Strategies for a discontinuous future.

Sunday, November 20, 2005

Why Variable iTunes Pricing Means the Music Industry Knows It's qwned

OK. I have taken no small amount of flak recently for saying that variable pricing on iTunes is a very, very, very good thing.

I think it's amazing that people are arguing the opposite, in fact (no, this is not about signaling- it's about trying to maximize profits). Look, I am the guy that wrote the original "file-sharing is economically cool" article. So let me explain my thinking on this for a sec.

Think about what's really going on here. This is the first concrete sign that the market power record labels used to hold is shifting to consumers. Strategically, it's great news for consumers.

But let's go deeper. In fact, this is (finally) the reflection of a radical shift in music industry economics: the atomization of the core, where publishers, and labels sit, and the shift of value to the edges - to consumers, artists, and aggregators/reconstructors like iTunes. It's an admission by the industry that it is indeed deep in strategy decay.

Think about the economics of fixed pricing. Essentially, it meant that something incredibly backwards, and quite strategic, is happening: essentially, unpopular artists subsidize popular ones.

That is, the Metrics of the world subsidize the Britneys and Xtinas. Why? Simple: it costs a huge amount more to create a Britney or Xtina - marketing deals, etc are the most significant cost driver for blockbuster artists. Those higher costs should be reflected in higher prices.

So prices for popular artists should be higher than prices for unpopular ones, to reflect their higher costs. That they're not simply means that popular artists are relatively underpriced, and unpopular artists are relatively overpriced. And that, in turn means, that unpopular artists are effectively subsidizing popular ones.

Think about that for a sec. That's a big deal - it's really why we all think the music industry sucks, to be blunt.

Why? Producers can get away with mechanisms like this that create economic inefficiency when they have market power. In a situation of monopolistic competition, the music industry could enforce this - and use it to boost revenues (at the expense, essentially, of consumer surplus). But that's the point: the fact that the industry recognizes those days are long gone is a great thing for consumers.

That's because when unpopular artists don't subsidize popular ones, the industry loses a key economic component of the blockbuster model. It has less incentive to invest such huge amounts in marketing Britneys and Xtinas. Conversely, it's incentive to invest in less popular artists increases, because, counterintuitively, capital is freed up to invest more in artists, and less in marketing.

And that, in turn, means that the market is becoming more efficient: the industry is finally slowly being forced to begin producing music people want to hear (versus what gets marketed) - because this whole thing is an admission, really, that returns to marketing economies are eroding fast in a world of scarce attention.

Now, will the industry try to use this a tool, to prop up it's decaying strategy? Of course - you didn't really expect otherwise, did you? But it doesn't matter - you can game mechanisms, but not your own industry economics. And that's the point: this is a reflection of deep shifts in industry economics, which are shifting power to the edges of the value chain. And that is a great thing.

-- umair // 11:58 PM //


But don't unpopular artists, notoriously make a loss. In hit-based industries the hits cover the money lost on the flops.

How can loss-making flops be subsidising prifitable hits?
// phil jones // 3:57 AM

doh! "profitable"
// phil jones // 4:01 AM

Yeah, also remember industry accounting is uhh...how can I say...creative.
// umair // 4:03 AM


Question #1: How do we figure out, and does it in fact matter, if the MI mightn't be smokescreening an average price increase via a "popularity pricing" scheme? Is it YAPITE (yet another poke in the eye)?

Question #2: Do the $3.00 artists earn the increment under the proposed scheme or do the $0.30 artists benefit from the $2.01 increment paid for the popular track? I don't recall ho the payouts go, is there a pool or specific accounting for online sales?
// r // 8:24 AM

exactly my point.
// umair // 9:36 AM

Umair, right on as usual. Until we have a true free market for digital media, we are not "there" yet.

Note to pundits: the free market can/will sort out DRM for us, too. If the content holder has the choice of DRMs or no DRM at all, we'll see what the real cost of DRM is, and what the market will bear.
// ian c rogers // 5:52 PM

Why should costs drive pricing? Shouldn't the labels maximize revenues instead.
// Mr Juggles // 3:25 PM
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