iTunes and music price discrimination

Lynne Kiesling

You may have noticed on Tuesday that Apple’s iTunes store implemented price discrimination for the purchase of singles.

On Tuesday, Apple’s traditional 99-cent song price was shelved. From now on, record labels can choose to charge $1.29 for new releases. Some older catalog titles will sell for 69 cents, and everything else will be available for the tried-and-true 99 cents.

The pricing structure decision is the record label’s, not Apple’s, and the label is the one making the calculation of whether or not the additional revenue from selling the $1.29 songs at that higher price more than offsets the reduction in revenue from the reduction in quantity demanded for those songs plus the reduction in revenue from selling the older songs at $0.69. Put another way, they have to estimate whether the price elasticity of demand for the new songs is sufficiently low to make the higher price profitable, as well as whether the price elasticity of demand for the older songs is sufficiently high to make the lower price profitable.

The CNet article linked above contains a good discussion of the difficulty of determining a price structure and estimating willingness to pay. But there’s another issue, discussed in both the CNet article and this Wired blog post on the change:

Although new prices will be a step in the right direction for many iTunes customers, they are a superficial fix for iTunes’ real threat: that most consumers and even some artists think 69 cents per track is far too dear.

According to Nielsen SoundScan, paid downloads growth slowed last year, increasing 27 percent in 2008, where it increased 45 percent in 2007. Meanwhile, free streaming services accessed through web browsers and mobile apps are growing in popularity. Apple and the labels raising the prices 30 percent on popular songs and dropping them 30 percent on back catalog tracks won’t help them compete with shifting consumer behavior.

Note also that in the paid music market, the structure has become a duopoly; Amazon has competed effectively with iTunes, matching their $0.99 pricing and offering a streamlined download application that connects directly with your iTunes application. I’ve used both recently, although I have to admit that I’ve been using Amazon more just to make sure and support competition … Wal-Mart also has an online music store, and both Amazon and Wal-Mart have followed iTunes in changing their pricing, but not exactly:

The Electronista blog noted that a new $1.29 price, the same top-level cost at iTunes, was applied to ten of Amazon.com’s top 100 songs, but a reduced $0.79 price was also applied more liberally to older tracks than over at iTunes. Wal-Mart, for its part, caps the top price at $1.24, and sells its bargain bin tracks at $0.64.