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Music biz waves axe at goose that laid golden egg

iTunes price hike a big, big mistake

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The maths just do not add up. The ungrateful record labels that were so desperate to beat piracy, but which overpriced all their own efforts at online music, are now working behind the scenes to drive up the price of music on Apple iTunes. It is a mistake and it will backfire; and judging by statements that are coming out of Apple, the people at Apple know it and are resisting it as best they can.

There have been a number of newspaper exclusives about ongoing negotiations whereby prices are set to rise, and every journalist is telling the same story. The New York Post, for instance, says that the five major record labels - Universal, Sony, BMG, EMI and Warner Music - have already signed new deals with Apple and new pricing is being rolled out now. In effect, the 99 cent pricing that drove Apple iTunes into the limelight and to its subsequent success, will rise to $1.25 per track. In Europe, where Apple iTunes and Napster are keen to launch services similar to the US, Faultline has been told that what's holding the process up is how to find a way to satisfy the powerful royalty collections bodies and that it's all a matter of price.

Some clever people at the record companies are unable to look up the international exchange rate and are setting 1 Great British Pound (currently $1.76) as being equivalent in buying power to $1, effectively driving a 76 per cent price differential between US online music services and their European equivalents. Such pricing is pure greed, and it will lead to continued piracy. If the US price goes up to $1.25 there would still be a 50 per cent differential.

US coverage reports that Apple is resisting the price upgrades by negotiating fewer burns (CD writes) for songs and for playlists, but has drawn the line at offering only albums, which is what record labels are apparently asking for.

Officially no-one is commenting, but what both sides are doing is leaking "information," to the press to push their own case. At 99 cents, Apple is probably not making a lot of money. Some sources suggest that it makes as little as 10 cents, but what it is doing is seeding the market with a new model and it makes its money out of the iPod and Apple Mac sales. Has that model taken hold yet? That's hard to say, but certainly changing it this early, after just one year, is a risk.

Most services have copied Apple with one or two dipping below its pricing, and this could leave Apple as the most expensive service on the market, and effectively kill the goose that laid the golden egg - and egg that may save the record companies from further losses and revenue shrinkage.

At Faultline we've made it clear that a new business model means a new formula for making money. With devices like iPods, people can hold up to 10,000 songs in their hands. This means that collections are getting bigger and bigger. That's an awful lot more money changing hands through iTunes before taking into account the millions more devices that Apple expects to sell this year, or the raft of iPod competitors that have just hit the market.

If people are to get into the habit of owning an awful lot more music, then it is essential that playlists drive the model, not albums. Customers want "type" or "genres" of music to sit together to create mood. They do not want all of a recording artists' work played in one block, and they don't want to be forced to buy it that way either. And what seems ridiculous to us is that all music, regardless of age, should be charged at the same rate.

Our US partner G2 in its Online Reporter has been pushing a "variable rate" pricing idea based on how much current demand there is for a given type of music.

If we look at the US film industry we see that blockbuster films costs a lot to watch at the cinema, subesuently less in a pay-per-view window, and then you can own a permanent record on DVD. Finally, you can see it for nothing on TV as long as you are prepared to put up with adverts.

Music needs its own form of new exploitation model that takes into account that people would like to keep their music in bigger chunks and for longer. If you want to fill an iPod on current prices it's going to cost $10,000. If it was more like $3,000 then more people would fill them. This is a fact that the recording industry will have to digest before it is successful once again, and bullying Apple will just kill any chance the music industry has of arriving at anything like the profitability of its heyday.

© Copyright 2004 Faultline

Faultline is published by Rethink Research, a London-based publishing and consulting firm. This weekly newsletter is an assessment of the impact of events that have happened each week in the world of digital media. Faultline is where media meets technology. Subscription details here.

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