DRM-free iTunes depends on variable pricing

 

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Posted on 9 Jun 2008 at 08:03

The major record companies are using the promise of DRM-free downloads as leverage to persuade online music stores to adopt variable pricing.

While some stores, notably Amazon, have adopted variable pricing in return for the right to sell unrestricted music files, market leader Apple has so far stuck to its one-price strategy, with one brief exception. As a result only EMI and independent labels sell unrestricted tracks through iTunes.

According to a recent US survey by analysts at IDC, among consumers who buy music, whether online, on CD or both, 33% downloaded between 10 and 50 songs in the six months preceding the survey, while 26% downloaded less than 10.

The idea behind variable pricing is to make more money from the third who downloaded up to 50 songs in six months by slightly raising the price on certain tracks, while at the same time convincing those who only downloaded 10 or fewer to buy more by slightly lowering the price of others.

The precise variations are not guessed at. Warner Music is currently testing a dynamic pricing system from Digonex that recommends raising or lowering the price of a track and/or album based on a variety of factors. In some cases, new releases selling very well may get priced higher, but so might back catalogue items appealing only to the die-hard fan willing to pay more. In other cases, the system recommends lowering the price of even new releases to spur more sales.

Digital service PassAlong, which operates its own branded digital music store as well as providing the back-end technology to several others, two months ago completed its four-month test of the Digonex system. It found that once a week the service altered the price on around 2,000 tracks participating in the trial based on the suggestions from Digonex. Singles, could be priced at 99 cents, 66 cents or even as low as 33 cents.

Album variations were more granular, but the upshot was that on average the system priced full albums at $1.18 less than other services were charging. Singles pricing also fell on average but revenue from the tracks included in the program increased an average of 122%, with some individual singles' sales spiking up to 500%.

"We had albums that weren't selling at all before the pilot that started generating revenue every week," said PassAlong chief executive David Jaworski,

What's more, as the price of a top selling single rose, the price of the album dropped, which encouraged more album sales.

"There'd be a point where people who would only buy two or three tracks bought the entire album," Jaworski says. "They really came shopping for those two or three tracks."

However, the test did not include single sales for more than 99 cents, so the jury is still out on whether variable pricing can support more expensive singles. Jaworski says PassAlong will conduct another test soon that includes more pricing tiers, as well as more music from major labels, but is not commenting on whether PassAlong is part of the Warner Music trial.

Until Apple, with at least 70% of the market, adopts variable pricing the full effect will not be felt. But despite accepting that model for TV shows and movies, Apple has so far shown no signs of budging on music. EMI remains the only major to sell DRM-free music through iTunes.

It seems that the music industry is hoping that the combination oof DRM-free and and flexible pricing will aid Apple's competitors and weaken the iPod-maker's stranglehold.

IDC analyst Susan Kevorkian believes variable pricing is the key