Rafi Mohammed

Why Are All Songs on Apple's iTunes Priced at 99 Cents?

Posted on April 5th, 2007 (0 Comments)

…because Steve Jobs (CEO and co-founder of Apple) says so.

Why are number 1 hits priced the same as throw away “B-sides?” Why does The Partridge Family’s “The Definitive Collection” cost the same as U2’s latest masterpiece “How to Dismantle an Atomic Bomb?” Why are adult contemporary singles targeted towards brie loving boomers priced the same as singles bought by ramen noodle slurping college students? Because Steve Jobs says so…

So…why does Steve Jobs want all songs sold on Apple’s iTunes Music Store to be priced at 99 cents? Apple is focused on profiting from its wildly successful line of iPod portable music players, with sales reportedly approaching 100 million units globally. 99 cent songs make iPods even more attractive to consumers – they value being able to buy their music cheaply. The iTunes music store has been a giant success. In January 2007, iTunes announced that it has sold over 2 billion songs since its April 2003 inception. Now here’s the really incredible part - over a billion songs were sold in the last year alone! Now that’s hot growth!

So…why would music companies allow themselves to get into a position where Mr. Jobs can price their highly differentiated music libraries like 99 cent commodities? Because they haven’t had much choice. Remember, when the iTunes Music Store was launched, the music industry was on the defensive. File sharing and piracy were rampant – the music industry was genuinely concerned that the days of fans paying for music were numbered. With the hip & beautiful iPod about to be released, it made sense to accede to Mr. Jobs’s wishes to make the economics work so songs could be sold on iTunes for 99 cents. 99 cents is better than free…right?

Apple’s success has been a double edged sword for music companies. Sure music companies benefit from digital music revenue, but their negotiating power is diminishing by the minute. Care to guess where the only place for the “approaching 100 million” iPod owners can buy digital music? Yup…iTunes. Note: technologically savvy music lovers may be able to convert other music formats to play on their iPod and of course, consumers can buy a CD and rip (copy) it to their iPod. But for all intents and purposes, iTunes is the only game in town for iPod owners to buy digital music.

Think Wal-Mart has a strong negotiating position? Consider how it must feel to be a music industry executive with Mr. Jobs on the other side of the bargaining table…“can I have a glass of ice water please?” At least when negotiating against Wal-Mart, manufacturers like P&G have other retail opportunities. Crest can be sold at other retailers like K-Mart, Target, grocery stores, discount warehouses, etc. But if music companies want to sell digital music to iPod owners, it’s iTunes or the highway. Now that’s negotiating power; no other music playing device (CD, record, cassette, eight track, Walkman) has had such influence over music pricing. In 2005, some music companies tried to break iTunes “one price” pricing strategy. Care to guess why those efforts failed? Because Steve Jobs said so…

I want to be clear that I’m not intoning that Mr. Jobs has done anything wrong or unethical. His company developed a wonderful device and service at the right time– everyone I know loves their iPod and iTunes. Apple is entitled to profit from its entrepreneurial activities.

It’s interesting that analysts haven’t picked up on the fact that as long as the iPod remains popular, Apple’s pricing policies are going to be a thorn to the music industry. With digital music forecasted to account for 25% of all music sales by 2010 (it’s 10% today), a growing percentage of the music industry’s revenue will be subject to Mr. Jobs’ decision on what he thinks the “right price” should be for iPod owners and potential customers.

Magic Eight Ball Question: Will digital music prices remain cheap in the foreseeable future?

Magic Eight Ball Answer: “Without a Doubt…”

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