  Eventually you get a company that is actually run by the support people for upper management and that works great till one of the geniuses decides to change something they actually know nothing about and then the circling starts, eventually ending in a gurgle.
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- ImpatientGirl, 5 May 2009 @ 11:36am
  
  Re:
  Have you worked in corporate America much? I know plenty of stupid execs...
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AdamR1, 5 May 2009 @ 9:04am

They are Smarter
They are smarter, they are getting paid six to seven figure salaries to alienate their customer base and find new and innovative ways of screwing artists out of money.
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- Anonymous Coward, 5 May 2009 @ 2:04pm
  
  Re: They are Smarter
  So they're griefers? I didn't know angsty 15-year-olds could become record execs....
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  - Anonymous Coward, 6 May 2009 @ 6:12am
    
    Re: Re: They are Smarter
    "So they're griefers? I didn't know angsty 15-year-olds could become record execs...."
    
    thats exactly who grows up to be record execs
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DMM, 5 May 2009 @ 9:06am

Personal anecdote
I buy plenty of music from iTunes, but I refuse to buy any music that has been jacked up in price.
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- R. Miles, 5 May 2009 @ 9:31am
  
  Re: Personal anecdote
  I refuse to buy any music that has been jacked up in price.
  What the hell did you think $1 per song was, genius?
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  - Shawn, 5 May 2009 @ 9:43am
    
    Re: Re: Personal anecdote
    From his comments I would assume he thought $1 a song was a fair price?
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  - linlu, 5 May 2009 @ 9:49am
    
    Re: Re: Personal anecdote
    And a 30% hike in price is what, chump change?
    
    I took all items that went up to $1.29 out of my cart. I simply will not buy them. I rarely buy an entire album anymore since most of the songs aren't that good. On the majority of albums, I buy by the song. Even when the album is discounted to $6.99, it's still a waste of money to pay that when I only like 2-3 songs.
    
    For most albums that I do buy I wait for the album to be liquidated (yourmusic site or Amazon price drops). Only my 'true fan' artists get my pre-orders for their latest release.
    
    I have a library of few thousand songs, so ya 30% is a big increase.
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- Chris, 5 May 2009 @ 10:26am
  
  Re: Personal anecdote
  Same here. When it went DRM free, I started buying like crazy. The minute anything I wanted got jacked up, I walked away. I would be more inclined to buy something for $1.29, if were relatively new and not something that was 20 years old already.
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Jeff, 5 May 2009 @ 9:11am

I don't buy the $1.29 tracks
I just looked for three songs last night. All from the 1970's. Amazingly, all three were $1.29. No purchases from me.
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- Anonymous Coward, 5 May 2009 @ 10:27am
  
  Re: I don't buy the $1.29 tracks
  And that defines the problem - pricing isn't based on demand but on sheer greed. The very fact they are attempting to charge the top end price for a thirty year old song as they do for one produced this year is simply absurd. The songs you were looking for likely drew in revenue in excess of cost production and marketing decades ago yet they are still trying to make margins on them the same as one produced today. Sheer stupidity.
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Baloney Joe, 5 May 2009 @ 9:15am

What a SOurce
Man you really had to dig to find that story. Nice source by the way, Joomla template and all.
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Anonymous Coward, 5 May 2009 @ 9:20am

This makes me feel better. I used to buy a lot of music from iTunes, enough that I almost felt bad at the end of every month (but not so much that I cut back). When 'variable pricing' came in, it took a lot more thought to buy a track. I'm OK throwing away $0.99 on a song that may not be great, but $1.29 looks a lot more significant and gives me the hesitation needed for impulse-stopping guilt to sink in. I've spent a lot less on music lately, from iTunes and Amazon, and even on some $0.99 songs I would have bought otherwise.

I'm glad to see that, maybe, the price hike is hurting them enough that they might notice and reconsider it. I'd like to go back to spending more money on music.
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PaulT (profile), 5 May 2009 @ 9:45am

Hardly surprising if this turns out to be correct.

Having the same price for every song is easy for the consumer. If someone goes to iTunes and they know it's 99c/track, they know what they're spending. It's easy to make instant purchases without considering the cost. There's no extra thought involved and no confusion. With variable pricing, you have to start shopping around. This track that used to be 99c is now $1.29... I wonder if that same track is on Amazon for less?

Add that to the fact that an extra 30c (30%!) is simply an unreasonable price hike for many people, and it's not surprising that some people don't bother buying at all. Not to mention the psychological factor - I'm no expert, but I'd guess that there's a psychological barrier when something more from being less than $1 to more than $1...

Finally, there's the catalogue issue. It's been well documented that while it's been extremely easy to find tracks that have been jacked up in price to $1.29, it's very hard to find any that have been lowered in price.
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- Michael Long, 5 May 2009 @ 11:06am
  
  Calculating prices...
  Of all of the reasons not to increase prices, I find the "price confusion" argument the most absurd. Is it really that hard to figure out that three $1.29 songs are going to cost about four bucks? Or to check the total in the cart?
  
  Every time you click on "Buy" you're doing the price/value comparison anyway. "Worth a buck? Worth a buck thirty? Do I want it?"
  
  By this logic, Amazon should price every book, CD, and DVD in the store the same price in order to eliminate "confusion" as to how much you're spending online...
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  - ChurchHatesTucker (profile), 5 May 2009 @ 12:14pm
    
    Re: Calculating prices...
    Of all of the reasons not to increase prices, I find the "price confusion" argument the most absurd. Is it really that hard to figure out that three $1.29 songs are going to cost about four bucks? Or to check the total in the cart?
    Yeah, it is. It seems odd if you're approaching it from a perfectly rational point of view (and this is the failing of many economists) but the reality is that the consumer has different priorities.
    "I want to hear song X!" OK, if it's a level field, she (i.e., my GF, who is the iTunes buyer in the house, and thus is what I'm basing this on) has one calculation to make: "Do I want to hear this a dollar's worth?" Pretty easy.
    Now we introduce variable pricing. She then has to decide if she's getting screwed because a thirty year old song (personal aside: Fuck Eternal Copyright) is worth paying *extra* for. I can tell you straight up, before she even tries to complete that math, she's looking for another song.
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  - Freedom, 5 May 2009 @ 12:32pm
    
    Re: Calculating prices...
    >> I find the "price confusion" argument the most absurd.
    
    At $1 most folks associate the cost as trivial and not worth the effort to torrent it. Above, $1, the cost becomes "real".
    
    In today's market, the reason to purchase from iTunes is for convenience and possibly to avoid feeling guilty. I can easily see someone gladly spending $1 for a song as it is truly a trivial expense and mentally just doesn't register. Once you go above $1 then it is "real" expense.
    
    The true issue is that you are making people think about the purchase decision. It is no longer an impulse decision. If there weren't any options in the market, then this probably would be a different story. But then again, if there weren't any options in the market, the record labels will still be trying to charge $14.99 for a digital download of an album and one that included DRM to boot with no options to purchase the songs outside of an album.
    
    Freedom
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al, 5 May 2009 @ 9:49am

"Losing Money"
i don't think so....just not making there "fair" percentage..
which to hear them tell it =100..
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Erv Server, 5 May 2009 @ 9:49am

Money
The execs will blame piracy and not the pricing plans
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ChurchHatesTucker (profile), 5 May 2009 @ 9:51am

Grand Plan
Oh please, that tiny loss of revenue will be more than made up for when they use the resulting 'piracy' to justify the internet tax.
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AnonCow, 5 May 2009 @ 9:57am

I can imagine how a music exec would hear an explanation of a variable price model: "blah blah blah blah PRICE INCREASE blah blah blah blah"
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mks50, 5 May 2009 @ 10:00am

Mental Block
If a track is $0.99, it is not popular - not good, not worth. $1.29 must be good but it is not at $0.99 - I will wait for sale (of some kind). My search does not return any price below $0.99. I am stuck, cannot buy track.
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yozoo, 5 May 2009 @ 10:21am

I think they are plenty smart
They are fighting tooth and nail for every last dime they can get (in the shortest possible term). Since they are superfolous in the modern music industry, this seems like the right move to make. Grabbing as much as you can on your way out the door seems reasonably prudent to me actually.
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Anonymous Coward, 5 May 2009 @ 10:21am

where's the value?
At .99 iTunes songs are about equal in price to a cd. But, on iTunes, there's no cost to mfg the cd or ship it. Where does that percent of the retail go? If I buy the .99 song I'm stuck with the apple format right? If I buy a cd, I can rip to just about any format I want right? So, where's the value in iTunes? With songs at 1.29, they now cost more than they would on cd. No thanks.
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- Anonymous Coward, 5 May 2009 @ 10:32am
  
  Re: where's the value?
  You can export iTunes songs to MP3 format. Always could. The DRM is there to keep the labels happy.
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Johnny Rotten, 5 May 2009 @ 10:31am

I don't know where you folks are getting your songs from, but when I download them, they're free. Then, the ones I like, I go see the bands who play them, and they make money, much more than the $1 per CD (or about $0.10 per track) that the record companies pay them. If you really feel bad about it, send a buck to the band, but why support a bunch of greedy fat-cat leeches who do nothing other than drive up the cost of something that's freely given away (music, on the radio, tv, etc.).
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- Anonymous Coward, 5 May 2009 @ 11:21am
  
  Re:
  While Johnny Rotten would have us all believe that his consumption habits serve to benefit the artists, liberating them from the oppression of their corporate masters, the reality of the situation is far different. In fact, the only interests he serves by operating under the mentality he espouses are his own. Although his comments reflect a fundamental failure to understand even the most basic realities of the music industry, he does raise an interesting point, albeit unintentionally, that the probelm with the music industry today is that it is laboring under the weight of parasites. The parasites, however, are not the record companies and the music publishers, who finance the artists' creation of the music we all love so much, but the douschebags who think that they have an inherent right to help themselves to the fruits of any musician's labor they choose. Granted, the major lables have been slower than they should have been in adapting to a rapidly changing market, but without their money and resources, many artists would never have gotten the exposure necessary to make a living doing what they love.
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  - Anonymous Coward, 5 May 2009 @ 1:51pm
    
    Re: Re:
    And if the RIAA continues suing the audience, it will ensure that many artists will never get the exposure necessary to make a living doing what they love.
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  - Tristin (profile), 5 May 2009 @ 4:52pm
    
    Re: Re: (Anon Coward @11:21am
    See, your rebuttal to Johnny Rotten might mean something around here if nobody ever read the posts. But anyone here that has half a brain has seen example after example after example of artists that make money in spite of illegal downloading and without the awesome money and exposure of the record labels. It is an antiquated business model gasping for air in a world that no longer needs its services. So please don't throw anonymous insults without at least researching your intended audience.
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Aaron Martin-Colby (profile), 5 May 2009 @ 10:31am

Value
I wonder if Apple agreed to these terms fully knowing what the reaction would be?

It's been well-known that Jobs and the record companies have been butting heads for years. Maybe he finally just said "fine, let's see what happens."

With revenue dropping this quickly, they may be forced into Jobs' arms yet again, and maybe we'll now see an increase in value.
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Lester Smith, 5 May 2009 @ 10:59am

A Possible Explanation
Imagine, for a second, record execs sitting in a meeting looking at their deals with iTunes and Amazon.

One of them says, "We really need to experiment with a different pricing model to see what the market will bear."

Another one says, "You know, those devoted Apple fans are already used to paying more for 'cool factor.' Let's try new pricing at iTunes, just to see what will happen. It's not like most iPod users are going to go to the trouble of figuring out how to buy mp3s elsewhere."

It's a boondoggle, fer shur.
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Tom, 5 May 2009 @ 11:00am

Predictions
All this is assumption and I do not mean to vindicate any of the labels here. But my assumption is that the execs or their lackeys were using some sort of demand curve model along with some genuine market research to determine how many people would buy at the 1.29 price point.

I think it is safe to say their model predicted that enough people would still buy songs at $1.29 to compensate for those who wouldn't (I'm one of those who won't either).

I'm also going to guess that the drop of revenue will be chalked up to a couple factors. First, the economy in general. iTunes is not a necessity for life, so if you have to make each penny count, the latest song is not going to be purchased at any price. Second, I'm also going to guess their model may have predicted an initial drop as people react to the price increase and it also predicts that over some stretch of time (say a year at most), people will come around and the revenue stream will rise to where their model predicts it will.

So my guess is the labels are not too concerned about this yet. In fact they may be expecting it. For it to be punishing, the drop in revenue has to be sustained over a much longer period and directly attributable to the price increase.

I don't believe the $1.29 price reflects a fair price and so I won't buy. I hope that doesn't mean the record labels will in the future request bailout assistance if enough of us don't buy either.
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Chuck Norris' Enemy (deceased), 5 May 2009 @ 11:08am

A "smart" exec would say...
..."Let's stop variable pricing. Make them all $1.29!"
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Anonymous Coward, 5 May 2009 @ 11:22am

Law of nature
It is a law of nature that content providers overvalue their content. This isn't new. The same thing applies to most business plans. Almost without exception people place too high a price on what they are trying to sell. A product usually becomes successful when someone figures out that it can be more profitable to make a little bit on many transactions rather than make a lot on a few transactions.

Unfortunately the modern economy is dominated by monopolies, cartels, and anti-competitive legal systems. This means that the execs can usually live in their fantasy worlds quite a while by keeping volume sellers out of the marketplace.

Instead of being able to shop for a good price, customers are only allowed the choice of buy/don't buy. Execs are shocked that so many people are exercising the "don't buy." option. This brings industries rapidly to solutions that involve some type of tax (on Internet access, blank CD's, Google, or whatever is available) to subsidize the industry even if they don't have products that the public is willing to pay for.
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rkelley, 5 May 2009 @ 11:43am

Record Industry
It seems to me that the record industry, movie industry and US car manufactures have the same problem. All of them are making business decisions based on how their industry used to work. None of them understand how business is today. I think most people are seeing these companies doing things that seem totaly out of touch with their customers, and relize that they won't be around much longer becase of it.
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refe, 5 May 2009 @ 11:52am

Why is anybody surprised?
Anybody that raises their prices during a well publicized recession shouldn't be surprised when sales drop. DRM free is not worth a 30% price increase when you can get the same songs for cheaper (free) elsewhere. Not good business.
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trudie, 5 May 2009 @ 12:29pm

free LEGAL music
I have started using Qtrax since they launched their U.S. preveiw ,Right now songs can only be played on your computer but they have a huge catalog (all majors and alot of indies)and if they follow up on their promise to allow transfering music to mp3 players and cell phones ,I'll never go back to any pay service,they say this month so i'll hope the labels will finally allow this. www.qtrax.com
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Anonymous Coward, 5 May 2009 @ 12:51pm

The last penny of mine the RIAA ever got or ever will get was over 10 years ago.
I will never pay for any product or service with any profit going to the RIAA.
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Anonymous Coward, 5 May 2009 @ 1:04pm

"It's been well-known that Jobs and the record companies have been butting heads for years. Maybe he finally just said "fine, let's see what happens."

Jobs needed the record label for a little while, just long enough to establish his ipod line/vision. They don;t need or care about them too much now. There hardware makes them a nice profit, and now the can sell apps for .99 & up and make for more the than they ever could selling music.
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Chris S., 5 May 2009 @ 1:08pm

I'll bet they could have actually made MORE money if they had left the price ceiling at $.99 and made the less popular songs $.79. Thus encouraging consumers to buy the less popular music.
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Chris S., 5 May 2009 @ 1:09pm

I'll bet they could have actually made MORE money if they had left the price ceiling at $.99 and made the less popular songs $.79. Thus encouraging consumers to buy the less popular music.
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LM, 5 May 2009 @ 1:13pm

Smart Execs
Give the execs credit for trying something. What will define their stupidity is if they don't change, now that they know the results of the program.
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Charles (profile), 5 May 2009 @ 4:20pm

When they move to 99 again, people will love them!
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Joel, 5 May 2009 @ 4:47pm

Mike,

I agree with your main point, but I was wondering what you thought the labels should do instead, focusing on the long term. If the labels return to $0.99, how long should they stay there? At some point, they are going to have to raise prices (even if just to keep up with inflation) to accommodate.

Further, I think you've mentioned this before, but .99 is a really distinctive price, and the longer they stay there, the more people will be outraged when it changes (for instance, see the press on variable pricing right now). Isn't it better to get away from it now and take the heat while it's less, than to wait until some other point in the future? When would be better than today? Doesn't this plan make more sense in the long term, once the news cycles have left this idea far behind and people realize that, if they still want Flo Rida's "Right Round", they're just going to have to suck it up and buy it at $1.29?

So what would you say the labels should do instead? How can they maximize profit through a different model?

Thanks,
Joel
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- Mike (profile), 6 May 2009 @ 11:04am
  
  Re:
  I agree with your main point, but I was wondering what you thought the labels should do instead, focusing on the long term. If the labels return to $0.99, how long should they stay there? At some point, they are going to have to raise prices (even if just to keep up with inflation) to accommodate.
  
  Not so. Look at the history of any infinite goods (or look up increasing marginal returns) and you'll see that on those goods, prices tend to decrease, not increase over time.
  
  What they should do is stop thinking of music as the moneymaker, recognize that it makes other (scarce) goods more valuable and focus on selling those things.
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Lawrence D'Oliveiro, 5 May 2009 @ 6:02pm

Simple Answer
Apple needs to start its own record label. Then the fanbois will GLADLY pay a price premium for the tracks...
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Shawn, 5 May 2009 @ 8:00pm

(honest question)

Is Inflation actually a factor with infinite goods?
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- Travis, 6 May 2009 @ 7:59am
  
  Re:
  And is $.99 a fair price when dealing with a non-tangible infinite good? They should be going WAY lower than $.99 in my opinion.
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- refe, 6 May 2009 @ 9:01am
  
  Re:
  "Is inflation actually a factor with infinite goods?"
  
  Sure. It may not, technically speaking, but when people have more money they buy more so prices go up. That includes anything consumers are willing to pay for - infinite or scarce.
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Todd, 6 May 2009 @ 9:03am

Agreed!
Personally I've sho
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Todd, 6 May 2009 @ 9:03am

Agreed!
Personally I've shosen NOT to buy two albums via Itunes in the last week because they were more expensive ($15, and $16 respectively) than I was willing to pay. Who the heck wants a digital booklet anyway???
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Gubes, 6 May 2009 @ 11:44pm

Even $0.99 is too high...they would make more selling for $0.49
I have seen some very interesting figures. If you look at the total volume of music sold on-line and in traditional retail outlets, it is falling at a rapid pace. Half of on-line internet traffic comes from P2P sites - sharing free music & other content. I think that cutting the price in half could result in a more than doubling of volume and probably result in better profits. The key benefit from paying for music is peace of mind - no viruses, its quicker etc. If you sell CD quality songs for $0.49 through iTunes, you will have a music revolution and the labels will make more money.
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Robert, 4 Jun 2009 @ 8:36am

30% increase? what for?
I've been using iTunes to buy music for a long time and I concur with many of your opinions. Actually I've felt that compulsion of buying 15-20 songs (all from different authors) in a burst of craziness (c'mon 99cents, it's OK).
Then they started offering the plus service thing... well I've never bought a song that way, I didn't see the point either I use an iPod and the difference in quality didn't pay for me. Then they started to sell all songs with the plus format at the same prices without DRM and 256kbps, wow, that was something... I've got completely mad and bought more in that period than ever.

Since the price increase I haven't bought not even one song. Nothing, zero. I've installed a script that will lookup the same song in amazon (which is still $0.99), but amazon only allows mp3 download on the US, so not an option either... then the only way to go is boycott by not buying anything more, simple, I'm the client, I have my money that I'm willing to spend, but I'm not going to because a 30% increment for nothing means greediness to me.

I've had already the good deal of AAC with no DRM and 256kbps for 99 cents and now without even offering me nothing more, nothing extra, nothing new... they increase a 30%? I have the feeling they think we consumers are idiots and we will continue buying, well there you go, I'll find another place to spend my money on.

Another one bites the dust... :-D
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