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5.02.2006 

Apple Cracks the Whip on the Recording Industry -- For Now

The Financial times has a piece today reporting that Apple renewed its contracts with the major record companies to continue selling songs at 99 cents apiece. While everyone will herald this as a victory for Apple and consumers--and it is--in the long run it will only exacerbate the record companies' pricing dilemma and will cause them to aggressively seek out new distribution methods over the course of the next year. In other words, the fight between Apple and the recording industry is just getting started.

But why, you might ask, isn't it a fair price? A price that the market has undeniably embraced? And isn't iTunes the sole bright spot in an otherwise gloomy market?

Well, yes, all that is true. But Apple and the recording industry are approaching the issue from opposite ends, as the FT points out:
iTunes accounts for about 80 per cent of the US digital music market at a time when the record companies are desperate to show shareholders they are replacing declining compact disc sales with new internet revenues. "The labels need Apple too much right now," one record executive said.

Online music sales surged 194 per cent last year to 352m units, according to Nielsen Soundscan, as overall album sales fell 3.9 per cent. Digital sales now account for about 5 per cent of the music majors' revenues.

The surge underlines the competing priorities for Apple and the music industry. While the record companies are seeking new ways to generate revenues, Apple generates the bulk of its music-related revenues from sales of iPod players.
The problem in a nutshell (as I argued previously on this site) is that to the recording industry, a billion dollars over the course of several years is chump change. While digital sales are skyrocketing, and those per-unit figures look pretty good, a brief glance at the recording industry's overall sales paints a decidedly different picture.

Annual sales are still down more than two billion dollars from the high water mark in 1999. Granted, the total value of digital sales in 2005 was up to $500 million. That's money--substantially more than the $183 million in sales from 2004.

But the point remains that the 99-cent single can't replace the $15 CD. And the more digital sales the record industry makes; the fewer physical sales. Couple this with the fact that the average consumer only buys or downloads four songs from an album. You're looking at an eleven dollar difference per album there.

Now, I don't know what the profit margins are for a digital vs. physical sale for the recording industry. And perhaps consumer behavior might change to the point where instead of buying, say, one CD per month, people begin to buy fifteen singles by different artists. But margins would have to be pretty high or the sales volume would have to take off dramatically in order to make up the current difference.

So what's next? That's the big question. Current subscription models are a joke. People want to own their music. Period.

Regardless of that, the 99-cent single is ultimately unsatisfying to the recording industry, and that will drive them to experiment with other distribution methods until they find one that consumers embrace yet that offers them more money than Apple does. Either that, or they'll learn to make do with less--and there are too many record company execs with outstanding Porsche payments for that to ever happen.

So if Apple is smart--and it has proven that it is much smarter than its critics repeatedly since Jobs' return--it needs to begin experimenting with other pricing models that aren't dependent on a la carte downloads, even as it continues to offer the best thing going--for both consumers and the industry--with the 99-cent download.

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