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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?"
No, it's too little. If you put demand and supply as 2 linear equations on a graph, you'll see they're related.
Let's go through a simple situation: demand is x, and supply is y. Now since we have infinite supply (since this is a digital work), we're going to say that y is not supply, but rather money supply (since the money is the only limited part as far as the markets are concerened). As demand goes up, price goes down. If we were at the far-right, with maximum demand, price would tend to zero. If we were at the far-left, with only 1 person wanting the work in question, the price would tend to the total production cost! For 0, infinity (which is why if no one wants it, it won't get made).
You're not going to get a perfect relation due to effects outside the market's control (such as non-market copying), but you'll see that 99 cents is too little for something this is in low demand, and 25 cents is too much for something that is in high demand.
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Not to mention that the idea of having songs go down in price as demand goes up will appeal well to peoples' egos. There will be people who will buy the early copies of a song for $2.50 each (I'm considering that an upper limit because I saw it as a proposed upper price somewhere) and consider themselves to be the "trendsetting elite." There will be those who will buy obscure songs that don't sell well for $2.50 each and feel it inflates their indy cred. People like me will hang around and see what seems good, then buy it for $0.99 or whatever the lower price is, and feel good about being thrifty in our patience. The music industry gets its extra money and most of the smart people will still be paying the low prices for their music.
This sig has absolutely no significance and serves only to take up screen space and waste the time of the reader.
The problem is that the price that the supplier wants to sell matters just as much as the buyer's price.
Except for two basic facts:
1) People don't need this. It isn't vital and required for life, it's music they can live without. If you charged me $5 a song and that was the only choice, I wouldn't buy it. I'd just listen to the radio or something.
2) There is still a music piracy underground, and it's pretty big. Whatever anyone's feelings on the issue, we have to accept that stamping it out through force isn't looking too possible right now, or anytime in the foreseeable future, since there are thousands (at least) of tech savvy people to create new networks and forms of filesharing, and they can move faster than the music industry. Therefore, the way to beat piracy is to make the "official" files that cost money worth more than what is available over bittorrent or LimeWire or whatever.
I read the article but the author doesn't really understand basic economic theory very well.
The general thrust is 99 cents is not the right price for all music to maximize profit. This we can all agree upon. But the formula of "less popular" + "cheaper price" = "more profit" is not correct.
Yes, if you price things lower, you do get more buyers. But this does not mean that pricing unpopular music means you make more money. It's possible that music that fits a certain "niche" such as, say JPop tunes, the optimal profit point is $2.50 per song not $.99. (Plug: http://gomorning.com/scene/itunes )
In addition, companies need to consider strategicly in deciding optimal pricing -- meaning, if all pre-1990s Jazz music is priced low, it impacts the profits made in new Jazz release. People may not buy any new Jazz music, and instead collect only older Jazz music. In some respects, it affects all music purchased, regardless of genre.
What record companies want to do is price older music fairly high to encourage the purchase of newer music. Which is why old music then is priced similarly to new music, though the demand is apparently much lower. (This is also one reason why retaining effectively indefinite copyright is in the interests of record companies. A large public domain does remove incentive to buy new work.)
"Digital song prices is determined by market forces, and with unlimited supply and limited demand, the price can only fall, because for every demand, there is a supply (and more) to match."
Umm, no, not really. There are two big reasons why you can't apply supply and demand here, and why the prices are not determined solely by supply and demand.
1) Music is not a commodity good. You don't want to download the song from iTunes? You can't replace that song with any other song out there; it has intrinsic qualities that make it more or less desirable to the market.
2) Limited suppliers. You don't want to pay $0.99 at iTunes? Fine, but where are all the other suppliers who could come in and offer you the song for $0.96? Or $0.92? There are not a potentially infinite number of suppliers who are capable of setting their own price on the songs they sell.
Also, people assume that given infinite supply, prices will fall to zero. Not true. Not all supply/demand curves will intersect at P = zero when supply approaches infinity.
"Trolls they were, but filled with the evil will of their master: a fell race..." -- J.R.R. Tolkien on Olog-hai
Right now, I think the studio execs know that they're sitting on a profit curve, and they probably think that in general, they're on the lower end of that curve. What I mean by this is that if you priced a song at $0.01, you would sell a million copies (netting $10,000), if you price a song at $1.00, you sell 50,000 copies (netting $50,000) and if you price it at $5.00, you sell 2,000 copies (netting $10,000). Of course these examples are contrived, but I think the general premise holds. I think the execs want to sell at what they perceive as a 'sweet spot' (say, $1.49 per song, if it's popular, selling 40,000 for a profit of $59,600).
That's what they call stock market/commodity pricing, maximizing their profit curve. But I like what you mentioned. What if you, as an iTunes buyer were allowed to sell your copy of a song you purchased on an iTunes auction market. It's DRMed, so if you did go through the iTunes marketplace, Apple should be able to enforce the proper rights on the song and transfer them to the new owner (please ignore the burning to CD loophole for a second, this is merely an academic exercise). This could have several potential benefits. If you bought a song for $0.99 and you discover that you hate it, you can sell it on the marketplace (probably for a slight loss of a few cents in most cases). If you happened to buy a song, as you said, that was a bit obscure for $0.99 but then it became a classic hit worth $3.50, you could then sell it for a profit. You could have a speculative market!
I think if Apple gave in to the execs and went with 'market prices', then it would only work well if people were allowed to sell their songs back. That way the studio is kept in check from raising their prices too high, because if it gets rediculous, the allure of a nice profit will keep supply high (and therefore lower market prices).
I'm sure everyone will point out tons of flaws (like the fact that a studio will probably only start songs at high prices and slowly lower them, thus defeating any potential profit for speculators, or as I mentioned before, the DRM loophole), but regardless, I still think it's a very interesting idea.
Bah. Just auction off each song ebay-style.
.95+ tax or something like that)
First day available, only allow 10,000 downloads, priced based on bids.
Two days later, release another 10,000.
A month later, release another 10,000 of an album-rejected REMIX!!!
Yes, I'm trolling. I just think the whole idea's stupid.
It's like why I make my own coffee now. Dunkin' Donuts used to charge a dollar for a medium. Sure, it was cheaper to brew at home, but a dollar was *so* convenient and simple. (actually, it was
I surrendered my money *every damn morning* without thinking!
Well, now... coffee's between 1.70 and 1.95 depending on where I go. I always think about stopping... but I don't anymore. The coffee in the office tastes just as good and it's free.
And one more thing to wrap up my point: Let's hypothesize that DD ups the price to $3... and the coffee at work becomes $2 a cup... and the coffee at home is, um, poisoned. Guess what I'll do?
I'll stop drinking coffee.
Assuming mountain dew remains affordable.
I'm done with sigs. Sigs are lame.
In fact, this is fairly consistent across all industries where supply is not constrained. Only through artificially or naturally constrained supply does higher demand result in higher prices. When supply is not constrained, higher demand results in lower prices because the incremental cost of most products is small compared to the up-front R&D costs.
So in order to convince me that prices should be higher for more popular songs and lower for less popular songs, you would have to convince me that supply of music is naturally or should be artificially constrained. Good luck. I know the record companies would like it to be that way, but Steve is right; artificially constraining supply to drive up price is greed, pure and simple.
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The more a song gets downloaded, the more it would cost.
Why? What market force drives the price up? Is there a limited supply of this song that can't meet the current demand? What extra cost is there to the company that isn't covered by 99 cents per song?
There's no reason. There are a theoretically infinite number of copies of that song. Charging more for a song that is in higher demand is a direct money making ploy by the companies to take advantage of people. Why should I pay more for a song because a few other thousand morons downloaded it to?
Having read the article it makes the same classic mistake of ignoring the production cost, and concentrating purely on the physical item/distribution costs - which is as you say the same in software markets - the more something sells, the lower the production cost per unit - which is really what you'd expect with music - the more ubiquitous the cheaper it gets, niche art music costing more (like bespoke tailoring or software costing more than mass produced).
What's also daft is the idea that someone logs on, sees Eminem is $5 so then decides they'll buy Coltrane for 25c instead - like people do that now.
'Capitalists of the world, unite! Oh