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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."
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...
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.