Lessons From iTunes' Variable Pricing Failure

What happens when you start charging more than 99 cents for a legal download on iTunes?

Well, if you're a record label you are convinced that it will make you a lot more money.

In theory, the big hits sell for more and the catalog items get a boost on the other side -- lower prices, more volume.

If you are Apple CEO Steve Jobs, you know that the 99 cent threshold is holy and cannot be breached but you eventually let the labels get their way after stonewalling them for years. After all, Jobs knows that most music is stolen not purchased and his company is going to continue to sell iPods, iTouches and iPhones no matter what.

Variable pricing has been in effect for months now.

The results?

All legal music sales are decreasing as a result of the variable price shift.

Digital Music News was quoted recently as saying sources close to the major labels including executives told them anonymously that the strategy is failing:

"In the initial weeks following the pricing changes, including a move towards top-end, $1.29 downloads, overall revenues are moving downward. Lower unit sales can still result in greater revenues given the higher pricing tiers. But according to the figures shared, unit sales are dipping far enough to produce aggregated revenue declines compared to the pre-variable position".

You can just imagine these label execs scratching their heads.

Can't be us. Must be the kids.

There is speculation that the labels will probably adjust the prices to get closer to, you guessed it -- 99 cents per tune and away from $1.29.

So the first report card looks like an "F" although the labels are hoping for an "I" -- incomplete. Lower unit sales can generate greater revenues under certain circumstances. It's just not looking very good right now.

Legal downloaders may have been spooked by the increase but the label execs remain optimistic that they will come up with the best pricing mix and make up the difference.

If they studied generational media (you know, the study of how each generation is different or the same vis-a-vis the media business), they would have their answer.

99 cents was the top tier. Jobs was right.

There is far more free downloading of music going on than paid purchases. The marketplace was saying -- you're lucky to be getting my 99 cents. Don't push me to more piracy.

When I ran the variable music pricing concept past a music industry class of mine a year ago, they immediately rejected the idea that they would pay one penny more than 99 cents for any song on iTunes.

They pointed out how other legal sites had slightly lower prices than 99 cents and even that didn't make a difference.

As it turned out, the young consumer thinks of iTunes as a convenience. If and when they pony up and pay for a song, they do so as a convenience. They all know how to download free music from piracy sites or peer-to-peer sites like LimeWire.

The labels got all full of themselves thinking that they have control over music distribution.

The real price of music is five or ten cents a song -- about the cost of a text message. And that monthly plans could be sold only if consumers got hooked on downloading five or ten cent songs -- meaning, volume is how you make money.

Be that as it may, you didn't have to be a genius to know $1.29 was not going to work when a cheaper price -- free -- is still available for a click.

So, unless these early trends are reversed -- not likely in my opinion -- the labels would have shot themselves in the foot one more time by reducing a source of music income by not knowing their consumer's limits.

So what lessons can be extracted from this misstep for the media industry?

1. It would be wise to start looking at their world holistically -- meaning, the greater economy, recession, world markets, Internet aspect and lack of control over what winds up in cyberspace. What a CD once cost is no longer the price. If consumers wanted CDs -- if -- they would have to be priced at a few dollars and the labels just can't wrap their arms around that right now.

2. Everything has a price -- but it is not what traditional media execs think. They look at things from profit, loss and debt service. Sorry you've got a big nut to make but in today's world consumers have so many ways to circumvent your product or service that you've got to nail the right price down. And you're probably not going to like "the right price".

3. Newspapers might keep in mind that raising the price of daily editions as The New York Times and others are now doing will hasten the demise of printed newspapers. At some point getting the news for free is a better option and wouldn't you know that almost all newspapers give their information away for free online.

4. Radio executives have the other problem. They price their advertising too cheaply even in an industry that is dying. Of course, the way to price radio is not to sell spots but to sell marketing solutions using terrestrial radio (where applicable), Internet streams (other than the terrestrial stream), mobile content and social network. If only they had solutions in these critical areas.

5. It's all about supply and demand as it always has been. Except now the supply cannot be controlled in many cases. Record stores would call mall security if you walked out of Sam Goody with a CD you didn't pay for. Then your parents would lecture you about stealing. But the labels can't control the virtual record store online and ethically young people have come up with their own definition of what's right and wrong about pirating music. Still, the only way to control the supply is to keep it off the Internet. Lots of luck.

6. Less is less but you have to make up for it with more. For example, if I had 10,000 free subscribers to this publication and tomorrow I suddenly demanded $99 a year for a subscription -- perhaps one or two thousand would say, hell yes, I'll pay for it. But many would go away or steal it from paid subscribers. I'd have to take less and hope to find more willing to pay $99 a year.

7. The way to make money would be to find the price at which it doesn't pay to steal. For music, few will argue that paying five or ten cents is not worth alternatively stealing the music. And even if these consumers went nuts and spent $50 on music five or ten cents at a time, then and only then, the labels could successfully sell a $20 unlimited monthly plan. The precedent is out there -- texting. Mobile operators fell into text messaging by happenstance. No content costs. Addictive. Now there is a price point: $20 a month for unlimited texting. Once someone offers unlimited texting for $10 a month they'll bastardize their business. Oh, and it's awfully hard for an individual to set up their own text messaging system. In other words, unlike the labels that can't control distribution, mobile operators can control who gets to use texting.

There are greater possibilities if you'll let me push your imagination a little more.

My friend Dick Carr produces the best "Big Bands, Ballads & Blues" show I have ever heard. It's only on a handful of stations because radio people would rather use voice tracking or lesser talent to syndicate and save costs.

Would I pay, say, $9.99 a year for this?

Of course and so would many others because it is something you can't get elsewhere -- unique, addictive.

You could do it with jazz, even new strains for street music and world music if a music authority came along with it.

Sounds like a new form of radio.

Can I be serious?

Well, I just bought Tiger Woods Golf for my iPhone and didn't cry over the $9.99 that went to Electronic Arts.

There will always be free, but there can also be paid.

At the right price.

If it's unique and addictive.

As an aside I've often wondered why the radio industry is so fatally flawed that they create formats by pouring music into a computer, dictating parameters and then letting the computer spit out the musical experience in real time.

Why not hire a great programmer like John Sebastian to use his head to program every song, every minute, every day in his eclectic style. Or Michael Tearson to use his computer -- his head.

So, the music media business in its never-ending attempt to simplify and overcharge for everything will eventually be left with -- nothing.

For those who want to proceed to the digital frontier, be a humble student of variable pricing and learn at the expense of the record labels.

Everything has a price.

Even nothing is a price for marketing purposes.

Know your consumer from a generational point of view the way Steve Jobs knows his young changemakers.

Match supply with demand only if you can control the supply.

Otherwise, make your "price" not worth resorting to stealing -- in the case of music downloading, five or ten cents a tune.

And, most of all -- innovate.

The more complex entertainment is, the more valuable it becomes.

If it is a simple song, it's simple to find it for free.

If it's something addictive, you've just found a growth business -- as witnessed by text messaging.

Creative in its simplicity but addictive.

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