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Apple Sets Tune for Pricing of Song Downloads
PygmySurfer writes "Apple Computer on Monday revealed it had renewed contracts with the four largest record companies to sell songs through its iTunes digital store at 99 cents each. The agreements came after months of bargaining, and were a defeat for music companies that had been pushing for a variable pricing model."
At last count, the breakdown of where that $.99 goes is (on average):
Apple - $.35
Label - $.53
Artist - $.11
And thats only after the label reclaims whatever they claim they spent in production costs.
See http://www.downhillbattle.org/itunes/ for details.
Steve's a smart guy though. He knows 99c works. He's set a standard, and he probably wouldn't be able to charge more than that on anything, save the extremely popular supercrap that 12-year-old girls buy. He's taken a ton of would-be pirates and turned them into legal consumers. I think he's aware of the fact that selling less popular stuff at under 99c could boost sales (and yes, there would be a "correct" price point for every song, probably around the 50c range for most of the older or lesser-known stuff). But you can't take your business that's been touting "any song in the world, 99c" and say "well, except for x, y and z".
Every item has an optimal price point. With inelastic items like gasoline, you can pretty much charge whatever the hell you want and people will still buy it (begrudgingly, but they still need to get from a to b). Music is quite the opposite, and digital music downloads even moreso. Charge $x for a CD, Y people will buy it. Figure in all of the associated costs and you've got your optimal price point. With downloads, costs are almost nonexistant. At the rates of my host, it would cost me about nine cents in bandwidth for a four-meg track, and you can bet your ass that it doesn't cost Apple even a tenth of that. The same pricing curve still applies, except that supply is infinite and distribution costs are negligable. Charge more, less sales; vice-versa: find the point on the graph where sales * price is at its highest point and there's your ideal price.
Of course, things change with demand and whatnot, but just suppose that songs all start at 99c, and as sales decrease the price is dropped by a dime to as low as 29c. Sales will pick up a bit due to the dropped price. If sales seem to be picking up too quickly, bump it back up a level. Make some uber-algorythm to automate this and all you've gotta do is add new music to the store.
And the RIAA becomes a problem again. Suppose that it worked out, as it roughly does, to 70c: RIAA, 5c: artist, 24c: Apple. Remove RIAA from the picture. 29c a track is remaining. Remove the RIAA, charge 49c a track, divide the extra twenty cents evenly between Apple and the artist. Sales shoot up more than twofold from the price drop in all likelyhood, the artists get FAR more money (three times as much even if the rate of sale stays the same), and Apple wins too. You've undercut the assholes and given more money to the people that deserve it, while simultaneously spreading the product to more people at less cost to them. Hell, Apple would probably be making so much extra profit that they could lose the CRAP and people using devices other than the iPod wouldn't hurt overall profits (assuming, of course, that a: people buy iPods for iTMS and not it being an iPod and b: they can be hassled to transcode from m4a to mp3/other)
How are sites slashdotted when nobody reads TFAs?
CDBaby has something similar to what you're looking for: http://cdbaby.net/dd
With downloads, costs are almost nonexistant.
Now that's not even close to right.
You ever priced a Mackie? Studio time? A decent microphone? There are a large number of non-trivial costs to producing an album. No, GarageBand and a Shure mic from Sam Ash isn't going to cut it. If you want professional sound (i.e., something that will sell), then you've got to get some professional gear. And that takes professional amounts of cash. Sure, you can cut your distribution costs with on-line sales, and yes, distributino costs are significant. But to hand-wave the rest of the costs of production as "almost nonexistent" shows a shocking lack of common sense.
Just junk food for thought...
Apple doesn't pay any money to the RIAA when a song is sold on iTMS. They pay the record company
"RIAA" is a metonym for the major record labels and the largest minor record labels, all of which are members of RIAA.
I don't have an iPod either, but I am an iTMS customer. Granted, I'm on the cheapskate end of the curve and I've never paid them for music, but I bought Multipass subscriptions to The Daily Show and The Colbert Report, because I don't have cable TV, don't have a TiVo, have had really bad luck recently dealing with my VCR, and after using BitTorrent for awhile I finally decided it's just more hassle than it's worth. So yeah, I'm paying for ease-of-use.
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if a market has perfect elasticity, that curve would be a straight line at a 45 degree angle...
Actually, I think you're thinking of "unit elasticity," or an elasticity of 1. "Perfect elasticity" would be represented by a horizontal line. At price p the firm would sell as many as they could produce. At price p + $.01 consumers display their perfect willingness to refrain from purchasing, and the firm sells none of their product or service.
Here's a page with some diagrams:
http://www.answers.com/topic/elasticity-economics
From the GPA:
"The result is I simply quit buying CD's. How is this profitable?"
The correct answer to this question is "You are not a part of our target market."
"So you are obviously an economist, since you know what supply and demand is... but you have never heard of economies of scale."
No, I'm high up in marketing for a major vendor of PC peripherals. As a result, I have to know this stuff pretty well.
I'll try to keep this as simple as possible, but supply and demand is typically a curve, not a flat line. A flat line would be an example of "perfect elasticity," as I mentioned in my original post.
In short, when you're setting up pricing, the curve might show you that a 50% drop in price might only increase sales by 25% (if it were perfectly elastic, a product that cost half as much would sell 2X as many copies, and a product that cost twice as much would sell half as many units. But perfect elasticity rarely happens. For any market that's of sufficient size, you can bet that the big players have hired the appropriately smart people to do the work to understand what the curve looks like. In my particular corner of the world, I already know that selling my product at $89 rather than $99 might reduce the product's net margin by 20%, but it won't increase sales enough to make it as profitable as if I'd left it at $99. So, I don't do it. Understand?
"You think $5 CDs would be a loss?? Maybe if the music business is more bloated than I thought. I can make CDs for less than $3... so the cost of production is not the issue."
I don't think it's an issue of the music industry being bloated... that's not for me to say, but I do understand the realities of selling stuff in retail. First, keep in mind that a CD is sold to a distributor, who adds five points, before selling it to a reseller (retail store). Retailers like Amazon might add 10 or 15 points; brick and mortar retailers might add more. So, if your manufacturing cost is $3.00, you can pretty much rule out setting a retail price of $5.
It's also important to understand the difference between net margin and gross margin. As you've correctly pointed out, the manufacturing cost isn't the big one. If you're selling PC equipment, you also have:
"You may be right about the current rate bringing in the most money, but you are seriously deluded if you think that /.ers buy the dung that you are heaping."
Well, you're right, in a way. I don't think that most people reading this believe that I'm correct. Slashdotters tend to be experts in server administration and coding and stuff like that; they're not in sales or marketing. I have tremendous respect for the folks who are experts in these areas, but spend a few days on Slashdot and you'll see that it's not reciprocal. There's also the phenomenon on Slashdot that I like to call "I know a little about one thing, so that makes me an expert on a lot of things." It goes with the territory.
"Also, according to the numbers The music industry has been pulling in less money lately. Maybe a valid case could be made that CDs are overpriced."
Oh, they've definitely been overpriced. CD prices have been in freefall over the past few years.
"I guarantee that the music industry DOES care if he buys a CD. BMG does not make its money by being exclusive. That's a horrible comparison."
Perhaps I didn't explain it well enough. If they can be more profitable by setting the price points that will cause some segment of the audience to opt out of buying the product, they'll do it. It all gets back to that supply/demand curve.
Sitting in my day care, the art is decopainted.