Apple Versus the Record Execs

Like a bunch of agitated Cro-Magnons running aimlessly from cave to cave with bleeding knuckles dragging on the ground, record executives were clueless about how to respond to Napster and its ilk when it was obvious that technology, which they saw as their greatest threat, would offer them their best shot at adapting to an ever changing business landscape.

So it’s no surprise then that STEVE JOBS and Apple Computer revolutionized music distribution through the iTunes music store, which started in 2003. The record execs saw the paid distribution model as a huge help and signed on. Jobs extended his right. The execs extended their furry mitts. And a deal was struck.

But now, the gloves are off. Before I explain why, let’s add some context. NICK WINGFIELD in the Nov. 30, 2005 edition of the Wall Street Journal wrote:

“Apple says it has sold more than 600 million songs over the Internet, from zero just two-and-a-half years ago when the iTunes Music Store opened for business. But week-over-week growth of online song sales this year, including from the iTunes Music Store, has significantly slowed as iPod sales soared. In a research report last month, RICHARD GREENFIELD, an analyst at Fulcrum Global Partners, estimated the average annual song purchases per iPod online fell to 15 songs per iPod in the third quarter from 25 in the same quarter last year.”

Hmmmm. More iPods are being sold but fewer songs are being bought per iPod. Odd.

The article later states:

“Some executives in the music industry privately express buyer’s remorse at the bargain they struck with Apple’s Mr. Jobs, who is making big bucks from selling iPods. Both sides are squabbling over the prices Apple charges consumers for music. The labels want higher prices for some songs, lower prices for others; Apple wants to leave everything at 99 cents a song.”

Ungrateful, eh? Just two years ago, the execs were happy to sign on and now they are unhappy? They should be grateful that Jobs did something because the record industry certainly wasn’t going to.

Anyway, this all begs the obvious question of who is right.

Let’s look at both sides.

If Apple is selling fewer songs per iPod sold, then elementary math would suggest that people increasingly think iTunes songs aren’t worth the cost. So why in Cro-Magnon’s name would anyone suggest raising prices?

The record execs say some people would pay more for popular songs by popular artists (Big Takeover fans, don’t worry. Your taste is too refined to be in jeopardy of meeting higher prices). And they are right. Some people would. But that doesn’t mean profits will pile neatly higher as they assume.

The record execs are ignoring simple economics. People usually buy less when prices rise – especially through the psychologically important threshold of 99 cents. If popular iTunes songs rose to $1.50 two things would likely happen. First, fewer people would buy the songs. Second, more people would get their music for free elsewhere. This is especially true of popular music, which is the most widely distributed, and therefore, the easiest to find free. And many people would surely go out of their way to get free music if only to stick it to the record companies.

And how do you think today’s tech savvy youth would react to higher prices? BigTakeover.com blogger JOHN DAVIDSON, in a recent column, wrote that a survey by JupiterResearch found that 34% of people between the age of 15 and 24 are “developing music acquisition habits that don’t involve spending money.”

So Jobs was right, when speaking about record execs in September, when he said, “If they want to raise the prices it just means they’re getting a little greedy.”

But Jobs is wrong to insist on 99 cent pricing. It’s shocking to admit but the record companies are right to seek lower pricing on older and less popular songs.

There are many albums that I would pay $5.99 or $6.99 for on iTunes but not $9.99. In fact, there is a wide swath of music that I would never pay $9.99 for. But if you could knock off a couple bucks here and there I’d be buying.

Put simply, lower pricing would stimulate sales. Yes, the profit margins would be lower but zero sales of an album with 20 percent profit margins is far worse than one sale with a 10 percent margin. Wal-Mart figured that out. It is in a low-margin business but makes huge profits through high volume. “A billion here, a billion there, and pretty soon you’re talking real money.” Indeed.