Posts filed under “Web/Tech”

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

for the About a year and a half ago, we noted the "Music Industry is Intent on Commiting Hari-Kari." 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
discusses how the music industry is (once again) 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 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, that CDs do not represent a good value for consumers, that consumers are rapidly adapting other forms of entertainment, and that DVDs  provide more bang for the buck.

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

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
Jeff Leeds
NYTimes,  August 27, 2005
http://www.nytimes.com/2005/08/27/technology/27apple.html

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

Category: Intellectual Property, Music, Web/Tech

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Consumer Issues and Investors

One for five.

That was my record for tech purchases during the 2004 holiday season.

My wife’s laptop arrived in perfect shape, worked great right
out of the box. That was pretty much where the streak ended — at one. The G5
iMac arrived with a thin pink stripe down the screen. A few calls to tech
support, and it was declared DOA, and shipped back to Apple. The replacement
had a white pinhole in the screen mask (that one pixel is dead for ever — and I didn’t bother to swap that one).

My wireless WiFi 802.11g Router didn’t work (hardware problem). The Bluetooth wireless keyboard had trouble connecting with the computer (but
the wireless mouse was fine). And the 40Gig iPod my wife gave me to replace my
first gen 5Gig iPod was great — but it came without the ordered inscription (Jim Cramer had the same problem).

As disappointing as the order problems were, I had (mostly) good
experiences dealing with tech support on replacing everything. Apple gave me a
choice of replacing or refunding my money on the iMac. A new wireless router
was shipped, along with a tag to send back the old one. They were less
cooperative on the iPod, however, telling me I would need to pay a 10%
restocking fee because I opened it. Perhaps someone at Apple explain to me how
else could I have found out there was no inscription before I opened the box?

These experiences intrigued me – I just had to laugh at 1
for 5 – so I started asking around. What I heard from friends, family, and
several hundred readers from Real Money and Dave Farber’s Interesting People list was that I wasn’t the only one having a
“funky” time with consumer tech orders. More than a few of you had horror
stories, which you gladly shared.

I got quite the earful from you guys. After reading hundreds of
emails (you can see them all here), I discovered a few interesting
things. For a guy with a mostly technical/quant predilection, I did a lot of
pure fundamental research.

This is an admittedly unscientific survey.

Perhaps we can glean
a few tidbits that are applicable to stocks. We might even be able to derive an
investable thesis or two. Indeed, there are a few lessons here for the
companies themselves to learn. With the 2005 holiday season only a few months
away, I wanted to revisit some of these issues that you, the reader, raised
about consumer tech companies this past holiday season.

Here’s what I discovered:

1) Some Productivity Gains Are Illusory

Since the late 90s, output per hour has improved dramatically.
But the measure of productivity is a quantitative one, a numerical reading of
total output per hour worked per employee. The problem with this measurement is
that it relies only upon easily quantifiable data; it ignores the qualitative side.

Example: Many tech companies have outsourced tech support. They now
handle more calls per hour than they were handling previously, and at a lower
cost. That appears terrific – if you rely on the quantitative data. But if my
mail was anything to go by, this cost savings approach is hemorrhaging clients
and damaging hard won reputation. Its approaching what I’d call
"anti-productivity."

Outsourcing seems to work better for coding than it does for
telephone customer service banks in the competitive consumer products markets.
I haven’t been able to quantify the exact cost of lost customers versus saved
salaries, but if RM readers complaints are anything to go by, it is quite
significant.

All this suggests that at least some of the enormous
productivity gains (quantitative) are perhaps less significant (qualitative)
than we have been led to believe.

2) Dell generates a lot of furious emails

Dell is now the best selling brand of PC. They move so many
units, one has to expect some bad experiences here and there; that’s merely the
law of large numbers. I do not have sufficient data to draw a statistically
reliable conclusion that quality control is an issue for the PC giant. I
have a sneaking suspicion that many of
the issues are Microsoft Windows problems, and not Dell issues — but that’s
another column entirely.

But I was really shocked at how many complaints I heard about
Dell, and how serious the tone was. After you hear the 3rd person tell you “I
will never buy another Dell for as long as I live” — you take notice of it.

These emails were all post holiday season, 2004. More recently,
Jeff Jarvis (of Buzz Machine) had a big problem with his Dell. What’s so
fascinating is that a blogger kvetching about a tech problem has spilled over
into the mainstream to the point where the issue has been overheard in a mall food court.

All this implies to me that Dell’s award-winning service may not
be winning that many awards in the near future.

3) Amazon delights their customers

The overwhelming consensus from shoppers is that Amazon does an
excellent job. People who are customers become repeat customers. This is
reflected in the continued 25% year over year growth of ecommerce. As Amazon’s
most recent quarter reflects, they are doing an outstanding job of attracting
and retaining customers. Ever since my college roomate gave me a gift
certificate in 1997, I’ve been a big fan. A special thanks to the reader who
gave me their public – but very well hidden – customer service number – U.S. and Canada: 1-800-201-7575 !

Also on the big box retail side, Best Buy got very high marks –
while Circuit City did not. A glance at their stock charts reveals that
customer attitudes towards a company get reflected in their share prices.

The lesson for investors is that when you hear a few customers complain
about a given store,
pay attention.  That doesn’t
mean run out and short the stock instantly — but do not ignore these anecdotal
warnings. At the least, pay attention to what they might be suggesting.

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