Apple keeps it cheap

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Apple Computer still reigns over the digital music world.

When the Cupertino company confirmed this week that songs at its iTunes Music Store will remain 99 cents each, it showed that Apple continues to set the terms in the digital download market it pioneered just three years ago.

As CD sales have continued to decline, Apple’s digital music sales and its iPod music player have been a standout success story. Music industry executives have meanwhile clamored for more control over prices – just as popular CDs cost more, executives have asked for the freedom to charge a premium for hit songs.

Apple’s answer: No.

No further details on the negotiations, which were confirmed late Monday, were available. Natalie Kerris, an Apple spokeswoman, would only say Tuesday that Apple had renewed its agreements with the major music companies.

“We’re pleased to continue offering iTunes customers music at 99 cents per song from a library of over 3 million songs,” she said.

But the music industry has been rife with talk in recent months that the big four music labels – EMI, Sony BMG, Warner Music, and Universal – wanted to offer variable pricing. That model would have entailed a variety of prices, where newer, hotter songs would be priced above 99 cents, and certain older songs could be priced below 99 cents.

A Warner Music spokeswoman in New York confirmed the company had signed an agreement with Apple but gave no further details. A Sony BMG spokesman declined to comment, as did a spokesman for EMI. Universal Music did not return calls seeking comment.

“Certainly it’s a vindication of strategy in terms of pricing models and consumer acceptance,” said Michael Gartenberg, an analyst with Jupiter Research. “The fact that Apple was able to sell one billion songs clearly demonstrated that it was not a model that you want to mess with lightly.”

Since Apple launched iTunes in April 2003, sales have soared. While the music industry was wringing its hands over piracy, Apple found the right formula to get consumers to pay for music online. It is now the leader in selling digital music over the Internet. The iTunes store had about two-thirds of the $900 million market for digital music. According to iSuppli, a market research firm in El Segundo, Calif., iTunes sales were $600 million in 2005, up from $200 million in 2004.

Other players in the digital music landscape include AOL, Yahoo, the legitimate version of Napster and eMusic. But Russ Crupnick, an analyst with NPD Group, said peer to peer networks, where consumers are downloading music for free, continue to surpass all the combined legitimate music outlets in volume by about a two-to-one margin. Music labels are forced to walk a fine line of trying to get more people to pay for their music, but not scare them away with high prices.

“If you are going to charge more than 99 cents, how are you going to explain that?” asked Mike McGuire, an analyst with Gartner. “It’s not like there aren’t a few more alternatives, both illegal and unsanctioned.”

And record companies can hardly argue with the numbers. In 2005, according to statistics from the Recording Industry Association of America, sales of CDs and CD singles continued to fall, down 8.1 percent, and 27 percent respectively. But sales of downloaded singles surged 163 percent and albums soared 198.5 percent.

The music studios “are negotiating with a party that is in a stronger position that it was in three years ago,” said Phil Leigh, president of Inside Digital Media, a research firm in Tampa.

Still, as one source in the music industry explained, in how many industries does a retailer set the price of a product, rather than the manufacturer?

“It’s more of a control issue,” said Mark Kirstein, an analyst at iSuppli. The music companies “want to be able to control the pricing of their songs. In contrast, Apple is just looking for simplicity. How do we make the consumer experience transparent? It’s a dollar, it’s a good price point, it’s simple, it’s consistent.”

John Cornett, managing partner of Om Records, a San Francisco-based label specializing in electronic dance and house music, said Apple’s pricing is OK with him – so far.

“It hasn’t been an issue for me,” Cornett said. “We’re still getting a pretty large percentage of that 99 cents, roughly 70 percent – pretty good deal considering the traditional route, with more middle men and chunks taken out.”

Most analysts continue to see Apple as the leader in the digital music area for some time to come. There are new competitors on the horizon, but no one knows how they will fare.

MTV is partnering with Microsoft to launch Urge, a digital music service that will be built into the next version of Windows Media Player, sometime this year. And Sony, which has stumbled in profiting on digital music, is working to gain some stake in the fast-growing market.

“It would be foolish to completely discount them,” McGuire said.

In France, where Apple has been sued by French consumer groups, the French government is reportedly reconsidering a proposal to force Apple to make the songs it sells through iTunes play on other MP3 digital music players that compete with iPods.

For now, Apple is still king of the hill.

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