Will The Launch Of AmazonMP3 Result In A Digital-Music Price War?

Sep 27th, 2007 // 10 Comments

amazonmp3.jpgIt’s been a couple of days since Amazon’s foray into the MP3 world finally opened, and so far the response has been positive despite the lack of two major labels. (It probably helps that one of the majors on board is Universal, which puts out more music than pretty much anyone else.) But over at TheStreet.com, one writer sees Amazon’s entry into the market as a sign that prices for MP3s–and not files with copy protection–will take a nosedive, thus bringing music down to a price point where people might actually want to pay for it again:

Amazon’s new store may cause that retaining wall to crumble, prompting many Apple customers to buy songs that offer them better options.

But what about iTunes Plus, the service Apple launched earlier this year that lets you buy DRM-free songs? Well, here’s where things will really start to get interesting:

ITunes Plus sells those DRM-free songs for $1.29 each. Amazon sells the same songs for either 89 cents or 99 cents. That’s a discount of between 23% and 31% from iTunes’ DRM-free songs. Many of Amazon’s best-selling songs — including those in the Top 100 albums — are retailing for the lower price.

There are two reasons this is interesting: First, it’s setting up a new tech-titan smackdown between Apple CEO Steve Jobs, the master strategist, and Amazon CEO Jeff Bezos, the Crazy Eddie of the Internet.

Bezos is doing here what he does best: Building market share and volume by slashing prices. Jobs won’t take that sitting down, and he is probably plotting some cunning strategy to hold on to its iTunes customers.

Second, it’s leading to a full-blown price war. In fact, the first shot has been fired by Amazon with its 31% discount of popular songs. Over time, more companies are going to be jumping into the DRM-free market, each one trying to build market share with bigger discounts.

In a few short years, Apple and iTunes could be locked into the kind of deep-discounting that Tower Records and CD Wherehouse were engaged in during the years before digital downloads swept both aside. That’s going to help rejuvenate volume sales of songs and albums — and bring their prices down to earth.

But over time, it’s also going to ratchet down the margins of music stores like Amazon and Apple. In announcing its new music store, Amazon didn’t say how the discounts would eat into its margins, but you can bet analysts will be grilling Bezos on this in next month’s earnings call.

In the abstract, this argument makes sense, especially given Amazon’s aggressive pricing in other arenas. But watching the labels’ attempts to squeeze every bit of money out of their catalog that they can makes me think that most of them, save the indies that have decided to stick around eMusic, will probably be slow to adapt to this brave new world of low margins. In the eyes of some majors, “variable pricing” seems to be code for “inflating the prices of ‘emphasis tracks’ to ringtone levels.”

And then there’s the question of whether or not some old-school companies will be able to give up the digital-rights management ghost at all; despite the floundering of services that offer protected Windows Media files, as Silicon Alley Insider noted this morning, the Rolling Stones’ earliest music, which is controlled by ABKCO Music, isn’t available at Amazon’s store, because the company isn’t keen on distributing its music without some sort of protection.

Either way, this brave new future may be the only way to save the recorded-music business–despite the fact that it’s contingent on the margins at labels being slashed dramatically, and the high-rolling executive living being curbed, or cut entirely. Which makes me think that it won’t happen until the business gets a new generation of people in charge, although it’ll probably only really work if said generation hasn’t been spoiled by their forefathers’ excesses and who understand that ships, belts, and budgets need to be tightened.

Let the MP3 Price Wars Begin [TheStreet.com]

  1. DavidWatts

    Ironically, Feist’s “1234,” from the iPod commercial, is their top download. Oh, Apple. Will you ever end your dominance?

  2. coolfer

    your vision of poorly paid executives probably isn’t going to materialize. it would be bad from a recruitment point of view and especially bad from an incentive point of view. the fat has already been trimmed greatly over the course of the decade. i don’t know if you are familiar with the music industry, but salaries aren’t terribly high relative to other industries (especially lower in the ranks, but really across the board). i find this common blogger attitude to be hilarious. “you’re just gonna have to tighten the belt and get by on less,” people often write (condescendingly) to music execs. believe me, the belt has been tightened. maybe the need to wear a different belt altogether, but that’s a different issue.

    why don’t you think lower prices (and lower margins) would be good for sales? it’s a frequent argument. people want lower prices, right? do you think they’d buy more music? if so, there could be a net increase in revenues and music execs would get to keep their “high-rolling” lifestyles.

    another thing about prices wars: they don’t always impact wholesale prices. often the war takes place at the retail level. loss-leading prices, for example, tend to be absorbed completely by retailers.

  3. Rob Murphy

    I know you come at this story from a “digital music price wars — how will it affect the music industry?” angle. But I’d like to make an argument as to why the coming “price wars” may be less industry-altering than people are currently thinking — and why there may not really be much of a “price war” after all.

    Put quite simply — Apple doesn’t really care as much as most people seem to think about actually selling content on the iTMS [see, Jobs tells NBC Uni to "suck it" when NBC Uni wants to sell "The Office" and "Heroes" for $5/ep.]. Apple’s business need is to protect sales of the iPod, not sales from the iTMS.

    Although Apple is sure to lose some sales to Amazon’s new store, every one of those MP3 files Amazon sells can be played on an iPod — Amazon even thoughtfully offers a little app that helps get the files right into your iTunes library for you [haven't tried it out -- Maura, does that work well?]. People buy the iPod and have made it the market leader because it’s very cool and works very well. It also offers a very slick integrated store-and-library app [iTunes], making it dirt simple for people to buy and add new content if they’re not technical — or if they’re just lazy. If people buy lots of content from the iTMS, they develop more and more hardware lock-in, for sure. But they wouldn’t be buying that content if they didn’t like the iPod in the first place.

    My point is that it’s not sales — sales that could be impacted by a price war!!! — from the iTMS that’s keeping the iPod flying high. It’s really the other way around — it’s the popularity of the iPod that’s driving sales at the iTMS [because it's so easy to buy, load up on the iPod, etc.]. [If you've ever seen the studies that divide the number of iTMS downloads by the number of iPods sold, you know that most iPods have very little content from the store.] That ease-of-use-and-integration won’t change just because Amazon sells the content unprotected at a lower price.

    Apple’s biggest business challenge has always been not that someone else would sell unprotected music from major labels for less than the same product from the iTMS, but that someone else would come up with a more-compelling player with a more compelling end-to-end user experience. And there is nothing about Amazon’s “new thing” that poses any challenge whatsoever to the iPod+iTunes experience.

    All of these stories about “the coming price wars” make me snicker a bit. Music with WM-DRM is widely available cheaper than at the iTMS [remember Wal-Mart and their $.88 WMA tracks?], and there are lots of players out there that play this music. But those players don’t sell because the public likes the iPod better. And that cheaper music doesn’t sell because it doesn’t play on the iPod. Amazon’s cheaper music finally will play on the iPod. Other stores will open up that will also sell MP3s that are cheaper than the iTMS.

    The non-iTMS outlets will prosper based mostly on how simple they make it to get these tracks onto the iPod, not on how much market share they can “win” from Apple through a “price war”. If the non-iTMS stores don’t make it as-easy-as-using-iTunes easy to get their cheaper songs on the iPod, people aren’t going to use them. You’re only saving $.10 per track fercrissakes — how much frustration are you willing to put up with for that?

    I suspect Apple and Jobs don’t really give much of a flip about Amazon and their “let’s have a price war!” game, and that they likely won’t budge on pricing for a while. Until someone figures out a way to make the iPod-with-non-iTMS-downloads experience seamless for the average user [and I'm not talking about music bloggers and tech geeks who know how to add "foreign" songs to their library and who strip the DRM off anything they buy anyway], sales from the iTMS won’t be much affected, and this will all be a move-along-nothing-to-see-here thing for Apple and the labels.

  4. Catbirdseat

    While I don’t disagree that Apple’s main interest is probably in iPods, not ITMS sales, it should also be considered, as DaringFireball recently pointed out, that ITMS sales have probably netted Apple somewhere in the neighborhood of $900 million. Steve probably wouldn’t be too happy about that revenue stream going away.

    [daringfireball.net]

  5. Catbirdseat

    P.S. I can’t help but feel like all of this hullaballoo about pricing, protected/unprotected formats, device interoperability, market share… it’s just a bunch of nonsense that we dinosaurs (aka people out of their teens) are just wasting our breath on.

    Most kids today think music is/should be free. Doesn’t matter if you price a track at .99, .89, or .02– you’ve still got to compete with “free.”

  6. brainchild

    i would love for emusic to jump in and smash all of the competitors.

    any idea why EMI and UMG haven’t struck up a deal to make their catalogue available on emusic yet?

  7. Catbirdseat

    @brainchild: Because they are unhappy with the amounts that eMusic pays out.

    [hypebot.typepad.com]

  8. Chris Molanphy

    As usual, my man DHMBIB nails it. Agreed on all counts.

    All I’d add to this excellent discussion is the one piece of intrigue that I know deep industry-watchers will be eyeing: What Universal hopes to gain by (a) ending yearly contracts with Apple and threatening to pull content any month now; and (b) letting Amazon have the same content, DRM-free, for a lower retail price. (I say “retail” because I assume The Thug won’t budge on his wholesale price, and it’s Bezos doing the discounting. Still, Universal hates seeing their big hits priced under $1, so the end-user price matters here.)

    Basically, the theory ’round the campfire is, Universal is using Amazon as a wedge to create competition for Apple, and they’ll continue to tolerate sub-$1 hit-song pricing for a while longer; but the minute they sense that neither Apple nor Amazon has them over a barrel, they’re going to demand that hits be priced at $2 or more, take it or leave it.

    The only question in this scenario is, will this work? Again, throwing props on the very perceptive DHMBIB, there’s more than a bit of wishful thinking on Universal’s part believing Amazon’s going to take anything more than a decent minority stake away from iTunes. It’s the experience, stupid.

  9. CharlesRockyPamplin

    @syd: @dennisobell: hear hear. I’ve just interviewed for a job with ‘a major specialist download service’- ‘specialist’ in that spinal tap, ‘our audience are becoming more selective’ way.

    one of the key benefits about this site is higher bitrate, longer track preview times, and compatibility with DJ software such as Tracktion, Final Scratch etc- which, of course iTunes don’t support. BUT, their files will work on Itunes.

    Someone made a comparison with Tower records and CD Warehouse earlier. that’s spot on. There’s not going to be one gigantic download service much in the way that there wasn’t one VHS Video rental place- sure, one kind of technology won out, but different retailers offered different benefits (your Porn outlet, your Euro/Art outlet, etc etc) using that one platform.

    there’s lots of smaller, download stores that have widgets and rosters and features that appeal to select buyers, or have more user friendly interfaces etc. like record stores were/are. but yeah, ultimately, Apple win out because it’s JUST THERE, but to some extent, the idea of brand loyalty still exists. these smaller places are creating a very small but sustainable niche for themselves.

  10. syd

    I rather agree that there will be a “price war”, but I also think Apple will do it’s best to turn attention away from just the price issue, but also towards their own more “feature rich” experience. And while I hope they do bring down prices, it seems to me the “new Apple” would be more likely to emphasize the added experience/content/slickness of using iTMS over amzMP3.

    It’s an interesting time to watch all this unfold bc Apple’s whole strategy is based on protecting their brand and their end-user and while I think Apple ultimately has what they think is their customers best interest in mind, they don’t always act in *my* best interest. Which, as a former “apple fanboy”, is actually starting to piss me off. Buy an iPhone–you can’t manually manage music or copy and paste. And King Jobs would have you believe you don’t actually *want* to do either of those things. Which, in fact *I* do.

    In this instance amazon came in and offered The Magic Numbers record I’ve been meaning to buy for a few bucks less at a MUCH higher bitrate, WITHOUT DRM and my impulse buying began—I think I’ve bought a total of 5 amzMP3 records in the last two days, contrast that with maybe 1 every 2 weeks from iTMS. The DRM is always what keeps me from buying from iTunes more regularly and, yes, pirating.

    Usually my purchase cycle is pirate before it comes out, compile a best of the year list and buy all of those albums on vinyl. I find most of my favorites are. That’s neither here nor there really…

    I would point out to DHMBIB that while I agree with most of your points, your conluding point stating the fact that music bloggers and tech geeks are stripping DRM from protected AAC files is, as far as I know, false. It has been a couple of versions of iTunes since we were able to do that, JHymn, the only project I know, has since been relatively quiet. But I could be wrong (and would *love* to know if I am)

    Anyway, great piece Maura, I think you offer an excellent point of view.

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