Last year Americans bought 325.7 million songs as digital downloads, according to Nielsen SoundScan–a major leap from the 2004 figure of 140.9 million. What was each of those songs worth? The easy answer is 99 cents, the standard price at the iTunes Music Store, and the price from which cheaper rates seem to be discounted: Wal-Mart charges 88 cents, Yahoo! Music Unlimited charges 79 cents, and indie-music site eMusic (which I write for) sells monthly packages of 40 MP3s for about $10.
But even iTunes’ prices aren’t quite consistent. Download an album with more than ten songs from there, and it’s $9.99–unless it isn’t. Apple has been experimentally pricing some albums a bit higher–or lower. The All-American Rejects’ self-titled 11-song debut album, from 2003, is $5.99; during the holiday rush, when Eminem’s Curtain Call was the only album of the fourth quarter of 2005 to be number one on the Billboard chart for two consecutive weeks, it was $14.99–pricier than at some conventional retailers.
Those are just the prices to buy songs for your computer. If you want to download music onto your mobile phone too, it might cost more–Sprint Nextel, for instance, sells full-song downloads for $2.50 a pop–or it might not. A new wireless carrier called Amp’d–it markets to the Punk’d set, hence the terrible name–sells songs to its subscribers for the magic 99-cent figure, but as a loss leader. Amp’d pays the three major labels with which it’s made deals the standard wholesale price for mobile-phone downloads, which is around $1.25 per song. “Right now, Apple has set the market,” Amp’d chief executive Peter Adderton told Forbes.
To compound the confusion, consider the two very big differences that record labels see between selling physical CDs and digital downloads. First, there’s basically no financial risk in selling sound files beyond recording and promotion costs that have nothing to do with the format of the product. CDs have significant manufacturing and distribution costs; they need to be pressed and printed and assembled and warehoused and shipped and shelved, and if they don’t sell, stores can return them for credit. With downloads, the “manufacturing” cost is an insignificant bandwidth fee; the buyer clicks on a button and boom, there’s the label’s money, and nobody ever has to eat an unsold copy.
The second difference is that while physical CDs can be resold, and often are, you can’t even transfer a protected iTunes or mobile-phone sound file, let alone sell it. Would anyone dream of charging money for a “used” MP3? Record labels backed off a short-lived anti-used-CD crusade in the early 90s, once a lot of conventional record stores made it clear that used bins were keeping them alive (since the profit margin on used CDs is so much higher than it is for new ones). But in the long run, labels have to prefer a format that can’t be passed along without bringing them income.
Wading into this swamp is New York State attorney general Eliot Spitzer, who’s been investigating the music business for a while–last summer he extracted $10 million and an agreement to stop exchanging money and gifts for radio airplay from Sony BMG, and followed that up by prying another $5 million out of Warner Music Group in November. Shortly before Christmas Spitzer subpoenaed all four major labels as part of an investigation into possible price-fixing in digital music. Reports last week said he was studying labels’ contracts with digital music services, specifically “most-favored nation” clauses that guarantee each label the same payment rate as its competitors. (Spitzer’s office, which generally doesn’t comment on ongoing investigations, did not return calls.)
Price-fixing is a tricky thing to prove–Spitzer would have to demonstrate that major labels colluded to set prices. On the surface, at least, it looks like exactly the opposite happened with iTunes: Apple CEO Steve Jobs picked a price and dictated it to the labels. Now that Apple has been selling music files for almost three years, its contracts with major labels are reportedly up for renewal, and the word is that Sony, Warner, and EMI Group don’t like the 99-cent rate; they want prices to be higher for new hits by big-name artists and maybe lower for older, less in-demand tracks, to keep up their sales volume. In September Jobs accused labels that wanted iTunes to raise prices of “getting a little greedy”; it’s unclear why he’s more willing to bend on the album rate than the song rate, though he’s argued in the past that a stable per-song rate is more comprehensible (and palatable) to consumers.
The argument for variable-rate pricing on music downloads rests on the idea that what the people are paying for–the thing that, perhaps, depreciates over time–is the music itself. But that doesn’t seem entirely true; arguably a significant part of what they’re buying is convenience. If it costs a few dollars more to buy an Eminem album as a set of protected, nontransferable files with no artwork and no liner notes from iTunes than it does to go to a record store and buy a higher-fidelity physical copy that you can sell later if you don’t like it, are you crazy to go for the iTunes version? Not if it’s worth it to you to get it instantly, without the hassle of driving to the store or waiting for Amazon to deliver your package.
That’s one kind of convenience. Another is reflected in the fact that digital sales are more often individual songs than complete albums; now that most hits are no longer available as physical singles, buying a single track is often an online-only option and hence potentially worth charging a premium for. If the cost of “any one song’s worth of bytes, right now” is understood to be 99 cents, then “‘My Humps,’ right now” for $1.79 sounds like a rip-off. But it depends on how customers frame what they’re buying. “‘My Humps,’ without having to spring for the whole Black Eyed Peas album” might be a bargain at $1.79.
It’s not a great moment for the music business in general. CD sales are down around eight percent from 2004, and new releases have been doing particularly poorly. Everybody’s got their own explanation for that: labels have their all-purpose excuse of piracy, while record stores blame what Coalition of Independent Music Stores president Don VanCleave called “an absolute, gigantic cesspool of really bad bands” in a Wall Street Journal article. So it’s understandable that labels are looking to squeeze some more money out of digital music, the rare segment of their business that’s enjoying some growth. In a few months we’ll probably know if the value of a hit, plus the value of convenience, adds up to more than a dollar, or if three years of iTunes have solidly established the market rate.