Digital Music Stock Market? 475
tommertron writes "Adam L. Penenberg has a column on Slate about about
the pricing of digital music, specifically, iTunes'
99-cent-a-song model. Basically, he suggests that song prices be determined by
market forces, just like stock and commodities markets. The more a song
gets downloaded, the more it would cost. Song by big-name bands would cost
more, and lesser-known acts would cost less (with a minimum of 25 cents.)" From the article: "Steve Jobs, who has been willing to take a few pennies per download so long as he sells bushels of iPods, calls tiered pricing 'greedy.' That view is shared by millions of consumers who believe the record companies have been gouging them for years. From the buyer's perspective, however, Apple's 99-cents-for-everything model isn't perfect. Isn't 99 cents too much to pay for music that appeals to just a few people?"
ECON 111! (Score:5, Interesting)
No, it's too little. If you put demand and supply as 2 linear equations on a graph, you'll see they're related.
Let's go through a simple situation: demand is x, and supply is y. Now since we have infinite supply (since this is a digital work), we're going to say that y is not supply, but rather money supply (since the money is the only limited part as far as the markets are concerened). As demand goes up, price goes down. If we were at the far-right, with maximum demand, price would tend to zero. If we were at the far-left, with only 1 person wanting the work in question, the price would tend to the total production cost! For 0, infinity (which is why if no one wants it, it won't get made).
You're not going to get a perfect relation due to effects outside the market's control (such as non-market copying), but you'll see that 99 cents is too little for something this is in low demand, and 25 cents is too much for something that is in high demand.
Are they really scrapping that much for change? (Score:3, Interesting)
Make Apple tie their prices to inflation or something. At least then you'd have a reasonable excuse to raise prices, as opposed to what you have now, which is... nothing.
The allure of trend-setting (Score:5, Interesting)
Re:Oh, for God's sake (Score:2, Interesting)
pfffft. Oops sorry, didn't mean to let that slip.
Popularity != Value (Score:3, Interesting)
Basically, he suggests that song prices be determined by market forces, just like stock and commodities markets.
While an interesting idea, I think this premise is flawed. Gold is not priced based upon how many people have bought it over the years, or even in a given year, but by how much people are willing to pay for it. Here's an extreme example. Suppose some very fringe singer produces a song called, "If you're not rich you're a stupid pussy" that appeals to to very wealthy elite and basically no one else. Perhaps this song names a dozen particular wealthy people and extolls their virtues. Say the total market for this song consists of about 500 people, but among those 500 people are individuals who would be willing to pay upwards of a thousand dollars a copy for the song and may buy a copies for relatives, friends, and even enemies they wish to taunt. According to a free market we could estimate the value of the market as 500 times and average of two copies per person times an average price of say $500. That gives us half a million dollars on a truly free market. Now consider the same market valued based solely on popularity and you get a song that is so unpopular the market is only worth a few dollars.
This same principal applies to the opposite end of the spectrum as well. What is someone makes a funny, six second long song that billions would like to own, but no one wants to pay more than a quarter for. The market price may be 25 cents for optimal sales, but based on popularity would price this song at $10, which no one would want to pay, especially as the price would continually rise.
I just don't think this is workable or desirable.
Digital supply and demand (Score:3, Interesting)
Right, because supply and demand dictates that... oh, but this is digital media. There will never be a physical shortage of that song.
From the buyer's perspective, however, Apple's 99-cents-for-everything model isn't perfect. Isn't 99 cents too much to pay for music that appeals to just a few people?
Right, because rarity typically dictates that something should cost more, so... oh, but this is digital media. There will never be a shortage of that song.
Yes, you have to pay for the bandwidth, the infrastructure, the yadda yadda and et cetera. It costs money to provide the media. Granted. And I personally think that $1 for a copy-protected, sampled audio file in a proprietary file format is ridiculous, but that's another can of worms. The point is that pricing by popularity when supply is not an issue reeks of greed, just as Jobs says.
Re:Oh, for God's sake (Score:3, Interesting)
Re:Oh, for God's sake (Score:5, Interesting)
Except for two basic facts:
1) People don't need this. It isn't vital and required for life, it's music they can live without. If you charged me $5 a song and that was the only choice, I wouldn't buy it. I'd just listen to the radio or something.
2) There is still a music piracy underground, and it's pretty big. Whatever anyone's feelings on the issue, we have to accept that stamping it out through force isn't looking too possible right now, or anytime in the foreseeable future, since there are thousands (at least) of tech savvy people to create new networks and forms of filesharing, and they can move faster than the music industry. Therefore, the way to beat piracy is to make the "official" files that cost money worth more than what is available over bittorrent or LimeWire or whatever.
Re:Completely backwards (Score:3, Interesting)
From 1c to 100$ per song, then (Score:1, Interesting)
If the price is to be proportional to the number of downloads, the most downloaded ones will cost an arm and about two legs unless a max price is set.
Game Theory (Score:2, Interesting)
Economics 101 (Score:5, Interesting)
The general thrust is 99 cents is not the right price for all music to maximize profit. This we can all agree upon. But the formula of "less popular" + "cheaper price" = "more profit" is not correct.
Yes, if you price things lower, you do get more buyers. But this does not mean that pricing unpopular music means you make more money. It's possible that music that fits a certain "niche" such as, say JPop tunes, the optimal profit point is $2.50 per song not $.99. (Plug: http://gomorning.com/scene/itunes [gomorning.com] )
In addition, companies need to consider strategicly in deciding optimal pricing -- meaning, if all pre-1990s Jazz music is priced low, it impacts the profits made in new Jazz release. People may not buy any new Jazz music, and instead collect only older Jazz music. In some respects, it affects all music purchased, regardless of genre.
What record companies want to do is price older music fairly high to encourage the purchase of newer music. Which is why old music then is priced similarly to new music, though the demand is apparently much lower. (This is also one reason why retaining effectively indefinite copyright is in the interests of record companies. A large public domain does remove incentive to buy new work.)
Re:Downloads aren't subject to the same market for (Score:3, Interesting)
Re:Supply & Demand (Score:4, Interesting)
Umm, no, not really. There are two big reasons why you can't apply supply and demand here, and why the prices are not determined solely by supply and demand.
1) Music is not a commodity good. You don't want to download the song from iTunes? You can't replace that song with any other song out there; it has intrinsic qualities that make it more or less desirable to the market.
2) Limited suppliers. You don't want to pay $0.99 at iTunes? Fine, but where are all the other suppliers who could come in and offer you the song for $0.96? Or $0.92? There are not a potentially infinite number of suppliers who are capable of setting their own price on the songs they sell.
Also, people assume that given infinite supply, prices will fall to zero. Not true. Not all supply/demand curves will intersect at P = zero when supply approaches infinity.
Re:Not a true market if I can't sell too (Score:5, Interesting)
Right now, I think the studio execs know that they're sitting on a profit curve, and they probably think that in general, they're on the lower end of that curve. What I mean by this is that if you priced a song at $0.01, you would sell a million copies (netting $10,000), if you price a song at $1.00, you sell 50,000 copies (netting $50,000) and if you price it at $5.00, you sell 2,000 copies (netting $10,000). Of course these examples are contrived, but I think the general premise holds. I think the execs want to sell at what they perceive as a 'sweet spot' (say, $1.49 per song, if it's popular, selling 40,000 for a profit of $59,600).
That's what they call stock market/commodity pricing, maximizing their profit curve. But I like what you mentioned. What if you, as an iTunes buyer were allowed to sell your copy of a song you purchased on an iTunes auction market. It's DRMed, so if you did go through the iTunes marketplace, Apple should be able to enforce the proper rights on the song and transfer them to the new owner (please ignore the burning to CD loophole for a second, this is merely an academic exercise). This could have several potential benefits. If you bought a song for $0.99 and you discover that you hate it, you can sell it on the marketplace (probably for a slight loss of a few cents in most cases). If you happened to buy a song, as you said, that was a bit obscure for $0.99 but then it became a classic hit worth $3.50, you could then sell it for a profit. You could have a speculative market!
I think if Apple gave in to the execs and went with 'market prices', then it would only work well if people were allowed to sell their songs back. That way the studio is kept in check from raising their prices too high, because if it gets rediculous, the allure of a nice profit will keep supply high (and therefore lower market prices).
I'm sure everyone will point out tons of flaws (like the fact that a studio will probably only start songs at high prices and slowly lower them, thus defeating any potential profit for speculators, or as I mentioned before, the DRM loophole), but regardless, I still think it's a very interesting idea.
Ebay *evil grin* (Score:4, Interesting)
First day available, only allow 10,000 downloads, priced based on bids.
Two days later, release another 10,000.
A month later, release another 10,000 of an album-rejected REMIX!!!
Yes, I'm trolling. I just think the whole idea's stupid.
It's like why I make my own coffee now. Dunkin' Donuts used to charge a dollar for a medium. Sure, it was cheaper to brew at home, but a dollar was *so* convenient and simple. (actually, it was
I surrendered my money *every damn morning* without thinking!
Well, now... coffee's between 1.70 and 1.95 depending on where I go. I always think about stopping... but I don't anymore. The coffee in the office tastes just as good and it's free.
And one more thing to wrap up my point: Let's hypothesize that DD ups the price to $3... and the coffee at work becomes $2 a cup... and the coffee at home is, um, poisoned. Guess what I'll do?
I'll stop drinking coffee.
Assuming mountain dew remains affordable.
Supply can be limited--sort of. (Score:1, Interesting)
They could do something similar for digital media, ex: release a classic "live" track for only one week, or putting a download limit like, first 10,000 tracks only, etc. Hope that doesn't give them any ideas, I find that kind of stuff highly irritating (I just said forget it, they can keep Bambi or Snow White or whatever in the vault for all I care now--the danger of that system is that some people like me just lose interest while waiting for the re-release).
99 cents is less than what I usually pay online (Score:3, Interesting)
Actually I pay 0.99 GBP (or ~$1.72) for a lot of music online. Why? Because I get it off of Warp Records' Bleep.com [bleep.com] website where I can find extremely rare tracks and the money is mostly going right to the artist. And while most of Bleep's big stuff (Boards of Canada, AFX) can be found in many places, none of these artists are cracking out gold records. The fact you can find out of print Detroit electro vinyl (say Dataphysix stuff) is a real boon.
Why would I pay this? Because I've paid $50 bucks for an album that I can now find on there for $15. Sure, for connoisseurs half the fun is the hunt for new albums but in the end you just want to have it sooner so you can listen to it more. So $1.72 per track is a great deal.
What I can't understand is have some sort of adaptive cost. The cost of a single track could fluctuate every day and they could track to see what affect it has on sales. Sales drop: reduce price. Sales rise: increase it. As with simulated annealing have the delta decrease with time. Why does there need to be a static price? A six cent song that sells a million copies is just as good as a sixty cent song that sells 100k.
Re:Completely backwards (Score:3, Interesting)
The problem was that somebody happened to browse the site with two different PCs at the same time and got two different prices. A little research uncovered the new system, and it was labeled as "unfair" since two different people could pay two different prices.
The amazon system probably was designed to go a step further and offer personalized discounts as well - if it figures out that you love Sci-fi it would probably price these products at a premium, and then entice you with super-cheap romance novels.
It is really no different than haggling in a marketplace. If the shopkeeper sees that you just hiked in from the desert and look famished, forget getting a good price on bottled water...
Re:Completely backwards (Score:3, Interesting)
Maybe the next big predicted hit goes on sale and prices are set high for the first week to catch the gotta-have-it-now crowd, and maybe they come down later for the heard-it-on-the-radio-and-kinda-liked-it crowd. Heck, maybe they go up later for the gotta-have-it-and-nobody-else-stocks-it crowd. The lower limit on the price is whatever Apple is charging the music companies for distribution, and the upper limit is whatever the labels think somebody will pay before they give up and just steal the song.
Since the supply-side costs are so low, might as well let the folks whose bottom lines are most affected (music labels) take their best shot at guessing demand.
Re:Oh, for God's sake (Score:3, Interesting)
Revenue experts like Robert G. Cross [uga.edu] espouse partitioning products and customers into different categories to ensure the each customer and product receives the greatest profit possible.
Regardless, I think it will be interesting to see how much higher premium priced songs will drive customers into alternative lower-priced ones.
Re:Oh, for God's sake (Score:5, Interesting)
In fact, this is fairly consistent across all industries where supply is not constrained. Only through artificially or naturally constrained supply does higher demand result in higher prices. When supply is not constrained, higher demand results in lower prices because the incremental cost of most products is small compared to the up-front R&D costs.
So in order to convince me that prices should be higher for more popular songs and lower for less popular songs, you would have to convince me that supply of music is naturally or should be artificially constrained. Good luck. I know the record companies would like it to be that way, but Steve is right; artificially constraining supply to drive up price is greed, pure and simple.
Re:Oh, for God's sake (Score:2, Interesting)
What a load of $&(@! (Score:3, Interesting)
Why? What market force drives the price up? Is there a limited supply of this song that can't meet the current demand? What extra cost is there to the company that isn't covered by 99 cents per song?
There's no reason. There are a theoretically infinite number of copies of that song. Charging more for a song that is in higher demand is a direct money making ploy by the companies to take advantage of people. Why should I pay more for a song because a few other thousand morons downloaded it to?
Re:Oh, for God's sake (Score:5, Interesting)
What's also daft is the idea that someone logs on, sees Eminem is $5 so then decides they'll buy Coltrane for 25c instead - like people do that now.