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Apple faces off with record labels over iTunes pricing

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By LC Angell

Contributing Editor
Published: Saturday, August 27, 2005
News Categories: iTunes

According to the New York Times, two major record companies are pushing for an increase to Apple’s 99-cent per song pricing on the iTunes Music Store.

“Two and a half years after the music business lined up behind the chief executive of Apple, Steven P. Jobs, and hailed him and his iTunes music service for breathing life into music sales, the industry’s allegiance to Mr. Jobs has eroded sharply,” the Times’ Jeff Leeds reports. “Mr. Jobs is now girding for a showdown with at least two of the four major record companies over the price of songs on the iTunes service.”

“If he loses, the one-price model that iTunes has adopted could be replaced with a more complex structure that prices songs by popularity. A hot new single, for example, could sell for $1.49, while a golden oldie could go for substantially less than 99 cents. Music executives who support Mr. Jobs say the higher prices could backfire, sending iTunes’ customers in search of songs on free, unauthorized file-swapping networks.”

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Comments

61

This should be read as: MUSIC EXECS FIGHT TO BRING BACK PIRACY.  Because this is exactly what they’re doing.  I generally buy new music from bands I like from iTunes as well as hard to find older songs.  Any song that costs more that 99 cents will be downloaded from pirate networks without prejudice.  In fact, if they succeed, they should do comparative statistics to show the rate of decline of those songs.

Posted by Frank Z on August 30, 2005 at 5:20 AM (PDT)

62

Code Monkey-

Don’t laugh…their business models are historically proven to work.  Think of all the rich companies, execs and artists.  Do you think the got rich off a plan that didn’t work?

I catch your drift that things have changed drastically over the last few years, but the Labels will not abandon their principals because of a new distribution method.

Their basic principal is to get the consumer to pay as much as they can for music, but many on this site think their objective should be to sell the music for as little as they can.

My point simply put is that the gas companies could sell gas for 25-cents a gallon, but who thinks they’re going to?  It’s absurd for some people to post that iTMS should sell songs for 25-cents.  It’s just not going to happen.

Posted by Talking Madness in Los Angeles on August 30, 2005 at 1:14 PM (PDT)

63

TM, none of your analogies are even remotely relevant because they all deal with fixed quantity products. Digitally distributed music can be sold an infinite number of times and there is no less of the original product. Further, with overhead relatively fixed whether you sell 1 copy or 1 billion copies, it is exactly the sort of product that should be targetted for high volume sales.

Posted by Code Monkey in Midstate New York on August 30, 2005 at 5:36 PM (PDT)

64

Monkey-

You’re way off base to think the price of singles will do anything but go up.  You’re off base to think they should do anything but go up.

Analogies never completely mimic the situation at hand, but the principals behind my analogies are sound.

Posted by Talking Madness in Los Angeles on August 30, 2005 at 5:48 PM (PDT)

65

How exactly are the principles sound if they’re not even remotely relevant?

In order for the execs to be able to pull this off they have to be able to control the supply, and they don’t.

There’s just too many people out there with P2P & bittorrent clients along with accounts at Russian music stores, etc.

Posted by Code Monkey in Midstate New York on August 30, 2005 at 9:05 PM (PDT)

66

Monkey-

Come back to Earth.  The Labels do control the supply of legally purchased music, and that’s what the article is talking about.
 
The price of singles will go up and people will still buy.  You may not buy, but it sounds like your a Limewire guy, anyhow.

Posted by Talking Madness in Los Angeles on August 31, 2005 at 3:22 AM (PDT)

67

A couple of facts:

Manufacturing and distribution costs are a small percentage of the overall album cost. The bulk of the price goes to the recording budgets and marketing of the album. To say there’s no overhead is not exactly true.

Don’t forget the cost of personnel working behind the scenes (not just record execs) to make their company’s work. For one executive you might probably have 25 people who’s lively hood depends on record sales. And most of their salary’s are sometimes less than the national average.

The average songwriter in Nashville 5 yrs ago was making $5-$7k a year. That average hasn’t moved up since prices have stayed the same. We only hear of the 1% - 2% of artists/songwriters who are making it and judge the whole industry by that.

The total of all digital sales will be an estimated 5% of the overall music sales this year. That tells me that there is not too many people using this technology yet. I can see why they are trying to restructure this before it gets more popular.

Do I wish price’s would stay where its at? Absolutely! But, I have friends who work in the industry who are in constant fear of their jobs because of piracy and the effect it has had.

Don’t judge the industry by a couple of scumbags that have made a bad name for some really great people that happen to be in the same business. There are great people in the industry who have families and responsibilities like you and me. I don’t mind paying for music because I know it’s more than just an artist or record executive that benifits from album sales.

Posted by KMA on August 31, 2005 at 2:08 PM (PDT)

68

“Don’t judge the industry by a couple of scumbags that have made a bad name for some really great people that happen to be in the same business. There are great people in the industry who have families and responsibilities like you and me. I don’t mind paying for music because I know it’s more than just an artist or record executive that benifits from album sales.”

Overall I agree with you, but I strongly disagree with the premise that higher costs are the way to address this. I think music only *officially* reaches such a small number of buyers for most artists precisely because it is hugely overpriced. I only have to look at what I’ve downloaded with my Napster sub or what I downloaded above and beyond what I bought during my summer of Soulseek to see that even though I do spend a fair chunk of change on music, I simply am not ever going to be willing to pay what they want for the vast majority of it. And I can go through the digital music collections of any one of my friends (and we are NOT in the <= 20s demographic) to see the ratio of what they’re willing to pay $10-$15/album for versus what they simply downloaded, borrowed from a friend, etc.

No matter what the underlying costs of music production, the problem is that entire revenue model is hopelessly flawed and needs a totally new direction.

Now, although TM thinks I’m smoking crack, I believe that a much cheaper price point would get people buying a lot more music and even spending more than they are now, and because of the nigh zero *inherent* overhead of digitally distributed music, the total spent is the only thing the execs, songwriters, artists, roadies, etc. should be caring about. Whatever gets the customer to part with the most cash routinely should be the sales model, and I just don’t believe in any way that increasing what are already too high prices accomplishes that in any way.

Posted by Code Monkey in Midstate New York on August 31, 2005 at 7:53 PM (PDT)

69

“No matter what the underlying costs of music production, the problem is that entire revenue model is hopelessly flawed and needs a totally new direction”.

I understand where your coming from but, I don’t understand how a change is possible without cutting salary’s. Again, not just record execs and artists…

In most cases a record company sells a cd to retail for $7. Out of that money $.80 cents goes to writers/publishing. $1.80 goes to artist royalties and producers. Packaging and distribution cost come to about $.50 cents which at this point leaves the labels at around $3.90. 

The remainder of the money spent depends on the label but some models I have seen are as such. $1.50 on marketing and $.75 on the recording budget. Leaves the label now with $1.80. $1.20 goes to building, personal salaries (including execs), and other office expenses.

That leaves the labels in most cases with a $.60 profit per album sold and a lot less for single song sales. Unless your a label that has a platinum selling artist (which is about 2% of the market share) your really not making much money. That’s why a lot of start up labels go out as fast as they came in.

I would love to see the price of music never go up, but with the rise of inflation I don’t see how its possible.

I would really love to hear your take on a new structure to help keep prices from going up. Please don’t think that I’m being sarcastic but really looking for another angle that I haven’t thought about.  And that goes for anyone who feels they have a better alternative to keeping prices where they are now.

Posted by KMA on August 31, 2005 at 10:57 PM (PDT)

70

Monkey-

I don’t think you’re smoking crack, I just think what you want to happen goes against all business logic.  Here’s how I see it…

Consumers have embraced iTMS and proven that it’s a valid way to sell music.  Because it’s so popular the Labels (and Apple soon) want to raise the price to see what the consumer’s threshold for pain is.  The problem with your argument is that you say the threshold is at 25-cents, but the iTMS is a hit at 99-cents.  The Labels will push it up to $1.49 or more and see what happens.  I think a lot of people will continue to buy.  You may not be one of them, but you’re in some sense not who they’re trying to reach…you said you would only pay about $2.50 per album.  Excuse me for being blunt, but the Labels don’t care about you.  If you’re that far off the mark, they aren’t even thinking of marketing to you.  The Labels are interested in seeing if the people who are paying 99-cents will pay $1.49, then they will see if they will pay $2.99 and maybe then they will try to go to $3.99.

I don’t think you’re smoking crack…I just don’t think your model is sound, or likely to happen.  You implied that you are down with P2P and piracy, well stick with it…it’s the only way you will be getting singles for anywhere near 25-cents.

Posted by Talking Madness in Los Angeles on August 31, 2005 at 11:20 PM (PDT)

71

” You implied that you are down with P2P and piracy, well stick with it…”

Don’t read more into my statements then what is there. I have only used P2P for music on any scale for a single summer. I continue to spend an average of $15/month on out and out industry approved ways of getting music, of course, $10 of that average is with my Napster sub which gets me unlimited music for that cost. Now, before you bash the ‘rental’ aspect of it, if I continued this my entire life, it’s still far cheaper than buying the music at the label desired price of $12/album. The other $5 is probably an average of what I spend on traditional CD sales, but even then I stick to album clubs, promotional sales, used CD vendors, etc. such that my average cost per CD isn’t more than about $4.

But, in addition to that, I spend about $5-$10 a month at Russian music stores, currently legal or at least not-illegal, and although the artists allegedly get a cut, the labels certainly don’t.

So in me you’ve got somebody willing to part with about $300/year for music entertainment. I *am* going to continue to spend that money year after year for then next few decades. The labels could be getting their cut on all of it if they met my demands, but because they don’t, half or more of that money never goes to labels and a good deal of it never goes to artists either.

And what I am doing is NOT piracy and P2P, it’s using the alternatives available to the consumer. Since the alternatives do exist, how exactly are they supposed to succeed raising prices?

Also, by no measure would I ever call iTunes a hit that’s been embraced by customers. If 95% of the music sold out there is still by other means it’s not even a statistically significant mode of sale yet, it’s an anomaly that could go away any time in the next few years if a better alternative comes along.

Posted by Code Monkey in Midstate New York on September 1, 2005 at 5:57 AM (PDT)

72

If 95% of the music sold out there is still by other means

Along those lines, it’s interesting to realise that the entire iTMS-style single-licence download model amounts to around 10% of the revenue from single-licence ringtone downloads, globally.

Posted by Demosthenes on September 1, 2005 at 6:38 AM (PDT)

73

EMI estimates that ITMS sales will be 5% of the total market share this year. Maybe ringtones are 10% of the total ITMS sales? I’m not sure….

What I do know is that EMI’s projections each year are pretty solid.

Posted by KMA on September 1, 2005 at 7:03 AM (PDT)

74

Monkey-

First, I’m in agreement with you on the subscription model…I think it’s great.

Second, iTMS is a hit.  Somethings have to be considered in absolute terms, not simply as what fraction they are of the whole.  ITMS has sold well over $500 million worth of music and dollars like that don’t get ignored.  The simple thinking of the Labels is that if they could triple the price of the single that would’ve potential been $1.5 billion worth of music sold.

I honestly believe that people are on the bandwagon and there is a lot of room for price increases when it comes to downloading new singles.  Not so much room for older singles or albums, but a lot for new singles.

Thanks for the conversation…

Posted by Talking Madness in Los Angeles on September 1, 2005 at 2:10 PM (PDT)

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