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Why are all songs the same price on iTunes?
99 cents, but the deals expire in two months. Apple insists on keeping a single price across the board. Why might this be? Why might the retailer care more about price predictability than the wholesalers?
1. The confusion and resentment costs of different prices might be blamed on Apple. But surely we see different prices in many other retail arenas.
2. Perhaps Apple is solving a status game problem. If everyone else is selling for 99 cents and your song sells for $1.20, yours looks special. Music companies might set prices too high, not taking into account the lower demand for iTunes, and music, more generally.
3. Could Apple be enforcing music company price collusion, while receiving implicit kickbacks in the rights agreements? This would require the complainers to be in the minority.
4. Apple makes much of its money on hardware, especially iPods. Low song prices cross-subsidize the hardware, to some extent at the expense of music companies. That said, some music companies wish to charge lower not higher prices.
5. Hit songs are kept at artifically low prices to discourage people from moving into the world of illegal downloads.
6. Price is a signal of quality and Apple doesn't want to admit it carries "lemon" songs. But won't demand for the hits go up?
7. Uniform pricing is a precommitment strategy for a durable goods monopoly game.
We must distinguish two aspects of the problem. First, Apple wishes to control retail prices. Second, Apple wishes to make all retail prices the same. Which of these features is more important for understanding the problem?
Here is a proposal for determining prices by auction; no way will we see it. Here are rumors that the uniform pricing will end. Note that the Japanese store already has two tiers of prices. How about keeping the price the same, but bundling hot songs with less desirable ones? Way back when, we used to call these "record albums"...
Posted by Tyler Cowen on April 26, 2006 at 07:45 AM in Music | Permalink
Comments
In bricks & mortar music stores, CD prices range from $5 to $20-- one is left with the feeling that CD pricing is quite arbitrary and that the 'real' price of a CD must be close to, if not actually equal to, zero. Personally, I never buy a CD at 'list' price, the 'it's a ripoff' voice in my head is too loud. This feeling is supported by the contrast with prices of DVDs, which are only a little more expensive than CDs but provide far more data/dollar.
In contrast, a constant $.99/song suggests that what you're buying has a real, fixed value.
Posted by: Matt at Apr 26, 2006 8:03:44 AM
As best I can tell, iTunes only purpose is placating the music companies labels, while Apple sells (and earns most of their profit) the device that has pushed music piracy more into the mainstream than anything else. Consider that iTunes songs sold/ipod is running at 10-20 and most ipods sold hold thousands of songs. I've never seen one that only had a few songs on it. Apples real interest is maintaining interest from the big music companies, lost song sales by the minor ones (who would benefit from lower prices) would push the larger labels to look a little more closely at sales.
Posted by: nelsonal at Apr 26, 2006 8:07:54 AM
Great discussion starter. I think #4 is certainly big. And I think they like the psychological effect of 99 cents, under $1 too.
Posted by: Christopher at Apr 26, 2006 8:29:54 AM
It's #5, plain and simple. $.99 has been considered the threshold price for legal MP3s since the early days of Napster. You could ask any random downloader, and they've say "I'd buy it if I could just get the tracks for a dollar."
Posted by: Nathan T. Freeman at Apr 26, 2006 9:03:34 AM
The pricing mode could also be a recognition that the differential pricing on CDs was arbitrary and capricious. The record producers tried to put hype into some songs and not others. Apple, like Shakespeare, seems to be saying "A song is a song is a song, but a song offered by friends of the RIAA would not sound as sweet."
A second comment. iTunes pricing, if you think about it, actually discourages piracy. The post by nelsonal (above) seems to reflect some notions that are simply illogical. I currently have two iPods - one to travel with and one for my car. Between them I have bought about 600 songs but on the larger one I have 6000 items. The other 5400 are divided up into three categories - 1) Songs of CDs that I have purchased outside of iTunes and collected into my iTunes files, 2) Podcasts and Vodcasts - taken down from the Apple site, and 3) Videos purchased from Apple. In spite of the claims of RIAA which might suggest that the shifting aspect of the CDs that I have purchased are somehow illegal - iTunes has actually encouraged me to purchase more music (notice that all of the music on the iPods is legal). The simplified pricing encourages me as a consumer to go on the iTunes site when I think of an artist that I would like to hear. The unbundling of songs does the same thing - I can buy an album (where there is the possibility of a couple of clunkers) or I can buy individual songs. Were this not so iTunes would not have sold more than 1 billion songs.
Posted by: drtaxsacto at Apr 26, 2006 9:14:17 AM
Isn't this the same question as "Why are all movie tickets the same price?" While I liked "Capote" and "Star Wars III," anyone could have foreseen demand would be greater for the latter. Why weren't prices set higher?
Posted by: MW at Apr 26, 2006 9:29:04 AM
There is zero evidence for #4, namely that any music company will if given the chance charge *less* than $.99. There is ample evidence that they will try to charge more.
Another possibility: Apple understands marketing in a long tail market better than the music companies. Niche tracks may not be worth $.99 to the latest-hits-buyer, but they are worth it to a certain subset of buyers. By keeping a uniform, competitive price, they prevent the music companies from pricing the service into unprofitability.
Posted by: Sandy Smith at Apr 26, 2006 9:29:07 AM
I was going to ask the same question about movies by MW. In the theater, movies cost the same price, although discount theaters show second-run movies for less. However, at the video store, some stores have gone to having different prices for first-run movies, children's movies, and outdated movies. Could uniform pricing have something to do with the marginal cost of an additional downloader or theater-goer being zero? However, a movie renter does represent a marginal cost because frequently rented movies will wear out more quickly.
Posted by: Christine Hurt at Apr 26, 2006 9:33:31 AM
Maybe the problem is "reselling" of illegal copies. All illegal copies(substitutes of iTune-files)have the same "price", just the search costs and costs of doing something illegal. Maybe iPod only can attract consumers which want to prevent extra search costs and costs of illegality. These costs are the same for all illegal copies.
Posted by: SteffenH at Apr 26, 2006 9:38:30 AM
I wanted to buy the Starker Bach Cello suites, or the Anna Magdalene suites if you believe recent theories, and 99 cents a track puts it up near 30$. I can buy it new for 24. Blah.
Posted by: skroah at Apr 26, 2006 10:12:25 AM
I've always felt 99 cents is actually pretty pricey for the quality of track. When you buy a song from iTunes you are buying a mediocre lossy 128kbps copy. If I want more than 5 or 6 songs from a given CD I'd still rather pay $12.99 to have decent quality recordings. Even if I wanted just 2 or 3 songs I'd probably pay $7.99 for a used CD rather than go to iTunes. But of course I'd have to spend my time to physically go and find that CD, or wait for Amazon to deliver it. So I believe the 99 cent price point works only because it is low enough to encourage impulse buys - it's the price you're willing to pay for the convenience of instaneous gratification. If you go above a buck you will lose a lot of customers like me.
Posted by: Vanya_6724 at Apr 26, 2006 10:38:45 AM
The iTunes song/iPod sales ratio is what it is less about piracy, I believe, and more about the many CDs most iPoders already own.
Posted by: false_cause at Apr 26, 2006 11:25:14 AM
I think it's got to be #1. The other arguments just don't seem to hold water. And many of them are arguments for why pricing should be low, not uniform. For anyone who is interested, I tackle them one by one over at my blog (econball.blogspot.com).
Posted by: Tony Vallencourt at Apr 26, 2006 11:28:41 AM
They might be worried about price discrimination from the record companies which are mostly also competitors so latest hit fo $1.20 on iTunes but $1.00 on EMI/Napster/whatever would be an effective way for large record companies to break iTunes dominance.
In a similar vein they may be trying to maintain the selling price at record stores where large companies buy shelf space.
$0.99 a track is not a cross subsidy because the distribution costs are so much smaller than for physical delivery. They do however cut out the retailers and distributors who take the lions share of the price paid by the buyer.
Large record companies mostly extract rent from access to distribution (shelf space) and media promotion (MTV/VH1).
Most of the music I have on my iPod comes from my CDs which is not piracy. The original Napster phenomenon predates the iPod and certainly its popularity.
Posted by: Jack at Apr 26, 2006 11:33:57 AM
The author of that Slate article knows jack about prices.
Posted by: Macneil at Apr 26, 2006 12:16:04 PM
The Apple VP of Marketing would say: marketing gimmick. You might sell some songs below wholesale price, but you make up for it in simplicity of message.
Posted by: smalliest at Apr 26, 2006 12:34:12 PM
I don't want to derail the conversation, but on a related topic - does anyone understand why bookstores sell high-demand titles at a steep discount? Harry Potter is the obvious example.
This practice seemt so take several steps further along the path of fixed-price songs, into a kind of bizarro-world where increased demand lowers the price.
Posted by: Tom Slee at Apr 26, 2006 2:19:04 PM
Alternate title: why are new releases priced identically in physical media as well and why would we expect the RIAA cartel to treat the digital experience any differently?
This argument starts from a false premise, that Apple sets the price. There's no evidence of this that I am aware of. And I don't think Apple cares what the price is. At one time it may have helped bring in revenue faster to cover the costs of the retail infrastructure, but with over a billion purchases, I think they're in good shape.
On that point, I agree that #4 is a red herring. The RIAA cartel has openly discussed raising prices on high-demand tracks but never mentioned lowering prices on back-catalog or low-demand tracks. And as another commenter noted, the physical media is often cheaper when certain tracks aren't open to purchase by themselves.
On #6, it would be useful to redefine Apple as anything other than a record store, rather than a record label. I don't see the same argument being raised that record stores only carry non-lemons: au contraire, a good record store is generally defined as carrying a deep collection, with complete catalogs.
The other aspect of quality (not mentioned, which makes me wonder if the original post was written from any experience with digital music) is that the quality of the tracks may be OK for a relatively lo-fi device like the iPod but many people would like to buy -- and would pay for -- higher fidelity tracks. I digitize tracks at much higher rates than Apple provides, since I will likely listen to the results in a variety of circumstances.
Posted by: paul at Apr 26, 2006 3:42:20 PM
A variation on #1: The confusion, whether it is blamed on Apple or not, will force the customer to think about price each time he picks one to buy, and the effort of thinking is part of the cost. By keeping the prices uniform Apple may be removing that cost to the customer and consequently increasing its overall sales. This may be at the expense of particular tracks but Apple is more interested in overall sales than the owner of particular tracks. That may be what Tyler means by "blamed on Apple" but if so it wasn't clear to me.
Furthermore, making all the tracks a uniform price makes it possible for Apple to advertise on price. It can say, "visit iTunes, just 99 cents a song", instead of having to say, "visit iTunes, 99 cents for some songs, a buck 20 for others, sixty cents for others, well here's the itemized list blablabla - [four hours later the commercial ends]."
Posted by: Constant at Apr 26, 2006 3:45:53 PM
Er, this may be too ECON 101-ish, but how about: regardless of quality of performance or number of musicians in the orchestra, the marginal cost of producing an additional ipod version is a flat 99 cents.
Posted by: howardl at Apr 26, 2006 3:47:28 PM
"does anyone understand why bookstores sell high-demand titles at a steep discount"
(warning: noneconomist speaking) There are many explanations I can think of but the one that seems best is this: bookstores like any business must sell their books at above cost. But the longer a book stays on the shelves, the higher its cost to the bookstore. So books that sit on the shelves must be sold at a retail price well above what the bookstore paid the distributor. However, high-volume books are sold quickly: the bookstore holds the books for a very short period of time before the book is sold. So the book takes up space in the bookstore for very little time. So the bookstore can afford to sell it for something much closer to the distributor's price.
As far as why the bookstore doesn't just charge full price anyway, the reason is competition. Like any business, bookstores are forced by competition to sell for not too far above their own costs - which includes the cost of keeping the book on the shelf for however long it's there.
Additionally, there could be price drops upstream as well. The more copies of a book that a publisher prints, the lower the cost of printing per book. This is an instance of the general fact that mass production can lower production costs and therefore lower prices. But I don't know how to fit that into a regular supply curve. The standard supply curve goes up: the higher the price, the greater the supply. My guess is that to model the effects of mass production you need something different or more involved than just a supply curve and demand curve.
Posted by: Constant at Apr 26, 2006 4:08:47 PM
RE: Cheap high demand titles at book stores
One word: loss leader. Come for the Potter, stay for the coffee, leave with an overpriced calendar.
Posted by: anomdebus at Apr 26, 2006 4:47:14 PM
howardl,
The cost of creating a song (writing it and recording) are fixed costs, independent of how many iTunes are sold. The marginal cost of an iTune is the cost of duplication, which is 0.
Posted by: Eric at Apr 26, 2006 4:51:24 PM
In the end it costs the same to make a song for a CD as it is for one to be sold on iTunes or any other digital store. So in reality, they make tons'o'bucks by selling digitally. After all, a BIG slice of the cost of buying a 99cent song is actually the charges from M/C and VISA. This comes out of the 30 cents Apple makes. In fact, Apple pretty much pays for all the costs of "selling" the song. The record companies simply deliver the files and then collect the money from Apple. They have nothing to complain about. Why 99 cents? Why is everything either 1.99 or 9.99 or 29.99??? It's how the consumer's brain sees value or a "good" price. Next step would be 1.99 which is juts too expensive.
Posted by: Dave at Apr 26, 2006 10:39:19 PM
I think the appropriate way to price something that has free (if illegal) alternative sources is to price each song the same, since the opportunity cost, the time you spend to find and download an illegal copy of a song, is roughly the same for each song you download. If anything, "rarer" songs that are harder to find should cost more. Although I guess if you d/l torrents then the opportunity cost is more like proportional to the size of the file (if you have to maintain a ratio). Would be interesting if 320 kbps rips cost more than 128 kbps...
I think differential pricing would encourage illegal downloading, because people then can judge that some songs are "unfairly expensive", like people that say "I only download illegally because it's a ripoff for CDs to be $18.99, but if they were $9.99 I would buy lots of them".
Posted by: Paul N at Apr 26, 2006 11:08:44 PM
