Mike McGuireLast year Steve Jobs wrote an open letter to the music industry imploring the industry to drop their requirements that songs sold on iTunes be wrapped with the company’s FairPlay DRM.
On Tuesday, Jan. 6, 2009, Phil Schiller, Apple’s worldwide senior VP for product marketing, got to announce that the US’ largest music retailer, iTunes was (mostly) DRM-free. (It was the last keynote at the company’s final year at the Macworld tradeshow and Schiller was filling the slot that vacated by Apple CEO Steve Jobs. If you haven’t been in a cave, you’ve probably noticed a few news stories about this.)
While no iPhone-status product announcements came forth, Schiller did get to announce iLife ‘09, containing significant upgrades to the company’s iLife suite of media applications – iPhoto and iMovie and Garageband – including facial recognition and location-awareness to iPhoto’s navigation and management capabilities. And he got to intro the latest MacBook Pro sporting a 17” LED backlit screen, a product designed for the power user who does not fear a $2,799 price tag. Nice. Very nice stuff, indeed.
But you know what? Schiller got to make the announcement that I figure Jobs had wanted to make for the past three or four Macworld keynotes: unlocking the FairPlay DRM shackles from the entire iTunes store’s catalog of songs. As of today, eight of the 10 million songs on iTunes will be DRM-free, $.99 and encoded at 256kbps (previously, only EMI had licensed its catalog to iTunes without the requirement for DRM). By April, the company will have all 10 million songs in the catalog available DRM-free. What’s more, iPhone users will now be able to downloads songs directly from iTunes over AT&T’s 3G network. (I remain skeptical about the level of consumer interest in over-the-air downloads here in the US.)
There is a catch (there always is) and that is that instead of a single price point, songs will be DRM-free, encoded at 256kbps but will be sold at $.69, $.99 or $1.29.
What happened? The labels realized a few things. Such as: a) encrypted DRM solutions have not been able to do what they were designed to do b) the largest beneficiaries of the proprietary FairPlay DRM (Apple and iTunes) didn’t even want to keep using it c) Apple’s other competitors just weren’t expanding the market as rapidly as they’d hoped. In fact, while the labels were working with Amazon to give the online retailer a catalog of DRM-free songs (albeit a smaller overall catalog than iTunes), Apple continued to dominate the market. In early 2008, Apple announced it had 65 million credit cards on account with iTunes. Today, the company announced there are 75 million credit cards on account. Oh, and since the store opened in 2003, its managed to sell six billion songs worldwide.
It would appear that Apple was able to trade that market position for getting the other three major labels – Universal, Warner and SonyBMG – to drop the DRM requirement. In return, Apple agreed to a tiered pricing structure. Now variable or tiered pricing has been a sore spot in the Apple-major label relationship for sometime. According to the carefully worded press release “…based on what the music labels charge Apple, songs on iTunes will be available at one of three price points — 69 cents, 99 cents and $1.29 — with many more songs priced at 69 cents than $1.29.”
When pressed, Apple execs said how the pricing tiers will apply to the catalog of songs will be determined by the labels. That’s it. No more details. Now, some folks have ventured that the pricing would be determined by popularity with the most popular getting the higher price tag with the less popular songs getting the $.99 and $.69 price tags. Perhaps.
Frankly, I view this as a fairly risky experiment by the labels, and I’ve been lauding the labels for the past year for their willingness to experiment with various social media platforms such as iMeem and Last.FM, but those are primarily ad-supported models – an approach that’s still pretty shaky in terms of reliable revenue streams. iTunes is the one service that’s proven it can make money online for the music labels, flying in the face of many who believe that virtually online media consumers don’t want to pay for anything.
To me, Apple’s put the onus squarely on the labels to make this work. The iTunes store is dominant because it delivers a seamless, predictable and reliable experience for consumers who are willing to pay for music online. It has built the kind of consumer equity that is the envy of competitors and causes a bit of concern among media company executives wondering about who really owns the consumer/audience in an iTunes-dominated world.
Perhaps the tiered-pricing will be all but ignored by iTunes customers who have completely bought into the selection, ease-of-use and predictability of the experience.
Let’s just say I have my doubts about that. You?
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5 responses so far ↓
1 Marcus Warner January 8, 2009 at 8:30 am
I have to agree with you on the tiered pricing, will this affect a key driver in the Itunes proposition – ease of use and a uniformed, simple service.
The problem with the tiered pricing, particularly when you consider labels putting a $1.29 price on the most in demand songs, is that there is a tipping point when people decide to download illegally as the price goes above what they are willing to pay. In my mind, in the long term, labels need to fostering a culture where people are willing to pay for digital content, the extra 20cents (I am British) is hardly worth jeopardising that surely?
2 shishir January 12, 2009 at 10:45 am
Well Apple has brought down its prices but its not only a question of a company but a matter to look upon as why Apple has slashed its prices. I have my views on http://controversial-affairs.blogspot.com/2009/01/price-or-prize.html
3 Spencer January 14, 2009 at 11:28 am
Pricing songs downloads has always been an elusive topic. Perhaps, the pricing should be based in a traditional manner: fixed cost + variable cost + profit margin. If you remove the physical packaging and physical distribution costs from the traditional pricing you are left with the recording and marketing costs that need to be recovered. Break those costs down to the discrete song level + profit and voila?? Tiered pricing increases the margin side which may have a negative buying behavior effect and may counter demand. Of course, there are volumes written on this in the halls of economics academia.
4 Mike McGuire January 14, 2009 at 11:46 am
Spencer,
Thanks much for the comment.
Agreed. Recent conversations with a few of the newer label execs are accepting that the tactic of tiered pricing is a vestige of a reliance on physical goods and the old promotion-distribution construct the labels built.That said, there appears to be some interest in variable pricing going forward. I find that fascinating as an idea but wonder how such a system gets positoned with consumers in this day and age.
5 Mike McGuire January 14, 2009 at 11:56 am
Shishir…Have to disagree with your take on this. While WalMart and Amazon are “in the market” and are making sales, they don’t appear to have significantly narrowed the gap with Apple.
As much as anything, I think removing the DRM was what Apple wanted and was willing to give in on pricing.