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Music Industry Attempts Price Increases (or Hari Kari, Part II)

Posted By Barry Ritholtz On August 30, 2005 @ 11:30 am In Intellectual Property,Music,Web/Tech | Comments Disabled

for the About a year and a half ago, we noted the "Music Industry is Intent on Commiting Hari-Kari [1]." Today, we revisit that subject.

In an apparent attempt to either a) prove they are as dumb as lawn furniture or 2) hasten their own imminent demise, the music industry is trying to raise prices for legal downloads.

A front page NYTimes article [2]
discusses how the music industry is (once again [3]) trying to force prices up.
This demonstrates a shocking lack of economic comprehension, as well as
a distinct failure to understand their own customers. 

Its a basic rule of Economics: Goods that have Elastic demand  (i..e, non essential) are highly price sensitive. Further, any item easily available for free (albeit illegally) will have an even bigger response to price increases.

This is before we even get to the proposition that 99 cents songs at iTunes are not a particularly good value proposition [4] either (you can buy the disc and rip it and have both MP3s and CD for about the same price).

Prediction: if the labels manage to crank up ITMS prices, expect those pricey legal downloads to plummet in volume. That’s just basic economics — if a free alternative exists, and consumers already think your product is overpriced, than you are in for a heap of trouble if you try to raise your selling price point.

Question: Where the hell are the artists and their representation in all this? Hasn’t anyone in the industry besides Mick Jagger (London School of Economics) eceived any sort of business training?

As we have shown time and again, music buyers are extremely price sensitive [5], that CDs do not represent a good value for consumers, that consumers are rapidly adapting other forms of entertainment [6], and that DVDs  provide more bang for the buck [7].

Further, price decreases [5] spur music sales, as does strong economic environments [5].

Here’s the NYT Ubiq-cerpt:™

"Two and a half years after the music business lined up
behind the chief executive of Apple, Steven P. Jobs, and hailed him and
his iTunes music service for breathing life into music sales, the
industry’s allegiance to Mr. Jobs has eroded sharply.

Mr. Jobs is now girding for a showdown with at least two of the four
major record companies over the price of songs on the iTunes service.

If he loses, the one-price model that iTunes has adopted – 99 cents
to download any song – could be replaced with a more complex structure
that prices songs by popularity. A hot new single, for example, could
sell for $1.49, while a golden oldie could go for substantially less
than 99 cents.

Music executives who support Mr. Jobs say the higher prices could
backfire, sending iTunes’ customers in search of songs on free,
unauthorized file-swapping networks.

Signs of conflict over pricing issues are increasingly apparent.
This month, Apple started its iTunes service in Japan without songs
from the two major companies – Sony BMG Music Entertainment and Warner
Music Group – leaving artists like Avril Lavigne, Beyoncé and Rob
Thomas out of the catalog because the companies refused to license
their music to iTunes, executives involved in the talks said . . .

Some analysts suggest that the willingness of the music companies to gamble on a new pricing structure reflects a short memory.

"As I recall, three years ago these guys were wandering around with
their hands out looking for someone to save them," said Mike McGuire,
an analyst at Gartner G2. "It’d be rather silly to try to destabilize
him because iTunes is one of the few bright spots in the industry right
now. He’s got something that’s working."


Observation
: From Stereophile, comes what may be the most astute statement on the subject — "The
real issue may be that iTunes has become the 500 lb gorilla on the
digital music block, controlling 75% of all legal downloads and 80% of
the portable digital player market. That level of market dominance may
be the real sticking point for the recording industry, which has long
been used to actually driving the market rather than being in the
passenger seat. In other words, it may be an old-fashioned turf war."

Great . . . just what the recording industry needs now, a good old fashioned cockfight.   

Alex, I’ll take Clueless Industry Executives for $100, please.


>

Sources:
Apple, Digital Music’s Angel, Earns Record Industry’s Scorn [2]
Jeff Leeds
NYTimes,  August 27, 2005
http://www.nytimes.com/2005/08/27/technology/27apple.html

Is the iTunes price right? [8]
Recording Industry Update
Wes Phillips
Stereophile, August 29, 2005
http://www.stereophile.com/news/082905recording/


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/08/music-industry-attempts-price-increases-or-hari-kari-part-ii/

URLs in this post:

[1] Music Industry is Intent on Commiting Hari-Kari: http://bigpicture.typepad.com/comments/2004/04/music_industry_.html

[2] NYTimes article: http://www.nytimes.com/2005/08/27/technology/27apple.html?ex=1282795200&en=01f491c5944a0133&ei=5090&partner=rssuserland&emc=rss

[3] once again: http://bigpicture.typepad.com/comments/2004/04/downloading_mus.html

[4] not a particularly good value proposition: http://bigpicture.typepad.com/comments/2005/03/cds_versus_down.html

[5] extremely price sensitive: http://bigpicture.typepad.com/comments/2003/12/music_sales_ris.html

[6] rapidly adapting other forms of entertainment: http://bigpicture.typepad.com/comments/2005/03/americans_tunin.html

[7] DVDs  provide more bang for the buck: http://bigpicture.typepad.com/comments/2004/04/cashing_in_on_d.html

[8] Is the iTunes price right?: http://www.stereophile.com/news/082905recording/

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