Absence of Aussie iTMS a warning?
There’s a fight going on for that little plastic card in your wallet. Yes, I know, there’s a plethora of business fighting to get those 16 magic digits on their receipts. But there’s one fight, that our Steve is fighting for us, that concerns everyone who buys music.
That fight is how much to charge for songs purchased online
In the beginning, Jobs created the iPod but he saw that it although it had CDs for company, it was still lonely and needed a partner, so he made iTMS. They went forth and multiplied and there was much happiness in the land. But then the kings of the land grew restless and greedy, for they saw that it was good, and that there was truckloads of stinking moolah to be made. But Jobs smote the greedy and threatened to take his bat and ball and go home. Peace was once more restored in the land and the people were happy.
When Steve was originally cutting deals with the record labels, neither knew how successful iTMS would be. Maybe the record labels were too generous - but a 99 cent price point made for a nice advertising hook.
Competitors said Apple had been cut a good deal because of its small computer marketshare and that the record labels didn’t see Apple selling music beyond that market, and hence providing no real threat to traditional music distribution channels. A little hard to believe - even though Steve likes to bluff - I can’t imagine he wouldn’t have thrown the “Windows” bait out to the labels.
Whatever the reason - if indeed iTMS songs are cheaper than they should be - the music labels want a bigger piece of cake now.
And how are they proposing to do that? By charging more. They want a bigger cake. Ironic. Even people who’ve never done marketing understand the supply and demand concept - i.e. a new product will come down in price as demand increases. Are the record labels really not making enough money off downloaded music? Only they know the true answer but the 60% figure bandied around sounds reasonable to me.
But, is it possible that iTMS songs are seriously under priced?
If Australia is any guide, at least one music label thinks so. The Australian iTMS was all set for launch in late April. Apple had booked advertising. Russell Crowe let the cat out of the bag telling a local radio station it would be launched that week. Ingenious Aussie hackers found a back door - or possibly a front door left wide open - into the as yet unavailable iTMS and began registering and buying songs. It didn’t take long for Apple to close that door.
Despite that minor hiccup, everything looked on track. Like NASA launching a space shuttle, all systems were go. The countdown had begun. We probably got to about “two” and then the launch was aborted. The advertising was pulled. Russell Crowe was silent.
What happened? There was much speculation but the rumour that carried the most weight was that one rogue record company was holding out for a higher price to be charged for the songs.
Nearly four months later, it seems no agreement has been reached as us Aussies wait patiently. But although we are still waiting, Apple is right to holdout. Whatever comes of this stalemate between Apple and the record labels in Australia will have major impact for the rest of the world’s iTunes Music Stores.
Australia being so culturally similar to the US, seems to get used as a guinea pig for dodgy ideas. (eg From what I understand, Microsoft tried out the software subscription here before anywhere else. ) With a population of only 20 million compared to the US’s 295 million you can see why this happens. We’re too small a voice to make any significant protest but if an idea works, then in all likelihood it will work in the US and elsewhere too.
Currently it appears that Australians will be charged the US equivalent (using Dashboard’s Currency Converter) of $1.30 per song. Even allowing for the 10% tax we pay, how would buyers in the US feel if come 2006, Apple announced a new minimum price of $1.19?
AppleInsider recently reported that Apple faces licensing renegotiations scheduled for next year with the labels pushing for a different approach and a bigger serve of cake, with at simplest, a two tiered pricing structure but who knows what else they might have up their collective sleeves.
Digital Music News also recently reported 36 to 40% of songs in the Australian top 50 are not available existing Australian online music sites because the record companies are playing hardball. Apple has obviously decided they want to give Australians a full catalogue - and that they won’t be held to ransom by the labels. After all, Apple knows how successful iTMS is. So they’ve probably said to “You can hold out on Australia and keep playing with the junior leaguers there, but until iTMS, you’re just making chicken feed.”
If Apple loses its battle here in Oz, you can bet it will have serious repercussions for their licencing re-negotiation in 2006 and the price of music downloads everywhere.
Hold firm, Apple, smite the greedy. We’ll wait.
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Comments
I completely agree. I think $0.99 is a very reasonable price for one song, especially when there’s no real distribution costs involved (at least not anywhere near the millions required for recording, mastering, reproducing and distributing CDs).
The record companies are still out to screw over the listening public because they just don’t get it. They’re going to eventually price themselves right out of the market, and musicians will bail and use other distro methods.
Ironic. Even people who’ve never done marketing understand the supply and demand concept - i.e. a new product will come down in price as demand increases.
Woah… Chris, I generally agree with your commentary, but you have the supply/demand curve concept completely backward.
Prices increase as demand increases (ie - demand reduces supply). Prices decrease as SUPPLY increases. When demand settles, that’s when prices drop.
The problem with the supply/demand model is that it doesn’t apply strictly to digital goods. Digital assets (like an MP3) don’t follow supply/demand curves because there is no manufacturing involved (nor warehousing, inventory or any other retail issues that come along with a solid item).
So, unfortunately, you started out your article with a seriously flawed analogy… but that’s ok, because you are correct on the larger points:
When you deduct the costs associated with manufacturing and inventory, 99c gives the record companies a very reasonable profit even after Apple’s cut. They have no CD to press, labels to print, no physical shipping and they still have a price point that is almost as much as a “solid” CD (I think we all agree paying $18 in the store for a 12 song CD is overpriced).
If we start to pay $18 or $20 for a virtual CD, they better damn well ship us a hard copy too!
vb baysider:
digital assets have no manufacturing etc involved but they do involve bandwidth which could keep the traditional supply/demand curve valid. ie, when a new release is in high demand it potentially raises bandwidth requirements requiring the company to buy additional bandwidth or take other costly measures to keep up with the demand.
also during the uptake of a new product/technology increasing demand does lower the price of a product due to increased efficiencies created by the product becoming mainstream.
but your point concerning the demand/supply price curve is basically correct.
Chris:
The music industry is on a four-lane highway to commercial extinction. I don’t know if the music executives are stupid, befuddled by years of substance abuse, too scared to turn off the road, or simply suicidal but I see not even a glimmer of hope.
Indeed, looking at the telecom industry I see cell phone executives drinking the same kool-ade! They think consumers will pay big bucks to get music on their phones? Sure, they are targeting this to the teen market which doesn’t have a track record for spending wisely but…has anyone told them that teens are the largest segment of people involved in filesharing?
I’m tired of hearing the industry talk about DRM being necessary to save music. I’m tired of hearing that Apple isn’t being a good digital music ecosystem player - Apple created that ecosystem! Why shouldn’t Apple have a big role in determining how it works? I’m tired of hearing of new DRM technologies being built into our hardware to control what we can consume and how we’ll consume it.
Napster and digital technology created a severe problem for the music industry but it also presented an opportunity. It showed that a market existed for downloadable digital music. Instead of grabbing an opportunity the music industry tackled a problem. It chose to utilize the legal system to kill off an emerging technology willfully blind to the fact that history clearly detailed the inevitable failure of such a strategy. Meanwhile a generation of potential consumers became leeches.
Then Apple decided to do what the industry was afraid to do. There’s no doubt the industry saw Apple as being too small and the market nonexistent but Apple was willing to take the risk at no real expense to the industry. I’m sure the music executives were flabbergasted to see how wrong they were. I’m equally certain the music executives view this thing called the iTunes store in the same way they have traditionally viewed music talent: as a cash cow to be milked and then thrown away when no longer needed.
But Apple isn’t a group of unsophisticated teenage rock musicians to be palmed off with a bit of nose candy and a promise of future riches. Apple has the wherewithal to fight back. I’m sorry the battleground is Australia. Goodonyah!
You need a better Editor to proof read your text:
“When Steve was originally cutting deals with the record labels, neither new how successful iTMS would be.”
should be “... neither KNEW how…”
and:
“If Australia is any guide, at least one music label think so.”
should be “..thinkS so.”
Other than that, it was a good article.
My fault. Thanks for pointing out the mistakes, they are fixed.
The music industry really must employ the most idiotic and just plain stupid people on the planet. Let’s see… iTunes is selling millions of songs. We get a majority cut of the price, and yet we have to DO NOTHING. We produce NOTHING. We press ZERO CDs and print ZERO CD booklets. I know: Let’s screw the customer and gouge MORE MONEY FROM THEM!
I mean, honestly, what is going through their collective empty heads? They are truly blinded by greed. Everyone hates them enough already.
I sincerely hope and pray that Steve will be stubborn enough to not change the $0.99 price point. I think it’s already too much, but anything higher and I personally will buy NOTHING MORE from iTunes.
davidwb wrote:
digital assets have no manufacturing etc involved but they do involve bandwidth which could keep the traditional supply/demand curve valid. ie, when a new release is in high demand it potentially raises bandwidth requirements requiring the company to buy additional bandwidth or take other costly measures to keep up with the demand.
Even with the digital distribution costs, it doesn’t even begin to approach the cost of producing, manufacturing, and distributing a physical item. Digital distribution costs probably one percent or less what it costs to distribute a physical item.
Apple is right to hold out on principle. Steve Jobs has publically stated in the past that the labels are making more profit per song sold on iTMS than they are selling physical CDs. Yet, the record companies want even more, even though they contribute nothing to maintaining the infrastructure that iTMS runs on.
2006 will be a critical year for Apple. It appears that Apple made some concessions in Japan, where there is a two-tier pricing scheme. Even so, the Japanese iTMS is selling songs for substantially less than its competitors, painfully undercutting them like the UK iTMS did.
So I think it will all depend on how big iTMS can grow by the end of this year. If iTMS is doing a billion songs per year, then Steve Jobs will have some negotiating power. Perhaps enough to hold the line on pricing.
The other thing is that consumers themselves have to be more aware and stop playing the part of the industry’s bitch. If the record companies are successful in forcing iTMS to start selling songs at $1.19 each, then consumers have to immediately stop buying those higher priced songs, en masse. With digital music, that shouldn’t be hard.
(BTW, it was laughable seeing the Dave Mathews band suggesting fans write Apple support to complain about the DRM on their latest CD. Fans would do themselves a favor by sending in a lot of complaints to Dave Mathews and then returning that CD to the store, making it a costly failure for the record label. As has been shown over and over without exception, the only thing that wakes a record exec up to reality is seeing red ink.)
There’s probably other things that The Steve can do to play hardball. For example, iTMS might not promote higher priced songs as heavily on the storefront as regular priced songs, relegating those songs to ghetto areas of the store.
But probably the best thing that can happen is iTMS gets big enough that it becomes more profitable for major artists to bypass the labels and sign with iTMS directly. So instead of the label getting 60% of the sale and then paying the artist a penny from that haul, artists could get 60% of the sale themselves, which could potentially dwarf any kind of deal they could get with a label.
Once that happens, the labels would have to start treating their customers as something more than ungrateful dirty thieves.
Thanks all for your corrections - both typo and facts.
Actually it’s only Sony holding out here in Australia all the other companies have signed up.
Apple are the ones playing hard ball, all the other record companies are pissed off at Sony for holding up the new revenue stream that they desperately need.