Stupidity and Greed

If there's one industry whose executives can be trusted to consistently make the wrong choices, it's the entertainment industry. Many in the record business seem utterly incapable of learning from past mistakes.

Two and a half years after the music business lined up behind the chief executive of Apple, Steven P. Jobs, and hailed him and his iTunes music service for breathing life into music sales, the industry's allegiance to Mr. Jobs has eroded sharply.

Mr. Jobs is now girding for a showdown with at least two of the four major record companies over the price of songs on the iTunes service.

If he loses, the one-price model that iTunes has adopted - 99 cents to download any song - could be replaced with a more complex structure that prices songs by popularity. A hot new single, for example, could sell for $1.49, while a golden oldie could go for substantially less than 99 cents.

Music executives who support Mr. Jobs say the higher prices could backfire, sending iTunes' customers in search of songs on free, unauthorized file-swapping networks.

There is no "could" about this, it will send them off. As it is, the option to buy a song for $0.99 in a format inferior* to a CD single as against downloading it for free is already less than compelling for many, and for all of the RIAA's actions to clamp down on filesharing, the means of obtaining pirated music online are more numerous and low-risk than ever.

These fools seem to be under the delusion that theirs is a lower elasticity product than it actually is - a much saner strategy for combatting online piracy would be to lower prices on songs which have been out for some time while leaving the price of hot new singles at $0.99, and combining this with a push to force Apple to bump up its offerings from 128kbps to 192 or 256kbps, so that not even the most discriminating audiophile should have an excuse to want to buy music in a DRM-free format like a Redbook CD. A side benefit of this move would be to render most offerings on P2P networks considerably less appealing - why download a shitty 128k MP3 file ripped (or worse yet, transcoded) with a lousy encoder like Xing or the one which comes with iTunes when you can get a 256kbps AAC which sounds perfect on any equipment you own for the low price of $0.70?

Having said all of the above, however, there is one point of contention the music industry has which I endorse completely: Apple's insistence on not licensing its FairPlay system to other hardware producers is incredibly shortsighted, and all the more inexplicable in light of the fact that this is the second time around that Apple will be making the self-same mistake. Someone ought to sit Steve Jobs down and give him a lecture on industrial organization: in the long-term, the ideal situation to be in is to be the licenser of intellectual property others find indispensable, while allowing any number of firms to destroy each others' margins by releasing ever cheaper and more capable devices which support one's software. Properly executed, this strategy allows one to maintain high and even increasing margins even as consumers enjoy cheaper overall prices, and this is exactly how the still-existing "Microsoft tax" on PCs arose. Apple may currently enjoy a tremendous lead due to the inept design and poor marketing of its competitors, but the firm cannot realistically expect its luck to hold forever, as some firm will eventually hit upon the right mix of features and interface to start eating into the iPod's market share.

*Any lossy format like AAC, MP3 or Vorbis is by definition inferior to a CD original, even if not perceptually so.

Comments

[Factory]

"Apple may currently enjoy a tremendous lead due to the inept design and poor marketing of its competitors, but the firm cannot realistically expect its luck to hold forever"
Hmm I don't think that this is quite Apples problem. IMHO their real problem is the inability to pitch their product at the low end effectively, which basically means that someone will undercut Apples market, mainly because Apple do not even try to take it. Which is bad because to domniate a market you have to dominate all levels, not just the top end.

OTOH I don't think price differentiation is a huge problem in online music sales, I find the problems are in that the prices are unrealistically high and that catalogues are still not 'complete' (ie for any arbitary music service you should be able to choose from a selection as complete as Amazon's is for books) (P2P actually beats the online services in this area, it shouldn't).

[Abiola Lapite]

"OTOH I don't think price differentiation is a huge problem in online music sales"

In principle it isn't, but do you think for a second that it means anything to the record industry other than that prices are too low? I mean, they explicitly *say* that this is what they mean in the article. No one would be complaining if they wanted to cut prices on older tracks, not even Steve Jobs, but these fools are belly-aching over what is pure profit for them, without the attendant costs in packaging and distribution of CD singles.

"I find the problems are in that the prices are unrealistically high and that catalogues are still not 'complete' (ie for any arbitary music service you should be able to choose from a selection as complete as Amazon's is for books) (P2P actually beats the online services in this area, it shouldn't)."

Yes, these are problems, but the bottom line for me is that there isn't a chance in hell of my ever buying extremely sub-CD quality, DRM-encumbered music for a greater per-track cost than I would a CD, no matter how complete the seller's catalog may be, especially seeing as I don't even get liner notes or a nice physical object I can be sure will always play no matter what happens with its manufacture.

I'm sure most potential consumers can and do make the same calculation as I have, and that is by far the biggest reason why piracy still runs rampant, not the absence of a back-catalogue of mostly obscure tracks - the 80/20 rule suggests that the great majority of sales are generated by only a small fraction of extant titles anyway.

[Niraj]

I would like to see a study on how much an artist makes on each song sold via iTunes or CD. If I had to gander a guess, it’s not much.

The bulk of the artist’s income comes from touring, merchandise, endorsements, etc. The only people I see who make money on song (or album) sales are record companies, and because of the success of iTunes, want a bigger piece of the pie.

If I were Steve Jobs, I would drop the offending companies from iTune and we’ll see if they sink or swim.

[dof]

It does indeed sound bewildering, except for the fact that consumers no longer need to buy filler tracks, so that must be hurting the music industry. Why shouldn't they try to get the price up to CD-single levels?

I don't think Steve is going to budge, and anyway, with or without iTunes, he's still going to ship a lot of mp3 players, and that's where the money is.

[Abiola Lapite]

"Why shouldn't they try to get the price up to CD-single levels?"

The fact that it gives people an added incentive to engage in piracy, which is already as easy as can be? Even if all the public P2P networks were shut down tomorrow, there'd still be instant messenger, usenet and any number of darknets available for people to get for free what the record industry refuses to sell at an attractive price.