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1 of 2. Apple Inc CEO Steve Jobs discusses his company's ''iTunes'' production at Apple's ''Let's Rock'' media accident in San Francisco, California September 9, 2008.
Credit: Reuters/Robert Galbraith
By Antony Bruno and Glenn Peoples
Sun Jun 21
Vibram Outlet Store, 2009 12:14pm EDT
DENVER/NASHVILLE (Billboard) In April, presently afterward Apple gave labels the competence to set different prices for their songs on iTunes, every track on Pink Floyd's "Dark Side of the Moon" was raised to $1.29.
Some music fans complained about these price increases, and many technology executives and bloggers advertised that labels were making the wrong push. But while sales of individual tracks from "Dark Side of the Moon" dipped by 11%, album sales remained steady. And all sales combined generated about 12% more revenue in the six weeks after iTunes implemented variable pricing than they did in the six weeks before that.
These are the results labels were hoping for when Apple relented and began selling music at three price tiers: 69 cents, 99 cents and $1.29. They certainly put ample work into getting there: It took years of negotiation to get Apple to damage its onepricefitsall format.
Playing with pricing won't solve the music industry's biggest problem: Digital revenue is increasing also slowly to recompense for the decline of CD sales. But variable pricing will assist labels bring in more money from online downloads, according to the results even now.
A Billboard analysis of Nielsen SoundScan data on FebruaryMay sales of hits and a sample of popular catalog songs shows that "Dark Side of the Moon" isn't an anomaly. While variable pricing made sales volume decline, higher prices compensate for that to build more revenue.
Not surprisingly, results alter. The claim for more popular tracks is less acute to higher prices, so sales don't reduce as much. Most lesspopular tracks undergo a larger sales decline and see only marginal revenue gains. There are also notable, if isolated, examples of songs that sell so many aggravate at a higher price that they bring in less money overall.
The math is uncomplicated. So long as sales for higherpriced tracks don't fall more than 29%, labels take in more revenue from $1.29 tracks, after factoring in wholesale rates, distribution fares and mechanical royalties.
Sales of the newspaper top 40 tracks most of which now have the higher wholesale rate fell about 11% in the six weeks after the fire of variable pricing. But retailer revenue from those tracks rose about 10% after the price hike. That means labels took in 20% more revenue for those songs.
"A $1.29 vs. 99 pence price point has not made a famous distinction in buyers appetite because online music," Pali Research critic Richard Greenfield says. "On the album side, you've seen variable pricing as a while and it's not remove that it's had a notable negate impact, so I'm not sure why the single surroundings would be assorted."
Other factors certainly inspired sales. A seasonal sales dip often takes place after the first 15 min. It occurred this year, too: Sales of all tracks, most of which have the same price, declined 5% during the sixweek period following the introduction of variable pricing. The top 200 digital tracks dropped 8.5% during this time. Making the situation more intricate, the price changes took place gradually. On April 7, 33 of the top 100 tracks on iTunes were priced at $1.29; by June 11, 72 of the top 100 had that price.
To measure the shock of amount changes single, Billboard examined extra than 70 classify trails from popular deeds with consistently muscular sales Stevie Wonder, Bob Marley, Bon Jovi, Jack Johnson, Billy Joel, Creedence Clearwater Revival, Sublime, Norah Jones, ABBA and others. The anthems were chosen because they sell steadily merely haven't penetrated spikes from television exposure alternatively medium coverage. So seeing at their bargains ought isolate the efficacy of amount changes.
It's essential to note that the size of Billboard's sample is too small to have statistical significance given the thousands of catalog songs sold on iTunes. But it offers a compelling picture of how variable pricing has helped labels by far.
In the six weeks after iTunes introduced variable pricing, the songs that Billboard looked at sold 20.9% less than they did during the previous 6 weeks. That's a many steeper drop than that of the most popular titles. By path of comparison, the top 40 tracks on Billboard's Hot Digital Songs design declined only 10.8% in the same period frame. But even this deep drop in element sales resulted in a web acquire to the base line. Consumer spending on the catalog tracks dropped about 2% and net revenue to labels rose approximately 6%.
The revenue increase from those catalog tracks has only a fragment of the weight of the top 40 tracks. In a typical week, for instance, the number one track in the country will sell numerous more copies occasionally double as many copies as the combined absolute of entire the catalog tracks in Billboard's specimen. Billboard also looked at track sales from albums in which some or entire tracks were raised to $1.29. The results varied but each example showed a decline in unit sales greater than the total market's 2% drop during the sixweek period.
That's the woods. To truly gauge the impact variable pricing can have on sales, one has to examine the trees. Individual results for characteristic artists show how scrupulous labels must be when they use their newfound pricing power.
Take Sugar Ray's 1999 hit "Every Morning." On the iTunes listing for the album "14:59," the song is priced at 99 cents; on "The Best of Sugar Ray" it costs $1.29. (Both are priced at 99 cents on Amazon.) During the six weeks after variable pricing started, sales of the $1.29 version dropped 41% compared with the 4 weeks ahead the price change.
Revenue from the 99 cent track increased 102%, recommending that the price difference drove fans to the cheaper option. The decline in revenue from the more expensive version was roughly offset by the gains in the less expensive version. Overall, sales for the two tracks dropped approximately 17% and net revenue dropped by about 6%.
Expect alike fluctuations on individual tracks as the labels persist to experiment raising prices for different songs. The decision to heave the price of a song is "a merge of art and science," according to an label source, meaning that it's based on sales data and gut instinct. But label executives wouldn't say more about how those choices are made.
Some labels, including Warner Music Group and Nettwerk Music Group, as well as the digital distributor INgrooves, have used pricing analysis services like Digonex to help advise their decisions. So far, though, most variable pricing decisions have been made through a process more akin to throwing pasta opposition the wall to see if it sticks.
"For the first year hardly ever the labels are looking at this to see how the market reacts," Gartner analyst Mike McGuire says. "It's realtime research
Coach Handbags Clearance, in effect. They need as much data as they can to try to understand where they go from here. I don't know thatthey have enough data to say whether this has worked or not at this point."
It will also take more time to resolve what impact price changes might have on award card sales. NPD Group estimates that about 40% of iTunes sales get cracking award cards, which have set merits. A teen with a $25 gift card is working to spend $25, if that value buys 25 tracks at 99 cents every or 19 at $1.29 each. So far, iTunes hasn't issued cards with new values, and it's too early to determine whether higher prices will lead parents to buy more expensive gift cards.
It's also at present clear how variable pricing will affect publishers' revenue. While labels can make up for lower sale volume with higher wholesale rates, music publishers receive a nailed mechanical rate per download, regardless of price. Lower volume manner less revenue. To them, lower sales volume manner less money. And, of way, the biggest publishers are owned by the largest label teams.
So far the bulk of the analysis on iTunes' new pricing scheme has focused on the $1.29 tier. There's too the lower 69 cent price to consider. But equitable as pricing some tracks at $1.29 probably won't make iTunes users rotate to unlawful filesharing, pricing them at 69 cents virtually certainly won't convince filesharers or fans of physical product to start purchasing downloads. It may not even be the best way to get consumers to buy more music.
Labels have lowered prices on far more tracks than they made more valuable, according to multiple sources. But these changes are only starting to emerge in iTunes.
Right now, detecting those tracks is a hitormiss process. Labels have mostly lowered prices on slowermoving tracks and albums, some from acts that have other popular songs. But Billboard's analysis suggests, and label sources validation, that lowering prices hasn't resulted in significant sales or revenue additions.
The 1971 Jackson 5 song "Maybe Tomorrow" now costs 69 cents, but it continues to sell among 60 and 90 copies per week, as with it did in February and March. Stevie Wonder's "If It's Magic" from "Songs in the Key of Life," also now 69 cents
Vibram Five Fingers, sold fewer copies in May than in April or March. Nor did price slits on all 10 tracks on Canned Heat's "One More River to Cross" result in any increase in volume.
So far, most significant sales increases have get busy combining lower prices with promotions or production them portion of a pack. Universal Music Group Nashville lowered the price of six popular George Strait songs to 69 cents the same week CBS televised a Strait concert. That week track sales jumped 283% from the prior sixweek average. The lowerpriced tracks rose 334% while the tracks that lingered at 99 cents rose only 276%. Combined digital album sales for the three titles jumped 786%.
The same phenomenon tin be seen on Amazon, which often drips the price of one artist's older albums on the day of a fashionable loosen, then promotes the all catalog on its family page.
"You need to set a price point where you're getting people to pay more for more music, as disapproved to attempting to extract an increasingly higher perunit price," McGuire says.
Looking along, the lowest price tier may also give labels the flexibility they need to develop digital products other than the album. For example, if a popular new single sells for $1.29, labels or retailers could nail four other songs from similar but unknown acts and sell them as a parcel.
Potentially, the medleys are infinite. "The behalf of digital is that it gives you endless ways of packaging content," Greenfield says. "The more the names think about bundling in, the better."
This is one way that labels could increase digital sales, which in the past several years have begun to level off. Yearoveryear growth in digital music sales has fallen from 147% in 2005 to 27% in 2008, according to SoundScan data. Through June 7 this year
cheap coach handbags, track sales are up 14% from the same period in 2008. About 75% of iTunes consumers are repeat purchasers rather than new users, according to NPD Group. This won't make up for the huge problem: Worldwide physical sales have fallen 52% in the last decade, according to the IFPI.
Simply increasing the price of music on iTunes won't make up for that decline. To do that, the music industry would need to increase digital revenue across the board, not just the part of it that comes from downloadable tracks.
Of the folk who immediately buy music in anyone format, 2 out of 3 still purchase CDs exclusively, and they are buying less of them, along to NPD Group. Those who do purchase digital music mostly buy it along the track which has left more profitable scrapbook sales in ebb for well.
"We're not going to have $14 billion in iTunes and Amazon sales not material what we do," says NPD Group VP/senior industry analyst of distraction Russ Crupnick. "There's still tens of millions of people who haven't tried the digital music model. Half of them have digital music actors. Some of them use. We're not making the circumstance for them to buy as many CDs as they accustom to and not making the case for them to buy anything from digital. Variable pricing is irrelevant."
This is where other new digital business models could come into play, such as Nokia's Comes With Music model and the variety of collective licensing creature pioneered by Choruss, either of which would bundle the cost of music into other services or products. Both rely less on a revenueperunit model and more on revenueperuser. Or "pricing the consumer versus pricing the content," as one label digital administrative puts it. "We think the real story around price as it relates to the audience for digital music is with respect to the new business models that are userbased as opposed to wholesale pricebased."
These exertions are still amplifying, of course. Variable pricing is here, and it's already responsible for a 10%15% increase in revenue on mean for affected tracks, according to label sources.
"With the commerce continuing to be so hitdriven, having the flexibility to price inventory online the way you do in the traditional world makes a lot of sense," Pali's Greenfield says. "Maximizing the profitability of digital via variable pricing is critical."
(Editing by Dean Gooodman at Reuters)
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