Labels may buckle in bid for variable iTunes pricing

[AppleInsider]

The record industry may be on the verge of surrendering to Apple boss Steve Jobs and abandoning its demand for iTunes to charge different prices for different songs.

According to a report last week in the NY Post, contract re-negotiations between Apple and the four US major record labels have reached a crucial point, with several record executives now saying they are unlikely to convince Apple chief executive Jobs to allow for variable music pricing.

The comments mark a change of tune for the record industry, which late last year drove headlines with its push for a variable pricing structure that would allow them to charge more than 99 cents for some popular tunes and less for others. All four of the labels --Universal, Warner Music, SonyBMG and EMI North America -- have deals with iTunes that will expire in the next two months.

"But Jobs has dug in his heels on the issue, creating the potential for a showdown between the mercurial Apple boss and the record industry should the labels continue to push for variable pricing," The Post reported. "Some executives even mentioned to The Post the possibility that some labels may end up pulling their music from the service, which is by far the most popular of the digital download services."

However, the report notes that a more likely scenario is that contracts will expire and some labels will operate without a deal as they seek to reach new terms.

Up until this point, the labels have charged Apple wholesale prices of between 60 cents and 80 cents per music track, which the iPod maker then turns around sells to customers 99 cents a piece.

During a conference call last week covering its second quarter financial results, Apple said its iTunes music store continues to operate at "above cost," generating a small profit.

[ View this article at AppleInsider.com ]

[JohnnyKrz]

I don't know Steve, I think eventually you'll have to allow variable pricing if that is what record companies want. Even if you get them to agree to keep 99¢ pricing this time, I don't think it can possibly last forever. Personally, I see it both ways, but If they are wanting to drive the price up as high as physical CDs, it would be a big mistake on their part.

[crees!]

If I heard this correctly the basic price of physical CDs the labels put out is the same. All music, all labels, same price. When they hit the store shelves that's when you see this record at $12 and another at $20.

[a_greer]

Originally posted by JohnnyKrz
I don't know Steve, I think eventually you'll have to allow variable pricing if that is what record companies want. Even if you get them to agree to keep 99¢ pricing this time, I don't think it can possibly last forever. Personally, I see it both ways, but If they are wanting to drive the price up as high as physical CDs, it would be a big mistake on their part.

The record companies have made a key mistake here: they let Jobs have control, making iTunes the Walmart of music, if wallMart wants a product at a lesser wholesale cost and to sell it for less than recomended markup, they get it because of sheer volume. Apple also has tons of pop-culture karma, giving Jobs something that WalMart doesnt have; a bully-pulpit, allJobs has to do is air the dispute in public, with the "these greedy bastards want to screw you and I want to stop them" spin (which is actually less spin and more about truth).

[hmurchison]

They have a right to ask for variable pricing. Album prices already vary from the $9.99.

I think Jobs is right in that it's still a bit too early for variable pricing. Give it another year or year and a half and let the catalog rise to 3+ million tracks.

I'm not overly worried because what they will do is take the classics and the new top 20 stuff (which you hear enough on the radio) and raise the prices there. I would like some back catalog stuff for say .50 or so that would be interesting to do some iTunes "crate digging" but the download market is still a bit nascent compared to CD sales to risk upsetting purchasers.

I'd like to see Apple increase the bitrate to 160Mbps for more expensive tracks.

[BRussell]

Let them charge extra for the newest mass pop crap, if it means better stuff is cheaper. Consider it a crappy music tax.

[Chris Cuilla]

I believe the only thing the wholesaler (record companies) really have any "right" to in pricing is the wholesale pricing. I don't really get how they dictate (directly) retail pricing as well as wholesale pricing.

If they want to do variable pricing at the wholesale level...then that is what they should try to negotiate and shut up about retail pricing. Let the retailer choose their pricing strategy.

[monkeyastronaut]

arggh those greedy, artist-ripping, puppy-kicking music executives, you bastards!!

Steve-o, teach them a lesson!! unleash your RDF unto them.... NOW!

[JeffDM]

I honestly wouldn't see a problem if hit singles were $1.49. That said, I'm not really an iTunes customer.

A few years ago, there used to be a lot $3 and $4 single releases, but at least those offered as many as three different versions of the hit song, plus a song not found elsewhere in any version.

[ecking]

Music companies are stupid.

If they wanted higher prices they should have done it in the first place.

How are they gonna jack prices up?

"New and improved iTunes 7! And by improved we mean more expensive!"

You don't create a million selling customer base and then rasie prices because people can just stop downloading, it's not like increasing the price of a physical good, people can always go else.

People can just go back to downloading illegally or back to real life stores.

But I guess the latter of the two is a what the lables want.

[Anders]

One of the few times I like Jobs personality.

[Bancho]

A couple replies here seemed open to the idea of the labels varying prices.

To me, the ability of the labels to dictate prices like that translates to bad news for the consumer. This is a fight they *need* to lose. What other digital music service out there is coming anywhere close to providing them the revenue that iTunes does now? They should set aside their greed and enjoy the steady revenue stream. I agree the only variability they should enjoy is that of the wholesale price and that Apple should just keep that price capped so that their 99 cent model remains viable.

Personally though, I buy very little if any music from iTunes. I'm just not a big fan of any new music and they only a fraction of the music I like. For my money, I'll buy the CD's from eBay or used CD shop and rip it myself (if it's even something I can find).

[tak1108]

The labels are stuck here. Each one individually can ask apple to change their pricing. Apple can easily say "No" and if one label's music is suddenly more expensive than anyone elses, that label will probably sell less music.

If ALL of the labels go to apple and say "We want this pricing" they will surely be found in collusion. They are being investigated as we speak about this very thing, because of their negotiations with Apple.

So, either one does it, and they are suddenly MORE expensive, or they all do it, and they get FINED big time and are forced to go back to the old way. Of course with Orin Hatch as the RIAA appointed lawmaker, who knows.

If one label threatens to leave, "Raise prices or we're out of here!" Jobs can easily cut them off. That would only hurt the label. But again, if they all say, "Raise prices or we're out of here!", they would be easily found guilty of collusion.

[Chris Cuilla]

Originally posted by tak1108
if one label's music is suddenly more expensive than anyone elses, that label will probably sell less music.

Problem with this is that it assumes all music products are (even relatively) equal substitutes. They are not.

Originally posted by tak1108
If ALL of the labels go to apple and say "We want this pricing" they will surely be found in collusion.

True.

[Bancho]

Originally posted by Chris Cuilla
Problem with this is that it assumes all music products are (even relatively) equal substitutes. They are not.

Isn't that really a matter of musical taste?

Honestly, the idea of variable pricing indicates to me that the labels would love to have some tracks sell for more, and for the rest they'll cut us a break and *let* them stay at 99 cents. There is no hidden benefit to consumers in any way here. The only positive outcome from the consumer standpoint is for Jobs to stick to his guns on this issue.

[Chris Cuilla]

Originally posted by Bancho
Isn't that really a matter of musical taste?

Yep.

Originally posted by Bancho
Honestly, the idea of variable pricing indicates to me that the labels would love to have some tracks sell for more, and for the rest they'll cut us a break and *let* them stay at 99 cents.

Agreed.

[techno]

I am really surprised at the responses in here. Personally, I feel that the reason for the decline in illegal downloading of music is due to ITMS. The reason for the success in ITMS is the 99 cent single and reasonable album prices. There is a direct correlation. Most people would prefer to buy the music legally if it is priced fairly. However, when a CD is anywhere from $17 to $28, that is obscene. Most people feel the labels are greedy and their desire to raise the prices now after the ITMS success, is just a reminder of this. When is enough enough?

We should support Apple in this standoff by writing letters. A snailmail letter will have more of an impact than an email. Take the time.

[smack416]

I get the idea of $0.99 per track. Makes sense. Easy to figure what to expect when you're buying single tracks. But the reality is that there is already variable pricing.

Single disc albums are not all $9.99. Not all 10 song albums are $9.99. Not all songs can be purchased individually.

I just saw an album today that had 2 songs. 1 song $0.99 with 1 song album only. The album costs? $11.99. So, what's the big deal with variable pricing? Isn't iTunes already asked for $11.00 for that one song anyway?

So the argument is, *if* the song is available as a download by itself it should be $0.99? Who cares? I would rather all songs be available at variable rates than only have the option to pay $11.99 for an album because the one song I want can't be purchased separately.

[Bancho]

Some songs are essentially a whole side of an album or just excesssively long. For those I can understand a higher price or a necessity to buy the whole album. I've got some old Yes, Rush, Pink Floyd and some prog band/metal stuff where this happens a lot. I'm sure classical has the same characteristics where a particular piece runs much more than the standard 3 - 5 min song. I think you'll also find that it's very much the exception rather than the norm and seems reasonable to me. Is it possible the album you noted fit this criteria?

The main issue at stake here is the labels wanting the ability to vary price on more of a whim than any real systematic approach (except to systematically increase profit while providing nothing more than they do now). Apple has the high ground here and should stick to it.

[smack416]

Originally posted by Bancho
Is it possible the album you noted fit this criteria?

iTunes is all over the board with this. I can buy a two song Fela Kuti album with two songs each over 15 minutes long for $1.98, but I can't get a 6 minute song off of a remix album without buying 2 other 6 minute songs.

There is no logic to follow here other than one record label has said, "You ain't selling that album for less than $10.99" and another has said nothing.

In fact, even in Fela's case, the pricing is wildly inconsistent. One album for $0.99 a song, no matter the length, another album $9.99 with 3 songs because one of them is over 9 minutes and is Album Only.

[JeffDM]

Originally posted by techno
I am really surprised at the responses in here. Personally, I feel that the reason for the decline in illegal downloading of music is due to ITMS. The reason for the success in ITMS is the 99 cent single and reasonable album prices. There is a direct correlation. Most people would prefer to buy the music legally if it is priced fairly. However, when a CD is anywhere from $17 to $28, that is obscene.

The CD prices you state are obscene, but what CDs are priced $28, in what currency? I was rummaging through some of Best Buy's titles this evening and I didn't see a single CD priced higher than $15 US. I also don't remember any story or report that said that there was a decline in illegal downloading.

One reason I didn't have much of a problem is that there may be too many suckers willing to pay that, especially seeing that there are too many suckers willing to pay several hundred dollars per seat of a two hour concert and still sell out the auditorium. If they are willing to pay that, then maybe they deserve to be fleeced. At typical concert prices, I'm not anywhere nearly that interested, or that desperate to watch a band live, so I won't be going to their concerts.

I'm not sure if the record labels would want to lose that income by threatening to pull out, supposedly iTunes and other internet music licencing is the highest margin part of music sales.

[mike12309]

Originally posted by hmurchison

I'd like to see Apple increase the bitrate to 160Mbps for more expensive tracks.

umm ... kbps?

[BEatMaKeR]

During a conference call last week covering its second quarter financial results, Apple said its iTunes music store continues to operate at "above cost," generating a small profit

define "SMALL"

300 million dollars small?

or 250,000 small?

We all know its closer to the millions. Who do they think they are kidding?

[Chris Cuilla]

Originally posted by BEatMaKeR
define "SMALL"

300 million dollars small?

or 250,000 small?

We all know its closer to the millions. Who do they think they are kidding?

What difference does it make?

[Bancho]

Originally posted by BEatMaKeR
define "SMALL"

300 million dollars small?

or 250,000 small?

We all know its closer to the millions. Who do they think they are kidding?

Everything's relative, compare it's cost of operation to its profit and you'll see why they can call something like that "small".

[m_shell]

Originally posted by BRussell
Let them charge extra for the newest mass pop crap, if it means better stuff is cheaper. Consider it a crappy music tax.

lol love it

[the cool gut]

Steve has more control here than people realize, politicians are already smelling price fixing by the labels, and if this dispute gets out of hand, the politicians will step in.

[monkeyastronaut]

if Steve doesn't put an end to their greedy ambitions, this will happen:



gotta love toothpaste for dinner.

[techno]

Originally posted by JeffDM
The CD prices you state are obscene, but what CDs are priced $28, in what currency? I was rummaging through some of Best Buy's titles this evening and I didn't see a single CD priced higher than $15 US.

Canadian currency. Before ITMS the price of a CD was higher.

I also don't remember any story or report that said that there was a decline in illegal downloading.

I am not basing that on a study done at MIT. I have read articles but mostly I am saying out of experience with friends and clients. I believe more people are downloading movies now, not music.

[Tag Me Back]

Originally posted by BEatMaKeR
define "SMALL"

300 million dollars small?

or 250,000 small?

We all know its closer to the millions. Who do they think they are kidding?

With over a billion songs sold, with a margin of 19-39 cents each, they'd have made hundreds of millions. ITMS may however be 'paying' for the development of things like the iTunes app... Return on investment has got to be huge.

[Bancho]

Originally posted by Tag Me Back
With over a billion songs sold, with a margin of 19-39 cents each, they'd have made hundreds of millions. ITMS may however be 'paying' for the development of things like the iTunes app... Return on investment has got to be huge.

To help clarify that you need to add a few things:

1. Bandwidth/hosting
2. Hardware
3. Staff
4. Other stuff I've probably left out

That number you queoted would only include what Apple took in after *only* paying the labels. That 190 - 390 Million (per your estimate) woul have to cover the other costs above before it could even be counted as profit. Now spread that over 3 years (or 12 quarters) and the numbers aren't so amazing. Apple is profiting from music sales, but it's pretty small relative to other products.

It's more important for them to get the music out there at a reasonable price. Sales at the iTunes Music Store help drive sales of iPods and keep Apple ahead in digital music overall. The return on their investment you're speaking of is when the music store helps drive sales of other Apple products.

[theapplegenius]

Didn't Apple say that they barely break even on the iTMS?

[Gene Clean]

Originally posted by Bancho
Everything's relative, compare it's cost of operation to its profit and you'll see why they can call something like that "small".

Cost of operation is lower and revenue is higher, therefore there is profit. Wether that profit is small, or "small" (compared to what?) is irrelevant; the true profit of iTMS is how many people bought iPods because of it and vice-versa.

[Bancho]

Originally posted by Gene Clean
Cost of operation is lower and revenue is higher, therefore there is profit. Wether that profit is small, or "small" (compared to what?) is irrelevant; the true profit of iTMS is how many people bought iPods because of it and vice-versa.

My post was to illustrate how Apple could claim their profit from the iTMS was "small". I do realize that there *is* profit.

I also *did* mention exactly that iTMS helps drive sales of other Apple products, specifically iPods and that is where a much larger share of profit comes from.

[Tag Me Back]

Originally posted by Bancho
To help clarify that you need to add a few things:

1. Bandwidth/hosting
2. Hardware
3. Staff
4. Other stuff I've probably left out

That number you queoted would only include what Apple took in after *only* paying the labels. That 190 - 390 Million (per your estimate) woul have to cover the other costs above before it could even be counted as profit. Now spread that over 3 years (or 12 quarters) and the numbers aren't so amazing. Apple is profiting from music sales, but it's pretty small relative to other products.

Even this list would only run into a few tens of millions. Advertising would be higher though. Legal costs too. Alot of money spent agresively trying to grow the business. Profits may be low but the business value must be skyrocketing.

[Tag Me Back]

Originally posted by monkeyastronaut
if Steve doesn't put an end to their greedy ambitions...

And apple doesn't have greedy ambitions by using a near-monopoly to gain undue market influence?

[Chris Cuilla]

Originally posted by Tag Me Back
And apple doesn't have greedy ambitions by using a near-monopoly to gain undue market influence?

Apple does not have a monopoly.

[monkeyastronaut]

Originally posted by Tag Me Back
And apple doesn't have greedy ambitions by using a near-monopoly to gain undue market influence?

no. Apple = good. Record companies = bad.