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Digital Music Stock Market?
tommertron writes "Adam L. Penenberg has a column on Slate about about
the pricing of digital music, specifically, iTunes'
99-cent-a-song model. Basically, he suggests that song prices be determined by
market forces, just like stock and commodities markets. The more a song
gets downloaded, the more it would cost. Song by big-name bands would cost
more, and lesser-known acts would cost less (with a minimum of 25 cents.)" From the article: "Steve Jobs, who has been willing to take a few pennies per download so long as he sells bushels of iPods, calls tiered pricing 'greedy.' That view is shared by millions of consumers who believe the record companies have been gouging them for years. From the buyer's perspective, however, Apple's 99-cents-for-everything model isn't perfect. Isn't 99 cents too much to pay for music that appeals to just a few people?"
"Isn't 99 cents too much to pay for music that appeals to just a few people?"
... oh ... just for example ... 99 cents); buy two songs, pay 2x, etc. People want their music, they don't want to have to solve an accounting problem to figure out how much they'll pay for it. "Ten songs, ten bucks, plus I save a dime. Cool." That's how people want to buy music, and that's why iTunes has succeeded while every other pay-for-download system has pretty much crashed.
... and you know, given the long sad history of stupidity in the music industry, that's saying a lot.
No, apparently it's not.
This is a striking example of how dumb the "popular=good" meme is. When I buy music, or anything else, I don't care what it's worth to other people; I care what it's worth to me, whether I'm one of a hundred, a thousand, a million, or a billion.
Aaargh. Why the hell are people trying to fix something that's not broken? (Well, okay, I know why the RIAA is trying; what's this guy's excuse?) Tiered pricing, supply-and-demand pricing (hey economist guy: the supply is unlimited!) or any other fancy pricing scheme that requires people to pay more than 99 cents per song doesn't work. 99 cents per song, OTOH, does work. That's what online music buyers have decided, en masse, they'll pay for legal music downloads. Charge more and piracy looks a lot more appealing that paying for it. That's the reality.
Not to mention that it just makes sense: buy one song, pay x, where x is some reasonable amount (say
Stock market pricing is one of the stupidest ideas I've ever heard WRT the music industry
The correlation between ignorance of statistics and using "correlation is not causation" as an argument is close to 1.
Commodity pricing is based on the idea that supplies are limited. Likewise with stocks, as there are a finite number of shares of any given company in circulation. Even if every person with a computer on planet Earth bought a copy of the same song, it would not be in short supply.
That's not to say that there isn't value in a variable pricing scheme, but it wouldn't really be commodity pricing, or a "digital music stock market."
-JMP
If you're going to set a floor price, you'd better be prepared to set a ceiling price as well. Otherwise the model is both unfair and unstable because it's subject to unlimited inflation, which is just as unfair to consumers as unbounded deflation is to the artists and vendors. Either take both the upside and downside risk or ameliorate both.
licet differant, aequabitur
The record industry should hire a few economists. This is a great idea, but they've got the pricing completely backwards. The more popular songs shold get cheaper and the less popular more expensive. Why? That's easy.
The stock market works the way it does because supply is fixed and demand is the only variable. With digital music, the supply is infinite, and the demand is variable. Theoretically, that should mean that the songs could be free, except that the creation of the media has fixed up-front costs. That means that after a fixed amount of revenue is generated by a song, all additional revenue is going to be 100% profit. In order to make the maximum amount of money off any particular song, you want to increase it's appeal as much as you can through price lowering, while at the same time making sure you charge enough to recoup your costs before you break even, and as much as you can without pushing away customers after you break even. If there is a lot of demand for a song, you're going to make a profit on it, but you could potentially make even more money by lowering the price, because the drop in price could attract more than enough customers to make up for the loss in revenue. For songs without a wide acceptance, it doesn't work that way. You probably don't have many people out there who like the song but have price holding them back from a purchase, and the people that are buying the song are probably the ones that really like it and would be willing to pay a bit extra to have access to music that would otherwise be unprofitable to publish.
The only way charging more for popular songs is a good idea is if your goal is to punish your customers for being mainstream music listners, or if you have a complete lack of understanding of supply and demand. If the goal is to actually make money, they've got this plan completely backwards.
Not only is there no scarcity in this model, as several comments have already made clear, but there is also no way for a consumer to enter the market as a seller. If it were a true, market driven exchange, I would be able to take the track I bought for 25 cents when I liked Indie Band X, and sell it on the exchange for $3.00 when it becomes popular. I could then compete with the recording studio, who might be offering the track at $3.25.
But this won't work, again because of the fact that there is NO REASON for the price to go up as demand increases.
So, to review, we have a market for a commodity that isn't scarce, with a single seller, artificially fixing prices based on volume alone. Where's the market force in this?
I agree with much of your reasoning, but I think you're leaving out a factor. There are two different things that make a song worth more:
1. Many people want it
2. Few people want it, but they want it a lot.
That's why you'll end up with a U-shaped curve: very popular music will sell for a lot because so many people want it that you can raise the price until listeners squeal. And some unpopular songs will have higher prices because they appeal to a market with few people willing to spend a lot of money (say, "rare" jazz recordings or concert bootlegs).
In other words, "demand" is measured in terms of dollars, not in terms of people. The low price is for stuff in the middle, where some people want it but there isn't massive demand, either in terms of people or in terms of dollars.
By "rare" above I mean that they can try to artificially keep rare things rare with DRM. If they decide that DRM really, truly, genuinely doesn't work and everything sells a single copy and is instantly available for free, then everything changes. (I'm not taking a position for or against it, just talking about the economics of it and explaining a technical assumption.) This artificial scarcity corresponds to a completely flexible market, where they can make as many copies as are necessary but will make only as many copies as necessary.
The price to produce sets a floor on how much they can charge (and that price incorporates a company's total expenses, including overhead and the expense of producing records that flop), but that only affects how low the price can go before the company just goes out of business. It doesn't set the top of anything, and there's no economic reason for them to charge less just because they don't need the extra profit.
And for the unpopular stuff there's no particular need to take the floor into account because any sale is worth more than no sale; the expenses are sunk costs. The only floor is the management overhead needed to keep it on the web site, and in fact that may be so low as to be zero compared to the sex appeal of being able to make EVERYTHING available.
Right now, the channel producers charge the cable operators $0.50 per package subscriber for each channel (for example). I receive both Comedy Central and SciFi, but I only ever watch Comedy Central. So could I save $0.50 on my cable bill by subscribing specifically to that and cutting SciFi? Well all the people who watch SciFi but not Comedy Central would try to do the same thing. Then Comedy Central would say to the cable operator: "You're claiming that you have half as many subscribers as a year ago so we should charge you half the total. But that $0.50 rate was based on the knowledge that only half of your subscribers were watching our channel. Now we know that *all* of the subscribers want our channel, so we're raising the price to $1.00." Since extra channels cost nothing to deliver, an a la carte model just creates overhead that can only add expense.
I agree that cable prices are high and I'd like to see some downward pressure through competition. My Comcast bill is $80/month whereas my DSL (which provides comparable entertainment and utility) is $20/month. I live in an apartment building, so satellite TV is not an option. But if I could get TV through my phone line (like shows on iTunes) then maybe there'd be hope.
If you think you'll get music for less than $0.99 per song, you're dreaming. And if your scheme makes some of the songs I want cost more than $0.99 than you're giving me nightmares.
AlpineR
Regarding "supply and demand", the thing that makes this situation somewhat unique, as others have pointed out, is that the supply is virtually unlimited. To put this is economic terms, the marginal cost to the supplier of providing one additional unit is effectively zero. The only thing that really matters is demand.
Specifically, what's known in economics as demand elasticity. This is a measure of how responsive consumers are(in terms of quantity purchased) to a change in the price of an item. Simply put, how much of a change in quantity sold will there be in response to a change in price? This is what a seller needs to know when he is thinking about chaning the price of something. Gasoline is the classic example of an inelastic good. Remember when Katrina hit and gas prices spiked? You probably still had to get to work, school, etc, and probably bought about the same amount of gas as before. Plasma/lcd televisions are an example of a good with elastic demand. Not many people have them now but when the price falls by half you'll start to see a lot more people buying them.
Count on the fact that as we speak, there are economists being paid six figure sums by the record labels to do *nothing else* but try to analyze and predict demand elasticity for online music purchases. There's nothing magical about the number 99(cents). I'm not up on current popular music, but when Kanye West's latest album came out, if iTunes had charged $1.00 per track I doubt if they would have sold significantly less copies. Conversely, is there any artist who would sell a lot *more* songs at 98 cents? Probably not. But is there an artist who could sell a lot more songs at 75 cents? Would the increased sales make up for the reduction in price? The answer to both questions might be yes. Is there an artist who might sell less songs at $1.25, but the increased revenue per sale would offset the lost sales vs. a $1.00 price? Quite possibly yes.
Simply put, there's an optimal price for any good. If demand elasticity is known(I explained it conceptually above, but it's something that can be numerically quantified for the purpose of performing calculations) then one can use calculus to easily determine the optimal price for a good. The optimal price is the price which yields the highest revenue. Anyone who's taken even basic calculus has probably done problems like this. You're given the formula, you make the calculation, and then put the result on a graph. Vertical axis is revenue, horizontal axis is price, and your result looks like a parabola in the shape of an upside down U, indicating there is an optimal price to sell the good at. Price it too high and you lose revnue, price it too low and you lose revenue.
Fairness doesn't matter, there's nothing special about the number 99. It's all about how to maximize revenue. My own gut feeling is that some songs are underpriced and others overpriced at 99 cents.