iTunes music sales contract in face of variable pricing

Tue, Feb 9, 2010


When Steve Jobs and Apple first struck deals to sell music on iTunes, the music was shrouded in DRM and was only playable on the iPod, which at the time, was a Mac only device. At the time, the music labels were willing to get into bed with Apple because even if the venture proved to be disasterous, Apple’s share of the computer market was so small that the fallout would be minimal.

Things, however, didn’t exactly play out as expected. The iPod/iTunes combo quickly became a juggernaut whose dominance continues to this day. And along the way, Apple opened up iTunes and the iPod to the mass of PC users worldwide. Before the record labels could blink, Apple had amassed a digital music empire that gave them a strong position of power in negotiations with record labels, and one of Apple’s sticking points was that all music on iTunes would sell for just $0.99. Apple, of course, wasn’t making money on individual song sales, but instead were using a cheap pricepoint to drive sales of its iPod hardware.

The record labels, however, weren’t too thrilled and wanted leeway to experiment with variable pricing, wherein it could price more popular songs at higher pricepoints. Apple, in typical fashion, refused to budge and it wasn’t until Apple needed to secure licensing rights to transfer music files over the air that Apple was finally forced to acquiese and allow record labels to institute tiered pricing on iTunes.

Tiered pricing on iTunes was eventually instituted in April of 2009, with some songs selling for as little as $0.69 and more popular tracks going for $1.29. Labels also had the option to keep things as they were and stick with $0.99 per song.

Now, All Things D is reporting that in light of the relatively recent change to the pricing structure on iTunes, labels are noticing that music sales are contracting.

Warner Music Group (WMG) said this morning that it has seen unit sales growth at Apple’s (AAPL) iTunes decelerate since the price increase: Industrywide, year-over-year “digital track equivalent album unit growth” was at five percent in the December quarter, down sequentially from 10 percent in the September quarter and 11 percent in the June quarter.

This is only part of the puzzle, however. Sure, music sales might be slowing down, but with higher prices, labels can sell fewer songs overall and still come out ahead. Back in June, we reported that sales of Pink FLoyd’s “Dark Side of the Moon” experienced this exact cycle.

As an example, in early April, individual tracks from Pink Floyd’s epic “Dark Side of the Moon” album were bumped up to $1.29. Shortly thereafter, song sales from the album dropped by 11% while sales of the album as a whole remained stable. All told, revenue from “Dark Side of the Moon” was up 12% in the 6 weeks following the price change compared to revenue earned in the 6 weeks before variable pricing was put into play.

With an array of book publishers now trying to make the most out of the emerging iPad/Kindle rivalry, it’ll be interesting to see how e-book pricing will adjust over the long term. From the look of things thus far, it certainly seems that publishers will have a little bit more luck than the record labels had.



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