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Remember how online music stores were going to route around the music industry? The pigopolists have barely got their feet under the table and already demanding more. The Wall Street Journal reports that the major five labels think that 99 cents per song is too cheap, and are discussing a price hike that would increase the tariff to $1.25 up to $2.99 per song.

The current tariff is too much for most people, as saggy sales indicate. "99 cents a song is a pricing model designed to protect CD sales, and not one designed to move people into a new digital music marketplace," senior staff attorney at the Electronic Frontier Foundation Fred Lohmann told us recently. "If an iPod has room for 4,000, does Apple think people are getting to spend $4,000 filling it with music?"

As it is, online music stores are a loss leader, or barely cover operating expenses. Apple alone can consider its online store a success: it has driven demand for its iPod and given itself a toe-hold in a valuable new consumer market. Some analysts reckon Apple's cut is as high as 33 cents, but once the bandwidth, manpower and marketing are counted - and let's not forget that Apple pays Thomson an MP3 licensing fee on the iTunes software it gives away - there's very little to the bottom line. What it does do is indirectly help the iPod.

The iPod's success wasn't always assured. Almost exactly two years ago, we reported that Apple had seen a 50 per cent drop in demand for the iPod, launched to great fanfare, and an apologetic CFO Fred Anderson "defended the figures, and said other MP3 manufacturers had seen steeper declines". In the last quarter Apple generated $256 million worth of income from iPod sales and admitted it could have been higher if it had made more.

It's not a pretty picture for the other download services, all of which take the distribution costs onboard. What does the customer get for this? A very low bit rate file encumbered with DRM. Now the major labels want to make online music downloads even more expensive than conventional CDs, so customers are invited to pay more for less.

The major labels want us to view the DRM-encumbered download services as the carrot to the legal stick. But paying more for less is a business proposition that has only worked for the record industry when it has been able to make the previous generation of technology, such as vinyl, obsolete. It doesn't have that option anymore. CD sales and "pirate" downloads dwarf DRM online downloads.

Von Lohmann thinks the online services may yet be a success, although they need to offer much more for less. "Maybe. With no DRM, and by bringing the price way down and by having much more music - at 25 cents a song or with a flat rate pricing. That could be compelling." ®

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