Book Publishers Beware! At iTunes, Expensive Music Equals Slower Sales.
After years of complaints, last year the music labels finally got what they wanted from Apple–the ability to raise prices on their songs. Last April, iTunes introduced a “variable pricing” scheme, which gave the labels the ability to move prices from 99 cents a song to $1.29 (and for some tracks, down to 69 cents).
The result? Music sales are slowing.
Warner Music Group (WMG) said this morning that it has seen unit sales growth at Apple’s (AAPL) iTunes decelerate since the price increase: Industrywide, year-over-year “digital track equivalent album unit growth” was at five percent in the December quarter, down sequentially from 10 percent in the September quarter and 11 percent in the June quarter.
And since iTunes sales make up the majority of Warner’s digital revenue, growth is contracting there, too. In the last quarter, digital revenue at the label was up eight percent compared with a year earlier, when that number was 20 percent.
The positive spin here is that music downloads are a “mature” business anyway. So by raising prices, the labels are simply extracting whatever value they can.
And indeed, Warner CEO Edgar Bronfman Jr. argued that the pricing change has been a “net positive” for Warner. But he also suggested that in hindsight, perhaps it wasn’t a great idea to raise prices 30 percent during a recession.
So here’s the question for the book industry, which has been working very hard to boost the price for its digital goods: Which lesson do you learn from this?
My gut is that the industry will see this parable the way Bronfman apparently does: If you can move prices up early in the digital adoption cycle, you’re much better off.
During the earnings call, Bronfman sounded a bit wistful as he noted the book industry’s apparent success, with the help of Apple, at raising prices above the $9.99 floor Amazon (AMZN) had set. “It’s interesting that the book publishing industry, on the iPad, has much more flexibility than the music industry had,” he noted.
The counter here is the one that seems obvious to everyone else: Lower prices and you can sell more stuff. Looks like we’ll be getting another real-world test of this economics lesson soon.
Comments
So, the music recording industry, in the form of Edgar Bronfman, believes that tunes are price inelastic.
I find that really difficult to accept. I suspect that songs/music is very much elastic.
Posted by davebarnes at February 9th, 2010 at 3:28 pmWhat the publishers all want is to put the money they save from the tremendous production and distribution costs right into their pockets. They aren't even willing to play, 'Let's make a deal!', while we buy the product that allows this.
Posted by Phubaiguy at February 9th, 2010 at 3:55 pm$0.99 for songs and $9.99 for e-books seem like such no-brainers that I'm curious what studies, polling, quants or other magic beans publishers are counting that lead them to believe “variable pricing” for iPod, Kindles or iPads will lead to greater profits. Amazon and Apple seem to be constantly working to reduce the friction in their prospective customers purchasing decisions while it appears publishers have done little but increase it. Perhaps Apple's strategy is to let book publishers hang themselves with enough rope while catching Amazon in the noose.
Posted by kawika at February 9th, 2010 at 5:01 pmd-d-d DUH!
Posted by bjdrums at February 9th, 2010 at 5:19 pmForget sequential quarters, all from after the price hike…what was growth in the year-ago quarter? I have seen a Jan. 7 Billboard story saying that digital tracks growth overall slipped to 8% in 2009 (including 3 months pre-price hike) from 26% in 2008, 45% in 2007 and 65% in 2006. Seems like the deceleration dramatically increased!
Posted by ampressman at February 9th, 2010 at 5:26 pmYou are right, because for many people, the alternative to paying $0.99 for a song is paying $0.00 on p2p or some other means. People only pay real money for songs because it is cheap and convenient.
Posted by Mike Nguyen at February 9th, 2010 at 6:48 pmThe only way to find out if this is truly the case is to see what happens post-recession. Music is obviously a very “optional” luxury purchase.
And the .99 version of songs is STILL AVAILABLE. The 1.29 version is just an option. Don't want to spend the extra cents? No problem, get the old .99 version. Easy.
I think it's a result of The Great Recession, almost exclusively.
They could sell tracks for $0.01, but if you're terrified that you're going to lose your job, or if you already have no $, then you have no $… Simple. You're going to either download it for free elsewhere, or do without. Simple.
Posted by facebook-645700061 at February 9th, 2010 at 8:14 pmSlower sales of course. But from a revenue perspective, if we assume from what is said in the article that:
- They increased price from 30%
- Their sales increased of 8% in spite of 20% (they are other reasons than pricing for which this increase would slow down but let's not consider them)
From quick maths it seems that they're better of with the price increase (17% more revenue…).
Am i wrong?
Posted by graffour at February 9th, 2010 at 8:19 pmWell done. :) Ain't math fun?
Posted by facebook-645700061 at February 9th, 2010 at 8:35 pmMusic guys are just trying to get more money out a revenue stream that is slowing down. Publishers have a different incentive, since they will actually make less money per book sold under the “agency model” they're moving to. But they're convinced that doing so will let them keep up digital prices for a longer period of time, which they think will protect ink-and-paper tomes.
Posted by PKafka at February 9th, 2010 at 9:46 pmThey are indeed generating more revenue from digital then they did a year ago – hence Bronfman's “net positive” comment. The question is whether they would be generating much *more* if they lowered prices significantly.
Posted by PKafka at February 9th, 2010 at 9:47 pmYup, they have been decelerating for a while, which the music industry has known about but has been unwilling to talk that much about. So I'm sure revenue growth would have continued to slow without the prices increases. But Bronfman made a point of connecting the two data points.
Posted by PKafka at February 9th, 2010 at 9:49 pmWe extensively tested different download price points across a wide range of music 5+ years ago when I was with Rhapsody. The conclusion was clear – the clearing price was approximately $.35 a track – music was price elastic down to that level – I doubt it has changed, but no one will actually follow the data anyway.
Posted by Sean Ryan at February 9th, 2010 at 10:12 pmBook publishers are focused on setting an artificial price. A price that has no relation to the actual cost of distributing a digital file, but has everything to do with setting a price somewhat close to a typical trade paperback. Hmm, why should I pay the same price for downloading a relatively small digital file vs. the price covering your cost of printing, binding, shipping a book to a retailer or distributor, then, oh yeah, paying the cost of those retailers to return unsold copies.
Publishers may have won the initial e-book skirmish with Amazon, but they're going to lose that pricing argument in the long haul. Digital distribution of books will simply not command the same prices as physical copies of books. And I haven't seen a publisher who can successfully market that message — pay us a premium for a digital file that costs us pennies to distribute.
As you pointed out with relation to the music business, raise prices and sales volumes decrease. I'll be curious to watch a true book publisher 2.0 build a successful business model based on – low overhead for the publisher's fixed costs, attractive low pricing to encourage impulse purchases, free e-book giveaways to build audiences for new writers (permanently free titles – not some two-week promo), etc.
Unfortunately, the majority of NYC publishers will be headed down the same road as music companies – trying to maintain high pricing for digital files with distribution costs measured in pennies, suing your most passionate fans, grasping at assorted straws vs. pursing a low-price, high volume business model.
I wrote about this in a recent blog post. I think book publishers are inviting an eBook Napster – http://jeffrutherford.com/napster-for-ebooks-eb...
Posted by jeffrutherford at February 9th, 2010 at 10:42 pmHi Sean. Just to be clear: Want to define “clearing price” for us? Assume that means that lowering the price below that level doesn't change sales volume, but want to be clear.
More important — when you determined that lower prices = higher sales, and reported back to the labels, what was their reaction?
Posted by PKafka at February 9th, 2010 at 11:10 pm“Perhaps Apple's strategy is to let book publishers hang themselves with enough rope while catching Amazon in the noose.”
Boy did you nail that one with a great turn of phrase!
Posted by raycote at February 9th, 2010 at 11:25 pmRight – I'm agreeing with the premise that the iTunes price hike has
Posted by ampressman at February 9th, 2010 at 11:48 pmreally hurt sales growth, even more than Bronfman lets on. But we
could tell more if we knew the sequential sales growth numbers from
the quarters before the price hike. Just asking for more/better data,
please.
Peter – in running DashGo's catalog through the limited price flexibility options we have here are my learnings across a few examples:
1) Taking a track from 99 cents to 1.29 decreases units but raises overall revenue an average of 8% per title. A trade our clients are willing to make
2) Reducing a tracks price to $0.69 has a net unit effect of virtually nil; while a 99 cent verses $1.29 price only matters if there is other higher priced versions. Currently running a 69 vs 99 challenge of virtually the same track and see no change in leaderboards; once a title is entrenched I'm guessing it's so hard to read difference between 69 and 99 vs the extra digit in 1.29 that consumers don't care.
That said, one true learning has really crept out – for consumers there is iTunes and then there is the promise of “free”; be it ad-supported or all you can eat subscription. And price helps on iTunes. I'd be willing to bet that an iTunes competitor would not win out even at a 35 cent track price (which btw is effectively eMusics price). Many have tried at 79 and 89 and 88 and don't impact volume or total revenue. Until Android and Amazon devices and storefronts get more competitive with devices, iTunes will dominate actual sales, and all the price changes in the world will have no impact for labels or fans who won't click over to save a perceived marginal amount of money.
Music pricing brings to mind Dan Ariely's example from Predictably Irrational noted here: http://www.fivecentnickel.com/2009/08/05/the-fa...
Substitute 15-minute drive with 15-minute new customer and credit card registration process and it's the same example on the internet.
Posted by benpatterson at February 10th, 2010 at 12:03 amInteresting. What do you think accounts for your experience vs. Sean's price testing, which led to the opposite conclusion? The major difference I can think of is that Sean's platform was *not* selling MP3s or any other iTunes-compatible format.
Posted by PKafka at February 10th, 2010 at 12:18 amTwo differences:
Posted by benpatterson at February 10th, 2010 at 12:42 amSo, if the book industry falls flat, we can blame Apple now?
Posted by heartlessgamer at February 10th, 2010 at 12:51 amIt's like a snackbar we ran at work once. We raised soda prices to 55 cents a can instead of just 50. We were down significantly in revenue because instead of buying two sodas for a dollar, they would buy one and that 0.45 would dispear somewhere else. Changed back and stuck with 50 cent drinks and saw our revenue nearly double (back to its original rate).
Small example, but applicable IMHO.
Posted by heartlessgamer at February 10th, 2010 at 12:54 amI do so enjoy watching media middlemen squirm. It's almost as entertaining as the dreck they put out. No, come to think of it, it is more entertaining.
Posted by macbeach at February 10th, 2010 at 4:20 amRead up on anchoring (http://en.wikipedia.org/wiki/Anchoring)
Posted by Tal Rotbart at February 10th, 2010 at 6:22 amWhat I say is that they make more with the price increase than without the price increase (assuming they would have kept 20% growth and the same prices), not that they make more than last year. But that's probably what Bronfman meant by a “net positive” impact.
Considering a price decrease, elsaticities are not linear and we clearly lack data.
Posted by graffour at February 10th, 2010 at 10:30 amBut from what has observed: if a 30% price increase generates 10% of volume decrease (if 100 is last year basis, they would have sold 120 w/o price increase, with the increase they sold 108=> -10%), then we have a price elasticity of -0.33.
Meaning that a price decrease of let's say 50%, would generate 17% of additional sales, leading to a huge revenue decrease.
Part of the complication here is that download sales have been contracting for some time, so we have to assume that revenue growth would have shrunk from 20% without the price increase (which is what Bronfman is suggesting). But as you and other readers note, we lack enough data here to figure out the exact impact.
Posted by PKafka at February 10th, 2010 at 12:16 pm“The positive spin here is that music downloads are a “mature” business anyway. So by raising prices, the labels are simply extracting whatever value they can.”
peter, i think with your first sentence of the reply & the above quote from your piece.
from what i've gathered, the breakdown for variable pricing on iTunes is somethign like this:
$1.29 – Top 5-10% of songs available
$.99 – 85-95%
$.69 – <5%
i think there's a natural heuristic for consumers to turn their backs on pricing >$1 (they have to think a/b it)
i've always believed the highest revenue would come if they focused their attention on the $.69 price point where consumers would believe they found “great deals” and also able to acquire quality long tail content at cheaper prices…it would make them dig!
either way, as somebody alluded to below, i think the ideal price point is ~$.25
-adam w.
Posted by Adam Wexler at February 10th, 2010 at 4:18 pmhello i read this site and it is good site and more info!
Posted by zixmail pricing at June 22nd, 2010 at 7:45 amYup, they have been decelerating for a while, which the music industry has known about but has been unwilling to talk that much about. So I'm sure revenue growth would have continued to slow without the prices increases. But Bronfman made a point of connecting the two data points.
Posted by yuregininsesi at July 1st, 2010 at 1:18 pmgood for them
Posted by Live Rock Music at August 5th, 2010 at 1:48 am