Economic Analysis:  iTunes/iPod vs. RIAA/CD Retail Distribution | iLounge News

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Economic Analysis:  iTunes/iPod vs. RIAA/CD Retail Distribution

I’m currently working on my MBA and was required to do an economic analysis of a product lifecycle.  Being a new iPod/iTunes convert, I decided to talk about how Apple has taken on the old RIAA/CD retail distribution model.  This website has been a great source of information for me and I would like to share my analysis with the group. This posting does not represent the view of my employer.

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Comments

1

That is a very interesting article.
I did not know that Apple has to pay 80% of Itunes profits :0
I hope that will change soon.

Posted by Nemesis in Lexington, KY on November 18, 2003 at 7:40 AM (PDT)

2

Interesting, but a bit flawed IMO.
First, it should be the RIAA/iTunes/iPod model, as the RIAA has a huge hand in iTunes no matter how you look at it.

Second, I don’t buy that the physical item isn’t an important part of the music experience.  What about liner notes and cover art?  What about the physical qualities of the medium?  Are those not of real value to the customer?

Sure ultimately its the music that counts, which is why trading online is so big, but I would argue that having a physical item to go along with your purchase is and will be of high importance to the average consumer.

Heck, I would much rather look through my father’s vinyl collection than scroll through a bunch of files.  They have a much nicer quality to them, even if they are less convenient and don’t necessarily sound as good.

Posted by gti on November 18, 2003 at 9:19 AM (PDT)

3

In response to gti’s comments:

1)  cannot independent labels skip the RIAA process and license directly to Apple or any other online musi service?  Is there a law against not using the RIAA?  I envision this whole paradigm shift occurring after 1 or 2 bands make it big without the RIAA’s “assistance”.

2)  liner art/cover art can also be digitzed, downloaded, etc just as the music can be.

3)  the digitized music can be put on any
media the buyer chooses allowing them the choice providing maximum flexibility.

At the end of the discussion we come to buyer choice.  I don’t think that market for regular CDs will ever truely disappear since not everyone can/will choose that distribution method.  But why pay good money for a dozen songs when you only like 3 of them?  CHOICE, CHOICE, CHOICE.

Economic theory generally states that the most efficient means of providing a good or service generally will win out, especially on a commodity item like music.  And music is just that, a commodity and like any other commodity such as staples, cars, etc, the lowest cost producer will win.  Lets not forget, music is just zeros and ones arranged differently for different songs.

I for one will never buy a physical CD for 1 or 2 decent songs when I can buy what I want, when I want from an online store.  Taking my experience and newfound freedom from RIAA-imposed song selection, why would I ever go back to buying CDs?  What ever happened to the Customer is Always Right?

YMMV, IMHO, etc, etc

Posted by olay on November 18, 2003 at 9:41 AM (PDT)

4

1) Sure you can skip the RIAA, but the huge majority of music published in the US (in any medium) is connected with the RIAA (just can’t get away from them!)  Theres a possible paradigm shift in the future, but it sure isn’t now, and I wouldn’t count on it.

2) And you can view the Mona Lisa online.  Is it the same thing?

3) True, but its not the same as going to the store and picking up a brand new album.  Its simply a different (and in my opinion better) user experience.  Doesn’t mean theres not room for ITMS by any means.

I do agree that its about choice.  My parents will never buy online (never say never wink, but buy plenty of CDs.  And the ITMS model is great if you were buying a CD for 2 good songs in the past (personally, I prefer music in album form much more, so it doesn’t benefit me as much).

“Lets not forget, music is just zeros and ones arranged differently for different songs. “

Thats a scary thought, and thankfully its not true.  Remember the term analog?  99% (or something like that) of music originates as an analog source, whether it be a singer or a guitar or drums etc.  Music ultimately is all about sound waves, but its so much more than that.  A concert is a lot more than the sound waves in the air or bits on a disc, right?

I certainly am not advocating the current distribution system as perfect, but it does have some advantages.  Especially when you consider that with iTunes, you are basically leasing the music, whereas with purchasing a CD, you are buying a wider range of rights (namely something physical without major restrictions).

Posted by gti on November 18, 2003 at 9:53 AM (PDT)

5

The split on the iTumes Music Store is - $.65 to the RECORD LABELS (not their lobbying group, the RIAA) and $.34 to Apple.

What the Labels do with their share (or how they distribute it to the Artists) is their business. People who bemoan the fact that the Artists receive only a few cents from each CD sold, tend to ignore the fact that the Artists and the Labels have entered into a contract agreement. If the Artist are underpaid for their work, maybe they should hire a professional athlete’s lawyer to negotiate their next contract with their Label.

For their $.34 Apple provides the web site/store, massive amounts of bandwith, and personal (to design and support the web site/store). Apple also pays for the credit card processing fees (approximately 3-4%).

The bottom line is that Apple ‘may’ make 3 ‘profit’ on each $.99 sale. Maybe, but I doubt it.

Posted by Dru on November 18, 2003 at 11:01 AM (PDT)

6

You may want to look into what Pearl Jam has done with their Man of the Hour single from the upcoming movie Big Fish by Tim Burton. There was a big article in the NY times yesterday (Monday) about it, apparently they negotiated to release the single on their own on CD and through iTunes.

Pearl Jam is no longer under any contract (their deal with Sony/Epic expired after their last album) and is a huge threat to the music industry. They’re currently looking at not signing with any label etc. and just doing everything themselves.

Posted by Jon on November 18, 2003 at 11:27 AM (PDT)

7

Interesting.  I was thinking of Pearl Jam when olay said “I envision this whole paradigm shift occurring after 1 or 2 bands make it big without the RIAA’s “assistance”.”

They took on Ticketmaster regarding their monopoly and ultimately lost, but perhaps they can show that a major band can distribute a CD successfully.  Still not really a viable option for a small band, which needs to capabilities of a major label to really break though.  Thats as much of an issue with radio stations and MTV as it is with CD distribution.

Posted by gti on November 18, 2003 at 11:35 AM (PDT)

8

Dru,

Good clarification on the RIAA version the Record Labels.  I took a little artistic license there since most people lump the two together. 

I keep reading $.80 to the Record Labels not $0.65.  I’m sure it could be either.  Do you have a link to the source on that?

What I think is really interesting is Microsoft’s response.  I think they have the name brand recognition to easily drop into this market and they don’t need to pay anybody for the .wma format. 

Posted by Jeff on November 18, 2003 at 11:46 AM (PDT)

9

Quoted above :
>>>“3) the digitized music can be put on any
media the buyer chooses allowing them the choice providing maximum flexibility. ” >>>

Digitized music bought on itunes or most other websites is still subjective to the DRM of that format. If I shop at itunes I can’t put my AAC files on a portable device that doesn’t support it, nor can I put WMA files on my Ipod if I shop at Napster. Now if I buy a CD I can do whatever I want, whenever I want, as many times as I want. I can rip at the highest bitrate or the lowest. It’s my choice. I’d much rather pay a little more for a CD and not be bothered with DRM than pay for an electronic download. But if I was only interested in one or 2 songs… then I would question the cost benefit ratio of buying an entire CD.

Posted by digitaltrapper on November 18, 2003 at 2:21 PM (PDT)

10

Quote >Now if I buy a CD I can do whatever I want, whenever I want, as many times as I want. (+comments about no AAC on Rio etc and no wma on iPod)

That’s because a CD is digital audio without compression. If Apple or Napster or the upcoming MS service provided you with .wav or .aiff files, then it would be the same thing. Bandwidth is at the point this is feasible so the only real excuse to do it the current way is brand steering (so you can only patronize one) and putting in drm limitations.

And that’s the name of that tune…

Also per earlier observations:

I expect that independents that license through Apple, all the non-Apple portion of the .99 will go to the label.

And:

Also labels vs artists and artists get pennies. Its been that way since the dawn of recording. It’s actually a sharecropper system model. Most artists receive advances which their profits pay back with interest plus labels often bill publicity, support and transportation. Only platinum artists on the tip of an iceberg sell enough to pay back and then earn their own. That was the devil’s agreement to get manufacturing/distribution. With both those needs less useful you would think groups would try a licensing model, either to Apple or to a label. Best to have a finished product on your own and control how it goes.

But that still takes money, publicity, copyright filings which many artists/groups do not feel comfortable with, because many new artists/groups are young and naive. You know less when you are 18 than when you are 28.

My best advice. If you are committed to music look on it as at least a 10-20 year career. Grow it bottom up. Burn your own CDs on computers, create art & notes, sell at gigs and maybe a few select places (even in other cities anybody can priority mail). Maybe license as you get better known. Build up name recognition. Live with whatever level of the food chain you get to. I don’t think you’ll starve unless you are inept. Look on a solo career or band as a corporate entity of your own. If a band make sure you like each other cause you’re in for a long haul, but in case, issue shares so a member can cash out and a new one can earn his/her way in.

Big labels are like a lottery system, big payout, but only to the tiniest minority. Look on a music career as a conservative investment and leave the big label lottery system to fools lusting after the phantom big score.

Posted by Nub on November 18, 2003 at 6:08 PM (PDT)

11

I still can’t believe that all these people are willing to pay CD-quality prices to iTunes (and the other music services) for music that is obviously SUB-CD quality music?!?

People are stupid!

Posted by IDSmoker on November 19, 2003 at 6:06 AM (PDT)

12

People aren’t stupid (well at least in this respect), its that people don’t notice the different 99% of the time.  To the average ear, its not an obviously inferior sound (MP3, AAC whatever). 

heck, I am somewhat critical of quality, yet I am willing to deal with a reduction in quality for a huge increase in convenience.

Posted by gti on November 19, 2003 at 6:17 AM (PDT)

13

While I can understand the love for the whole I- tunes concept, I still consider it the digital age equivalent of cassette tapes. Sorry but, the consumer experience is like buying cheap Black Label beer,imo, when I could have had had a fine Pilsner or Lager. As a veteran musician myself, I’ll go out of my way to buy an artist’s CD instead of opting for an inferior compressed file.

Posted by JBboy on May 11, 2010 at 4:31 PM (PDT)

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