Higher Prices On iTunes: Bad For Sales, Good For Business

In a move that lots of people talked about—because this is the Internet and people have nothing better to do than discuss than the business practices of companies they have nothing to do with—iTunes last week instituted a variable pricing scheme whereby songs could go for more (or, presumably, less) than the $0.99 base rate they had been set at since the service’s inception. Shortly after the inception, some songs saw their price rise by thirty cents, to $1.29, prompting recent Billboard hire Glenn “Coolfer” Peoples to write an article about what effect the change had on the songs’ rankings in the iTunes charts. His conclusion: the hike resulted in a loss of sales, as the songs lost an average of 5.3 places on the charts two days after their price rose. While the general reaction seemed to be that this showed the higher prices to be a bad idea, the conclusion isn’t quite so straightforward.

The article prompted one wag to ask, “Does this prove that pop songs really are all the same?” Well, no. The money someone pays on iTunes for a song doesn’t represent the song’s worth; it represents the worth of the experience of listening to the song in the particular conditions iTunes offers, which is a very different thing. What would one person pay to have “Smells Like Teen Spirit,” say, exist, rather than not exist? That is the song’s worth.

An iTunes customer knows that the song is already there, and that conceivably they could just watch the video on MTV.com or YouTube, or borrow a friend’s CD, or whatever. That 99 cents is how much you think it’s worth to be able to have and keep the song on your computer and to transfer it to your iPod, both in terms of being able to listen to it in those forms and the ancillary benefit of the social status you might accrue from people seeing it in your iTunes library or on your iPod. More than anything about the fundamental nature of pop songs, this demonstrates how successful iTunes was in turning music into a fungible commodity. Music’s primary consumers (us?) know very well that there’s a big difference between one song and another, whether your metric be artistic quality, replay value, rarity, or coolness. But iTunes mainly wipes out those distinctions, at least for the music in its catalog. No longer does packaging matter, so you don’t buy something because it looks good on your shelf or is pleasing to touch. No longer does the effort required to acquire something matter, so you don’t buy something because you feel good about finding it. Though the charts still matter, marking a continued distinction between those who buy from the front of the store at Sam Goody and those who dig through the employee recommendations at Other Music, it’s hard to pretend they matter as much. While the secondary market still exists for true collectors, any other distinctions have been collapsed.

But mostly, these numbers just show a basic demand curve: the price went up a little, and demand went down a little. Nothing mysterious about that. It does, however, show how well-thought-out the original iTunes scheme was. In terms of cultivating a large audience, 99 cents was the more-or-less perfect price for an individual song. It seemed cheap if you really wanted the song, and a reasonable indulgence if you were just curious. For that three to five minute experience, a penny short of a dollar was perfect. And, as much as we may valorize small companies, it was only someone of Apple’s size that could come in. Tragedy of the commons, y’all: it’s in everyone’s interest to have a low price point, but any individual company wants it higher. So someone with Apple’s clout can come in and twist arms and send out very simple and unchangeable agreements and have that work. Meanwhile, Qtrax is saddled with so many limitations that it’s not workable.

The real point here, though, comes later in the piece:

The average final rank of the songs that dropped on the chart is about #45 and the average chart drop was about three positions. On the most recent Soundscan top track downloads chart, the difference between the #42 and the #45 chart position equals weekly sales of about 2,080 units, or about 300 units per day. A #42 track sells almost 9,800 downloads in two days. A #45 track sells just under 9,200 downloads in two days. The retail value of the #42 position over two days at $0.99 per track is about $9,700. The retail value of the lower #45 position over two days at the higher $1.29 price is about $11, 861. The increase of $0.30 per track offsets the drop in units sold by nearly $2,200 over two days.

The difference in rankings is magnified at higher positions on the chart. A song that drops from #7 to #10, for example, could lose about 4,500 units over two days but gain an incremental $3,600.

In other words, though the higher price may be bad for absolute sales numbers and chart position and mass appeal, it is better for profits. The Internet may not believe in profits anymore, but someone has to.

iTunes Price Changes Hurt Some Rankings [Billboard.biz]

Tags: iTunes