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?"

Comments

Oh, for God's sake

[Daniel Dvorkin]

"Isn't 99 cents too much to pay for music that appeals to just a few people?"

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 ... 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.

Stock market pricing is one of the stupidest ideas I've ever heard WRT the music industry ... and you know, given the long sad history of stupidity in the music industry, that's saying a lot.

Re:Oh, for God's sake

[Anonymous Coward]

I didn't read the article but the entire idea is flawed for one reason: Price elasticity is different for every song and artist. To use one demand-driven criteria for every song and artist would be stupid. To determine individual price elasticities for each song & artists would be impossible, at best a guessing game.

Demand only determines price when coupled with price elasticity.

Re:Oh, for God's sake

[PepeGSay]

supply-and-demand pricing (hey economist guy: the supply is unlimited!)

Thats the rub, the *music industry* as the prejorative term is usually referring to the distributors and "record companies". They exist as a means of distribution and marketing. Without the distribution portion, they are hurting. $13 for a CD... you gotta be kidding me.

They are trying to figure out where they fit in and create a purpose for themselves. Maybe they want to reinvent themselves as the stockmarket of music, what a dumb idea. The stock market idea is rooted in the idea that a company actually needs capital to continue growing. The really high quality bands cannot turn money into new songs, because it is a creative endeavor. However, the music industry *can* create more marketing generated pop bands with money... ugggh

Anything you see the record companies do in regards to online sales at this point, in my opinion, is a self preserving act. Word of mouth can do marketing, web sites can do marketing, but the record companies have been the ones who can put up the money to create the CDs that are released. With that gone, the record companies become largely anachronistic and will be eaten up by other more nimble companies that can provide the softer services. Until then we get beaten to death in our wallets by their death throws.

Re:Oh, for God's sake

[ZachPruckowski]

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.

Re:Oh, for God's sake

[jimbolauski]

I like the idea of stock market songs I could be one of the first to purchase the song for $.99 and then could sell it back for $1.25. I'm sure I could write a simple script that would purchase new songs by popular artists at since price would be based on sales and make a fortune. By the way I am patiening the idea of creating a script or a program to purchase online music and then resell it at the ceiling price.

Re:Oh, for God's sake

[dgatwood]

More than that, the suggestion of charging more for more popular titles is exactly the opposite of what happens in most computer-based markets. Software that is only important to a few people costs hundreds of dollars, while consumer-oriented products are cheaper.

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.

Re:Oh, for God's sake

[JulesLt]

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.

Re:Oh, for God's sake

[joel8x]

You know, you inadvertently bring up a really valid point. Why can't we sell our DRM'ed music?? If I buy a CD and decide I'm sick of it, I can sell it on eBay, or to the local used record shop. Shouldn't I be allowed to do this with my purchased online music. Can we as "netizens" rally together to make these online services offer a way to transfer ownership to another user? Think about it - I invalidate my own drm so I can no longer play the song, and give it to a willing buyer at whatever price I set and the service takes a small percentage of the sale (say 10%).

Downloads aren't subject to the same market forces

[jmp_nyc]

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

limits

[Rudisaurus]

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.

Love this idea

[spacedx]

This is great -- as long as the maximum price is 99 cents.

Completely backwards

[ivan256]

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 a true market if I can't sell too

[Millard Fillmore]

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?

Re:Not a true market if I can't sell too

[31415926535897]

Now this is an interesting idea that you bring up.

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.