Music’s Secret to Competing with Free: Raise the Price
Pundits are declaring that, due to so much free music on the web, Amazon’s 69-cent-a-tune program is the ultimate sign of retail music’s demise. But some basic laws of marketing are being ignored within these conclusions. The solution to competing with free might be counter-intuitive: raise its wholesale price. Insanity? Let’s see.
Sometimes it probably seems like I take a contrary position to my fellow music business experts just to stand out. But that’s not true. The truth is, I just read more data than many of them and, therefore, I’m more righter. (Great English, huh?) Such will be the case here as well. For a while many are saying that now is the time to cut back prices to “compete with free.” I say the opposite. What’s my secret?
History. Looking at history is always more revealing than pontificating about the future. But it does require a bit more research. History tells us what is likely to happen tomorrow, because even though technology may progress at the speed of a microchip, it still hits the road-bumps of bureaucracy and human nature; a constant often ignored by the “if you build it they will come,” techno-centric philosophers.
Case in point:
Gas, utilities and food, the three basic commodities of modern life, have all risen in price in the past 6 months. Surely increased supply due to record unemployment, recession and competition must drive the price down. How can gas prices be raised when the Toyota Prius, the Volt and the Smart Car exist as alternatives? How can food prices go up when there are so many farmer’s markets, Big Box stores and food co-ops as competition to the local Super Market? How can utility prices rise when they are regulated and we have solar and wind power? The answer is simple: in each case people will pay for convenience. These suppliers are not raising the prices of their products, so much as they are raising the price of easy access to their products.
Music is no different. For most it’s a necessity. That’s one reason you can get lots of music for free. But the quality of a free, bit-tormented MP3 file may come with computer herpes or worse. Not to mention the frustration of lousy transfers and sabotaged MP3 files masquerading as the real thing. Enter iTunes, the most expensive way to access music in history, second only to the ring-tone.
iTunes proves that people will pay a premium for convenient access to “clean” music tracks, just as Super Markets prove that people will pay more for food if it means the freshest selection is right down the street. This remains true even when people are broke.
AMAZON and BEST BUY
Best Buy began the trend of devaluing music at the retail level years ago when they sold CDs at cost just to get people in the door. Why? Because they make the majority of their money on other things. (BTW: Despite “experts’” fears that they were phasing out CDs as bait, I disagreed and, what-do-you-know, it has yet to happen. People still buy millions of CDs a year from Best Buy and Jewel-Box displays still occupy about 1/3 of the floor space at most big city Best Buy locations.)
Amazon is just taking a tip from their brick and mortar brother. Despite the fact that they will still have to pay the wholesale price of the digital track to the label, they are narrowing the margin they make just to get more eyeballs on other featured items.
However, there is a danger with this “music as loss leader” trend. It is not that the labels lose money today… They don’t. Both Amazon and Best Buy still pay the full wholesale price to the Distributors. The problem is that it lowers the bar for what people perceive as a reasonable price for a single or album. Which means labels, as well as the artists, writers and producers, could lose money tomorrow.
But, the solution is simple. Labels should raise their wholesale price so that Amazon and others have to mark it up further or forget about only losing a penny or two on each transaction. They may lose significantly more than the offset for the featured items.
You think? I know many of you reading this also follow the musings of “futurists” and curmudgeon-y bloggers who believe people already pay too much for music. Well, we’ll see. This excerpt from last month’s Billboard quoting two of my respected colleagues kinda says it all about experts who feel that raising prices will be bad for music sales.
“Raising the price of some [iTunes] tracks to $1.29 led to many warnings of impending cataclysm. For example, industry pundit Bob Lefsetz called the price hike a “stupid move, with potential short term gains and long term consequences.” Ted Cohen of TAG Strategic predicted a doomsday scenario. “This will be a full PR nightmare,” he told the Los Angeles Times. “It is for the music industry what the AIG bonuses are for the insurance industry.” But consumers appear to have taken the price increases – mainly to the most popular tracks – in stride. That acceptance has continued through the early part of 2011. Track sales were up 8.6% in the first quarter…”
Had Ted and Bobby looked more carefully at the history of retail, they might not have found themselves being quoted so harshly. History tells us, raising your rates creates artificial demand. As prices for food, gas and other staples rise higher and higher for manipulated reasons, music will start to once again look like a bargain. It already is a bargain when compared to other forms of entertainment.
My recommendation is what history demands: labels should raise their wholesale prices (PPD) at their soonest opportunity and watch as unit sales continue their chart pattern, but margins increase. This means more money for artists, writers and yes bonuses for executives as well. Plus, if this turns out to be a bad move, labels can always offer incentives such as Free Goods (which they have been doing since the dawn of time) that artificially lower the price.
Think I’m wrong? I want to hear why. Post your theory below. But you can NOT use the “but people are stealing music because it’s too expensive” argument. Show me how, with economic theory (or history) that I’m wrong. The one with the best argument below wins lunch on me, I’ll publish your theory and make you famous.