Music Prices aren’t all they seem

Thereís been a lot of talk about pricing recently in the digital music space, with the music industry, Apple and the EU finding themselves each under the spot light. Rather than go into a detailed critique of key aspects of each issue Iíll take a moment to debunk a a couple of myths.

Firstly, it simply isnít Appleís fault that they charge different prices in different markets. If Apple had their way they would charge the exact same amount for every single track in every single market they operate in. Unfortunately it isnít that simple. Securing rights for digital distribution is done on a market by market basis and each market has its own music market dynamics determined by factors as varied as VAT levels, consumer disposable income, physical music piracy and competition levels in the retail space. Added to that local record labels (both domestic indies and more pertinently local divisions of majors) have very specific pricing structures that have significant variation in different markets.

Apple are stuck with trying to squeeze margins out of what the labels are demanding in license fees. Youíd think of course that the majors would have a consistent international strategy. Well to some degree this is actually a manifestation of that. The labels have fought hard to uphold parallel import restrictions on CD sales that effectively fix prices in markets by outlawing unapproved imports. Last yearís successful court case against CDWOW is evidence of how importantly the majors take being able to set different prices for music depending on where you live. The CDWOW case is also interesting because it illustrates the degree of disconnect that also exists between regional divisions of record labels. CDWOW was actually sourcing its cheap product from South East Asian divisions of some of the very same labels who were dragging them through the courts in the UK. So price fluctuations are driven by a hotch potch mix of global strategies and uncoordinated regional differences.

Finally thereís been some debate about labels wanting to increase the price of music online. I think it is unlikely that labels will secure price hikes, nor do I think it is likely they will even rigorously pursue them. However one analystís claim that whoever came up with the idea knows the music industry like the average bovine comprehends applied mathematics misses the point. This isnít necessarily about label greed. Labels are rightly concerned that legal digital may be just as damaging to them as illegal digital is. Given that the average iPod owner has approx 20-30 iTunes Music Store track on their device that suggest that either they are only buying a couple of albums or they are cherry picking the best tracks from albums. And that is the labelsí big fear: digital allows consumers to skip the filler tracks and just go for the killer tracks, thereby undermining the album based business model the music industry has built itself upon in the last few decades. In that context labels could be understood for wanting to ensure that prices are at a high enough level to dampen a market that could undermine their entire business. Of course the solution is that labels need to take a whole series of actions to ensure that people want to buy entire albums or playlists. To find out more, take a look at my recent report.