Econ 101: Study Shows That If Record Labels Lowered Prices On Music, They Would Sell A Lot More
from the profit-maximization dept
Having talked with a bunch of music execs recently, as well as a few different companies that do analytics in the music space, one thing became clear: unlike most other industries, record label execs tend not to be particularly data or analytics-driven. Let's just say they didn't get into the recording industry because they were good at math. There are a few exceptions, obviously, but getting many industry execs to think logically and examine data isn't particularly easy. This isn't that surprising, given how many examples of actions by big record label execs that make little to no sense when thought about analytically.Yet another study has come out suggesting that the industry has pricing all wrong, pointing out that the increase in sales from dropping the price of music would increase profits. And yet what has the industry been trying to do? That's right: trying to raise the price. The study suggested that the "optimal" price for music might be closer to $0.60 per track. That still seems way too high to me when you look at how people flocked to services like Allofmp3.com, but in general I think the basic concept makes sense. You can maximize revenue by dropping prices, but it doesn't seem like many record industry execs have realized that.
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Filed Under: demand, music, optimization, pricing, supply
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Mike, you should know better than anyone, the reason why the labels do not act like other industries is because their industry is not based upon any free market competition. Their industry is based upon an ever expanding government granted monopoly.
And the labels do not even compete against each other. That's the unique feature of selling music. If someone really likes a particular song, they're not going buy a different song they don't like, merely because it's cheaper. Utility and pragmatism, weighing the objective pros and cons simply are not factors when deciding to like or buy a song.
So it's nonsense to talk about various labels competing with each other when you can only buy what you want from one.
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I.e. do a deal which gives two (or more) different labels to market the music - with a fixed royalty to the artist (unfortunately free wouldn't be a possibility). Then they would have to compete.
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Re: Monopoly
My preference would be to drive a Mercedes but I drive a Kia. Why? Because I got it equipped with every technical feature and convenience that a Mercedes has but at about 1/2 to 2/3 the price. I buy music the same way, music I like at the price I like. Musicians can now market their product and bypass the labels, and soon this segment will grow to where there are a lot more options than buying from the labels. The music recording companies are going to die because they are no longer needed. They are only going to have rights to intellectual and artistic content that they actually produced. (i.e. movies)
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Broken Record
If CDs were about $5/ea I'd buy 10 a month, probably forever, just rebuilding all the music I used to have on vinyl.
I like physical CDs because I like having a product to hold in my hand, I can't imagine ever buying a download.
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Re: Broken Record
The question is not if, but when. I guess only time will tell.
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But but...
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Saving the record Labels ....
The record labels would survive in a smaller more efficient form if they adopted the Amie street pricing model. I do not believe they can because of contractual obligations to their artists, and possible price fixing agreements between the labels. The fact that they think lowering the price devalues their product, based on the mistaken assumption that keeping the price high will cause more solid product sales.
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Really Idiotic Artist Association
For $15 I get a package, case, artwork and a CD with around 15 tracks of music on it.
That $15 includes lots of hidden costs:
1. The electricity for the lights in the store I bought it from
2. The stock clerk who put it on the shelf
3. The Cashier who I paid money too.
4. The Manager who runs the store.
6. The truck driver who delivered the product to the store.
7. The diesel fuel used in the truck.
8. The factory workers who pressed the CD
9. The raw materials used to make the CD, case, artwork
10. The artist who made the art work.
11. The people who made the machines to make the CD's
12. The inventor who has patents on the various technology used to make the CD, cases etc.
13. I could go on but I think you get my point.
If I download 15 tracks @ 99cents each thats $14.85
Why does it cost the same to get a download as it does to get a physical product?
Who in their right mind would pay the same amount of money, for less product?
Only idiots would think that such a business model will last forever.
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Re: Really Idiotic Artist Association
I generally agree with what you say, but you forgot to take convenience into account. By downloading I don't have to pay for the gas to go to the store and I save time by not having to drive into town. Is all that still worth the $0.99? No way! I stopped buying downloads and now buy CDs online. It's not relatively fast but it makes for fun surprises in the mail when I forget that I ordered them lol...
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Excellent thumbnail analysis of the situation.
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There are low price alternatives
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If music were cheaper
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But in many cases it is already cheap or even free
Yes, I think more music would be sold if it were cheaper, but on the other hand, when you can already pretty much listen to what you want without paying, to what extent is lowering the price going to significantly move more product?
I'm not suggesting a pricing strategy here. I'm just pointing out that lowering the price might not have as much of an impact as one might assume.
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Selling in bulk
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Unlike the MPAA...
Yet, the soundtrack CDs of these old movies are still $15, even though the tracks may be 50 or more years old. (Does anyone actually buy soundtrack albums?)
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Interesting in light of the Amazon/Macmillan spat.
http://bit.ly/917Paf
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my cost per cdr ( 700 meg of bandwidth )
thats my cost
at 40$ for 5 megabit bandwidth that i get 4 megabit actual speed
so when they make it available online what are they charging you?
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Professor Iyengar, a specialist in pricing and consumer behavior, surveyed only 600 digital music consumers as part of the study, and no study can reveal precisely what would happen if the price of music were reduced by 50 percent or more.
Effectively, he is calling for a 50% decrease in the price of music, but has little more than a narrow sample to base this on. This isn't Econ 101, it's mass extrapolation from a horribly small sample.
It isn't a "fail" outright, but there isn't enough data to support the conclusions. Further, one only has to look at the profit levels of Itunes to understand that a 50% cut in retail price would likely decimate their business model (Apple isn't making 50% profits).
I would say another study that is not much more than wishful thinking.
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Effectively, he selected a group of people most likely to answer in one manner. It is both too small and too narrow of a group to draw and signficant conclusions. The vast majority of music consumers are not "digital music consumers" (aka online buyers) but rather still buying shiny plastic discs. Asking the larger music community as a whole might actually reveal something meaningful.
Carry on.
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"Yet another study has come out suggesting that the industry has pricing all wrong"
(emphasis added). This isn't the ONLY study, it's just one of many studies. The problem is that you have no evidence to contradict the studies so you simply pick on the studies. Why not present contradicting evidence instead of picking on each individual study and ignoring what they do indeed suggest.
However, one thing to note is that Americans don't like to buy something once the prices increase after the prices have gone down so as a result many industries often try to avoid dropping prices to products, even if they know it will make them more money in the short run, because they anticipate that once those prices drop they will be harder to raise again. Other countries aren't so much that way. Hence, even though the industry can make more money by dropping prices they don't like the idea of getting people used to fair prices, they want to continue to rip everyone off.
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That's our TAMMY!
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Small by what measure? If you know that it is too small then you should be able to give some detail as to why. Depending on what you're doing a sample size of 300 can be quite adequate for the population of Earth.
"he only surveyed digital music consumers and not consumers as a whole"
The study says that they surveyed both existing customers and consumers who had professed an interest. I am unsure what surveying people who don't have an interest would achieve.
"digital music consumers are a small part of the overall music consumer world."
Isn't the point of the study to help companies take advantage of a yet untapped market?
"Effectively, he selected a group of people most likely to answer in one manner. It is both too small and too narrow of a group to draw and signficant conclusions. The vast majority of music consumers are not "digital music consumers" (aka online buyers) but rather still buying shiny plastic discs. Asking the larger music community as a whole might actually reveal something meaningful."
Ah yes, study the cat to learn about the dog. Sage advice. You did read the title of the study, didn't you?
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It would be incredibly relevant to see what price point ALL music consumers would consider good for digital media. and perhaps also to see what part of the plastic disc market would be shifted online if the price was right.
Keep an eye on all of the information out there, not narrowly on a single study.
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Is this your Benny Hill impression? You've completely ignored what I said and gone on to repeat what you said before.
Before I get dizzy, let's try again:
1. The study does not limit itself to current customers of digital music, nor does it exclude those who buy CD's.
2. Including those who have no interest in digital music would do nothing to help find a price for digital music.
3. Keeping an eye on the all the information out there would include any single study.
4. Including those who aren't already interested in the service would likely skew the results in the opposite direction to the one you want. People who currently buy disks aren't likely to become part of the digital market if the price goes up and would likely already be part of the market if the price was right.
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Professor Iyengar, a specialist in pricing and consumer behavior, surveyed only 600 digital music consumers as part of the study
600 digital music consumers. Next.
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So you can anonymously continue to fair reading101.
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You would have learned what a "population" is in Stat 101, if you hadn't failed.
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The rest of the population of , I don't know, The world maybe, would I'm sure rather be paying less.
The one doing the study could have given only HIS opinion and pretty much been speaking for the rest of us, Those of us NOT payed by the RIAA et al.
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Econ 101: If you have multiple markets for the same thing, you don't lower the price in the smallest market so as to hurt your larger market.
60 cents per song would mean 60x12 = $7.20 for an album. When albums retail between 11 and 20 dollars, why would you want to depress the overall market? You might encourage more people to buy online, but your net profits overall would drop. That wouldn't be good business.
Proof that none of you have run a business before.
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Ask ALL customers? How? There's a large proportion who would never respond. How would you ask? Via mail? Via phone? Via email? Not everyone uses all three and there would be a lot of overlap if you contacted everybody, even if that were possible (e.g. how do you get the contact details for those who only buy music through Wal Mart, or who only buy it second hand due to the high prices of new music)?
Maybe you have an answer. If you do, I suggest getting in touch with the top statisticians in the land because you've just rendered every algorithm and the concept of sample sizes obsolete. Even better, patent the process and you can be rich!
As for having run a business. Yes, many of us have, and we understand the concept of margin costs. The marginal cost of creating a digital file is $0. The marginal cost of distributing and storing it is minimal. It's almost irrelevant compared to a CD, and the shipping, storage and transport of a CD makes up a large proportion of its cost.
In other words, they can drop the price of digital file significantly and still make a healthy profit on each unit. Meanwhile, they sell more units. Get the proportions right, and they make more profit while making "pirated" content a little less attractive.
Only a fool like you would consider this a bad thing, and there's already some great examples of it in action out there. (e.g., admittedly anecdotal, but I bought many more albums when I was an eMusic member that I ever have before or since. 10 albums/month minimum, eMusic's prices got higher, availability lower, so I quit and now buy 1-2 albums on average each month and spend at most half of what I used to.)
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Ask ALL customers? How? There's a large proportion who would never respond. How would you ask?
Not ALL as in each one individually, but a sample that is larger than only a sampling of digital music buyers.
Digital music is still only a small part of total music sales. It would be like saying you sampled soft drink preferences from the market, when the only people you asked are people walking by holding Freska bottles. The sample is too narrow to get a full and reasonable result.
As for your purchases, have you considered that perhaps you have reached the saturation point in your collection? One of the amazing things about "long tail" stuff is that over time, your personal demand for older material drops off. Now you are only purchasing or looking at mostly newer material. So your declining in purchasing might have more to do with a lack of new material you like, than anything else. If you really wanted something, you would pay the (slightly) higher price for it today.
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From the study: "The conjoint survey was sent to some of the customers of the service provider and
other consumers who had professed interest in its service."
The article you quote from is wrong.
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"Apple isn't making 50% profits"
Ronald J. Riley,
I am speaking only on my own behalf.
Affiliations:
President - www.PIAUSA.org - RJR at PIAUSA.org
Executive Director - www.InventorEd.org - RJR at InvEd.org
Senior Fellow - www.PatentPolicy.org
President - Alliance for American Innovation
Caretaker of Intellectual Property Creators on behalf of deceased founder Paul Heckel
Washington, DC
Direct (810) 597-0194 / (202) 318-1595 - 9 am to 8 pm EST.
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Re: "Apple isn't making 50% profits"
Finally, something I can agree with you on.
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Re: "Apple isn't making 50% profits"
ALL music now sold on iTunes is DRM free. You can buy it and transfer it to any other music player on the market, since you can convert it from the open AAC they sell to an MP3 format, and there are third party converters that can convert to other formats as well.
So please tell me how their music is crippled?
Movies are a different story, but then is there ANY online store that sells DRM-free movies?
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.60 per single track
The main problem with online sales is the banking system and credit card checkout companies because a credit card transaction can cost as much as 0.30 plus 3% of the total.
That's PayPal's fee. For a business to even process credit cards on the cheap is still close to .15 per transaction. So if you sell a single at 0.99 the credit card processing can be up to 30% which is prohibitive. It sounds like a loser to me and the only way the cost will ever come down is to be able to get rid of the credit card processing fees.
If there was a way to batch process single track sales it would be cheaper. But the problem is that each credit card has to be approved and the companies sock you for it.
I haven't heard anywhere how much the Record Company gets out of each .99 sale, so it's really hard to figure total cost of sale.
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Re: .60 per single track
The only solution that comes to mind is; do like some toll road authorities do for toll tags and; set up an account with perhaps $25 in it, the draw against that until the balance gets low at which point they let you know, so you can put more money in the account. That way there is only a fee for every $25 or $50 or what ever amount you chose, and you could be offered a much better price for going along with the program.
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Re: .60 per single track
I'd like to see a mixed service, maybe 79 or 99c for one-off singles but offer the albums for $5 or $6. They'll soon stop bitching about the death of the album if they stop selling them for exponentially greater prices than the songs people actually want. People can happily pay a couple of bucks more for a full album, but $10 if all they want is 2 $1 tracks? Doesn't take a genius to work out which option people will go for, even if they would actually have enjoyed the full album..
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http://www.edge-online.com/features/valve-are-games-too-expensive#expensivegames
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I don't have an iPod. I don't listen to music. Good job recording industry! Thanks for destroying what little respect I had for the musical arts.
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The name changes, but the function remains the same.
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Great collections of legal free downloads
Amazon.com: Free - Songs: MP3 Downloads
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Ronald J. Riley,
I am speaking only on my own behalf.
Affiliations:
President - www.PIAUSA.org - RJR at PIAUSA.org
Executive Director - www.InventorEd.org - RJR at InvEd.org
Senior Fellow - www.PatentPolicy.org
President - Alliance for American Innovation
Caretaker of Intellectual Property Creators on behalf of deceased founder Paul Heckel
Washington, DC
Direct (810) 597-0194 / (202) 318-1595 - 9 am to 8 pm EST.
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Re:
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Executive Director - www.ihavenolife.org - Loser at ihavenolife.org
...
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A more fundamental question: why do we need to OWN music?
That may be in the car, walking on the street, in a restaurant, at a dance, while reading, while studying, while playing racketball ... having lost the ability to sing (as Souza predicted) they nonetheless crave the comfort of music to ease, speed and beautify their day.
Nothing in there says they must own anything. The question is only the access to music, not stuffing one's shirt with leaves on the mistaken assumption they are 'valuable' in themselves.
So the whole sales model is flawed from the start. Music is not an unit item sales business model, it is a bandwidth access rate supply model- I don't believe anything meaningful will happen to save their sorry hides until they wake up and realize that while they sit there stuffing their shirts with dead leaves, others out there are supplying audiences at affordable bandwidth access rates.
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Guess who figured out that that works for everything
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Econ 101
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TAM the amazing TAMHOLE
Yes, because ignoring small, emerging markets with significantly enabling technologies is a smart move.
The auto.
Film.
Electricity.
The Telephone.
At one time, these were all "next" type items. No one knew what they were, how they worked, what they would do or mean to anyone, and couldnt afford them anyway. New product segments dont always spring full-blown from your Corporate Masters Assholes like a spring rain that showers down upon the clueless masses, who accept it like mana from heaven and move en masse to adopt it, you know.
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TAM the amazing TAMHOLE ...now with MORE HOLE!!
Says the moron who repeatedly calls people out for personal attacks as "losing the argument." Good job asshole.
So what good is it to poll people who arent consumers of a product again? Lets see....lets poll 90% of people who are not a consumer of a product, then draw a conclusion about what they want....that would be, lets see...carry the 1....90% AGAINST whatever you are polling about.
Dumb shit.
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How to sell music and get a profit
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How to sell music and get a profit
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Re: How to sell music and get a profit
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Confusion
Yes, TAM is clearly an aspiring-to-professional-level contrarian, especially regarding the topics that Masnick tends to write about, so he might be a tad bit unpopular with the TechDirt crowd. That, I understand. What I don't understand is the mob behavior and sheer nastiness of other TechDirt readers towards him.
Generally TAM isn't ugly (resorting to personal attacks, etc.) until others, en-masse, provoke him without (apparent) provocation. Sometimes posters attack him before he even posts in a given thread (not this one, but I'm sure I've seen it in others).
Can someone explain the anti-TAM sentiment? Because I don't understand it, I find it distracting and a downer when reading TechDirt.
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