Joe Populist — May 30, 2006 at 10:10 am

James “Markets” sez: So it must have been surprising when Apple declared a few weeks ago that it would keep selling songs on iTunes for 99 cents each, no matter what the song, instead of allowing any kind of price variability. Such backward-style thinking wouldn’t seem to fit with a future-oriented guy like Jobs. But when labels like Sony and EMI advocated that they be able to charge more for new hits by recognized artists, Jobs called them “greedy” and refused.

Actually Jobs—unlike yourself and the conglomerates that dominate the music business—understands how free markets actually work.

You’d have to be an idiot or have your head buried in the sand, to not understand how the music business has practically destroyed itself by being backward, greedy and thinking only in the short-term. Like most of American corporations, the music business is run by MBAs, finance majors, and cost accountants who have little interest in anything but short-term profit. Their brilliant idea is to milk the market for all it’s worth, and screw the consumer.

Lest you forget, Mr. “Markets”, raising prices on “popular” online songs is the same idiotic thinking that the music industry used to justify knocking prices of a CD to $20 bucks. Which of course, created the black market in music downloading that has cost them MILLIONS in lawyer fees to crush!!!

Unlike “pretend” capitalists like yourself, Jobs has the big picture in mind, his I-tunes has been a huge success, and he certainly doesn’t want to “kill” it by taking advice people like yourself who haven’t even run a lemonade stand, but think they can give advice to everyone else.

Ironically for you, Job’s business savy has created a market position for I-Tunes that makes it virtually impossible for the MBA and Finance Majors who run the conglomerates to implement their self-destructive policies.

They should be thanking Jobs for careful nurturing of a new marketplace that ironically will create more business for them in the long run.

James N. Markels — May 30, 2006 at 10:51 am

Aside from a lot of hot air, Joe’s entire argument is this: Raising prices on high-demand music creates an illegal black market, so therefore price differentiation must be bad.

Joe sidesteps the inherent logic of supply and demand (as if that’s some kind of MBA concoction!) to instead argue that corporate greed pushes price differentiation, since corporations are his ever-handy boogeyman for all that goes wrong. Of course, what Joe forgets to recognize is that, for low-demand music, iTunes is OVERCHARGING us. If we assume that 99 cents is the median “value” of a song (and it’s probably not — iTunes has probably set the price higher than the median), then songs that have higher demand should be priced higher, songs with less demand priced lower. But under iTunes, those songs with less demand don’t get a discount. So all the people who purchase low-demand songs are getting scalped. Not to mention that iTunes becomes a barrier to entry for independent acts that can’t justify charging 99 cents to hear one of their songs.

Further, this “illegal black market” wasn’t a market at all — it was all for free! I won’t bother with the argument over whether copyrights are reasonable or needed (that is grist for another day), but it’s plain stupid to argue that price differentiation promotes overly-high prices because all price differentiation does is try match price to demand.

Simply put, iTunes is running an obsolete business model. Joe perhaps prefers a world where supply and demand is ignored (like in Soviet-era Russia), but those economies inevitably fall apart from ignoring the laws of economics. The only reason why iTunes is in a strong place has nothing to do with its pricing and everything to do with the ubiquity of the iPod. As soon as people start to realize that there are other places to get music from, and for cheaper, they’ll leave iTunes behind…forcing iTunes to adopt variable pricing. There’s a reason that single-pricing schemes are so rare. It’s because they just don’t work.

Isaac Freilich Jones — May 30, 2006 at 11:36 am

I think that what both the article and the comments posted thus far have missed is that the conventional supply and demand anaysis cannot apply to this transaction. It seems to me that the supply in the case of iTunes is nearly infinite-Apple can make as many copies of a song as it pleases. By this measure each song should be nearly free, or sold so that the cost of electricity can be covered. The limiting factor is the licensing fee, which is set by fiat by the record companies (Jobs forcing the record companies to back off a fee increase is a rare exception to this rule). I am not arguing that variable pricing is wrong in the case of iTunes. But I am saying that the issue is not nearly as simple as is implied in this article.

James Hamilton — May 30, 2006 at 1:05 pm

Actually, in a way iTunes does price some songs higher - they make them available only if you purchase an album. Most of these are longer songs (over about 6:00 on average), but iTunes also does it with songs that are more popular. I remember one song in particular, that was only 3:00 long (or thereabouts), but the only way to purchase it on iTunes was to buy the whole album. I also remember reading a review of that album that said the only reason people actually bought the album was the airplay that that song recieved, and that the rest of the record was crap. Now, that’s not exactly changing the price per song, but it did change the price because you had to buy the whole album that you didn’t even want, just to get the one song you wanted. Apple can price however they want, be it all at $0.99 or variable, because they have the market for legal, online music downloading cornered. Think about it, if you had a regular record store that didn’t carry anything by the Beatles, anything by AC/DC and anything by Radiohead (and many other bands, both popular and lesser known), they’d be derided for poor selection - but not iTunes. People buy from iTunes because they have “no choice,” although they do, they’re simply unaware of other online music download stores. The key to the iTunes monopoly isn’t price, it isn’t the iPod (you can put mp3s on an iPod), it’s name recognition and the lack of a competitor that has anywhere near the resources of a major corporation like Apple.

Jon H — May 30, 2006 at 2:10 pm

” But at, say, 25 cents, people might be more likely to give them a go. But for now, they are pretty much shut out of the iTunes market. ”

Wow, you don’t really have any idea what’s on iTunes, do you?

” But under iTunes, those songs with less demand don’t get a discount. ”

Do you actually have any *evidence* that the limiting factor is the price, as opposed to exposure? Any evidence that sales will rise if the price is dropped to 25 cents?

“Simply put, iTunes is running an obsolete business mode”

iTunes is obsolete? You’re the one who is trying to use an obsolete model that is based on scarcity - a condition which does not exist for iTunes. When supply is infinite, as is the case for digital music, there is no effective difference between the demand for Madonna and the demand for the Mekons.

James N. Markels — May 30, 2006 at 3:10 pm

Supply isn’t really infinite, in that people (and iTunes) only have so much space to store songs, and so much time (depending on bandwidth) to figure out what they want, then locate and download the appropriate song. Besides, just because you can similarly digitize books, movies, newspapers, and the like doesn’t mean that these media are now of “infinite supply” and therefore free (which would also make iTunes “obsolete” in that it demands a price for this supposedly “infinite supply”).

I agree with Hamilton that iTunes is about more than iPod, but iPod was the big “in” for iTunes. People looking for a way to buy music that coordinated smoothly with their iPod had iTunes right there, ready to go. The name recognition for iTunes borrowed heavily early on from the popularity of the iPod.

Per Jon H., I have iTunes. I also figure that lower prices will spark sales in lower-demand songs because that’s what demand curves tell us. It works for everything else, why not music? What about music is so different? Nothing, really.

Jerry Brito — May 30, 2006 at 3:55 pm

James, It seems to me the reason Jobs hasn’t gone with variable pricing is simply that the iTunes Music Store is a loss leader for Apple (see http://en.wikipedia.org/wiki/Loss_leader). What they’re really selling is iPods, and the iTMS 99 cent bargain is how you get them to accept the DRMd songs available there. If Apple’s goal was to make money off music, it would have begun to charge variable prices.

Also, FYI, your example of AllOfMP3.com doesn’t really work because that site is barely legal, operating under nebulous Russian copyright law, and will be shut down sooner or later.

Jon H — May 30, 2006 at 4:47 pm

” I also figure that lower prices will spark sales in lower-demand songs because that’s what demand curves tell us. It works for everything else, why not music?”

The thing is, what people are actually paying for from iTunes isn’t actually the music itself, but rather the service and convenience. That’s the same for every song (although that value proposition arguably favors the obscure artists more than the top 10 whose music is easy to obtain) so it’s only natural that they should all have the same price.

Arguments about what songs are more valuable than others misses this point - and is really nothing more than a music label pipe dream, because music buyers aren’t going to accept it anymore.

Everyone knows music is available free for download if you’re willing to put in the time and effort. That makes music a commodity, and the labels have no pricing leverage anymore - no matter how *special* they think their latest high-profile release is.

The market is clearly taking two approaches: fixed-price song purchases, or fixed-rate rental subscriptions. Both are effectively selling a service, not for the specific content. Since customers are paying for access and convenience, rather than the specific songs, there’s no room for varying the price of a given track based on the supposed claims of value as determined by the label.

If the price is raised, too many potential customers will go elsewhere to get it for cheap or free, because the asking price will have exceeded the value proposition of the service.

And if they go through filesharing, or through AllOfMP3, then the labels don’t get any money at all.

B Nelson — May 30, 2006 at 5:56 pm

Mr. Markels, several times you appear to have fallen back on the argument of “supply and demand” to justify the idea of higher pricing on these tracks. But as other posters have pointed out, the market mechanism of supply and demand doesn’t really apply here.

Traditionally, supply and demand is the mechanism through which the market establishes a clearing price when there is a finite supply and finite buyers. However, in the case of iTunes you have a (effectively *) infinite supply and finite demand. Any attempt to draw a traditional supply/demand curve has to deal with that problem.

More so than being a price ceiling, the .99 price charged by iTunes is a price floor.

Before you reject the “effectively infinite supply” point, keep in mind that it costs Apple well under $1 (in hw/sw costs) for each title that it inventories, and under 1 cent (in bandwidth) for each download that it streams.

Varangy — May 30, 2006 at 7:03 pm

Before you reject the “effectively infinite supply” point, keep in mind that it costs Apple well under $1 (in hw/sw costs) for each title that it inventories, and under 1 cent (in bandwidth) for each download that it streams.

@B Nelson

This may or may not be true — but it ignores, I presume, hefty licensing costs.

Joe Populist — May 30, 2006 at 7:33 pm

Mr. “Markets”: “Aside from a lot of hot air, Joe’s entire argument is this: Raising prices on high-demand music creates an illegal black market, so therefore price differentiation must be bad.”

No, Mr. “Markets”. I didn’t say that. I said that overcharging decreases the revenue stream, not increases it, as customers leave the market to seek alternatives.

Obviously, being the arrogant airhead that you are, you didn’t do your research before you shot off your big mouth. Otherwise, you might have found out that the Music conglomerates have been facing DECADES of declining sales…

Among the alternatives the consumer has to over-charging is the black market, but it’s hardly the only alternative that the consumer has. When faced with overcharging and excess profits, the consumer can just plain cut back on his purchases. Which is what happened.

Of course, the reaction of the media conglomerates was to spend MILLIONS pursuing technological solutions and legal action against downloading entreprenuers, as if black market downloading was their only problem.

Obviously, Mr. “Markets” doesn’t have a clue to what he’s talking about when it comes to simple price theory. I’d suggest he go back and take a remedial course in Econ 101 before you write another idiotic column like this one.

Joe Populist — May 30, 2006 at 7:50 pm

Issac commented: “I think that what both the article and the comments posted thus far have missed is that the conventional supply and demand anaysis cannot apply to this transaction. It seems to me that the supply in the case of iTunes is nearly infinite-Apple can make as many copies of a song as it pleases. By this measure each song should be nearly free, or sold so that the cost of electricity can be covered.”

Does bleeding the cow give you more milk. According to Mr. “Markets”, YES.

Issac is completely correct. By keeping the price low, Jobs increases the sales, and the increased sales maximizes the profits. Encourages the market, and supports the consumer.

Mr. “Markets” obviously hasn’t got a clue as to what Jobs is about. Jobs’ pricing strategy is common sense, something that we see little of in Mr. “Markets” commentary. It’s a basic concept called elasticity of demand, surprise, surprise. Try opening your Econ 101 textbook before you open your big mouth, Mr. “Markets”.

If Mr. “Markets” had done a little reasearch before he jumped off the cliff with this idiotic commentary, he’d have found out that the music business was in 2 decades of financial free-fall because of declining sales.

The reaction of the media conglomerates to their declining sales was to INCREASE prices on CD’s. Everytime the sales decreased the music companies RAISED their prices. (Exactly the short-term solution we could expect from a cost accountant or an MBA.)

Jobs is brilliant. I-tunes has rescued the music business, and his pricing strategy was the key to it’s success!

James N. Markels — May 31, 2006 at 7:14 am

Jon H. said, “Everyone knows music is available free for download if you’re willing to put in the time and effort.” Yes, and violate copyright laws. Most people aren’t willing to put in the time or effort, and most people don’t want to violate copyright laws either. Most people want to pay for the music they obtain. The question is: how much?

Jon H.: “The market is clearly taking two approaches: fixed-price song purchases, or fixed-rate rental subscriptions. Both are effectively selling a service, not for the specific content. Since customers are paying for access and convenience, rather than the specific songs, there’s no room for varying the price of a given track based on the supposed claims of value as determined by the label.”

Fixed-rate subscriptions are fine and don’t implicate supply and demand (which may make the argument for why that’s a better pricing approach). But once you start selling song-by-song, you necessarily raise the question of why THAT price. Yes, as you say, if the premium price is too high then people will go elsewhere. But that doesn’t mean that price variability shouldn’t be used to make the price LOWER. Everyone seems fixated on the idea that price variation means charging more for certain songs, when it also means charging less for others. Why not make non-label independent music only 50 cents per song?

See, when you set a price PER SONG, you are necessarily asking the purchaser to place their own subjective value on that song. If they value it at the price asked for or more, they’ll buy it. If not, they won’t. Pricing becomes a mechanism for affecting whether consumers buy a certain song or not. And variable pricing inevitably becomes a more efficient system for synching consumer demand to the song’s value.

Now, as far as AllofMP3.com is concerned, that it’s a Russian site has nothing to do with the viability of its pricing scheme. So I do think it’s a valid example of alternatives to the iTunes approach.

And then comes Joe Populist, whose capacity for tediousness knows no bounds. First he said, “raising prices on “popular” online songs is the same idiotic thinking that the music industry used to justify knocking prices of a CD to $20 bucks. Which of course, created the black market in music downloading that has cost them MILLIONS in lawyer fees to crush!!!” I say, that sounds like high prices create a black market. Then he turns around and whines, “I said that overcharging decreases the revenue stream, not increases it, as customers leave the market to seek alternatives.” Yeah, go find THAT in the original statement. Joe, you said that people left for the “black market.” And overcharging =/ price variation. They are two different concepts. So at least try, try, TRY to get these things in your head.

Then you get this beaut: “By keeping the price low, Jobs increases the sales, and the increased sales maximizes the profits. Encourages the market, and supports the consumer.”

Oh my, my, my, my, my. So, let’s just put poor Joe out of his misery: iTunes loses money. The whole point of iTunes is to attract consumers to other Apple products. http://www.theregister.co.uk/2003/11/07/your_99c_belong/

Joe, a piece of advice: When all you do is spout drivel that needs nothing more than personal (obstinate) belief or animus (what, did some MBA run off with your wife?), you’re fine. But every time you actually try to pretend that something you believe is actual fact, you only prove that you have absolutely no idea what you’re talking about.

Isaac Freilich Jones — May 31, 2006 at 6:38 pm

When I wrote that supply was infinite I did not mean that a person could have as many copies as they wanted of any song they wished. Rather, there is no limit on the number of people with computers and internet access who can download a copy. Markels writes that “Just because you can similarly digitize books, movies, newspapers, and the like doesn’t mean that these media are now of “infinite supply” and therefore free (which would also make iTunes “obsolete” in that it demands a price for this supposedly “infinite supply”).” I would say that this is indeed the case. Although the infinite availability of media is not healthy for the creation of new media, content which already exists can be copied and downloaded to as many people as want it at almost no cost. To demonstrate the fact that media has become free, one need look no further than the peer to peer file sharing program bittorrent, which accounts for 35% of all information transmitted over the internet, according to a recent study by british tech firm CaseLogic. I doubt apple has 1/1000000 of that volume on iTunes. In fact, I believe Markels takes my argument to its logical conclusion very nicely: iTunes is already obsolete, and is being handily outcompeted by its competitor, Bittorent, which has noticed that the natural price of media content is now zero.

Christopher — May 31, 2006 at 6:49 pm

I agree that Joe Populist is (to put it charitably) a bit of a windbag, but it’s important to note that while iTunes has been unprofitable for most of its existence, it began to make a modest profit starting in the second quarter of 2005, if my memory is correct. So it is quite possible to make at least something of a profit under the current fixed system.

That said, I’m not sure whether or not variable pricing would work with iTunes. Since there is no virtually no scarcity, the songs have value only because Apple sort of imposes scarcity at various points along the value chain. For example, iTunes allows users on OSX (who have already paid their toll to Apple’s profitable hardware division) to send their music to any portable player, while Windows iTunes users are restricted to the iPod. I think what it comes down to, regardless of the tricky sarcity issue, is that a firm’s job in a free economy is to maximize its profits. If Apple can introduce variable pricing and raise its revenue without sacrificing volume or market share, it should. But you’d need a lot more info than we have now to make that descison.

James N. Markels — June 1, 2006 at 11:36 am

Isaac: “iTunes is already obsolete, and is being handily outcompeted by its competitor, Bittorent, which has noticed that the natural price of media content is now zero.”

But that’s not true. It costs money to create media content, and it costs money and time to access the media content that you want out of the millions of options available, much of it being crap. And that’s assuming there is no copyright cost issue to factor in as well (which, of course, there is).

As some have noted, moving to a service-fee-based system may make more sense since the issue isn’t scarcity of material but scarcity of time and storage space — essentially, we should be paying for access to a library of content and assistance in locating what we want in there, not for each song. But if iTunes insists on charging per song, then it needs to address why variable pricing wouldn’t be more efficient.

Joe Populist — June 1, 2006 at 12:18 pm

Mr. “Markets”: “Joe, a piece of advice: When all you do is spout drivel that needs nothing more than personal (obstinate) belief or animus (what, did some MBA run off with your wife?), you’re fine. But every time you actually try to pretend that something you believe is actual fact, you only prove that you have absolutely no idea what you’re talking about.”

Oh Pooh. You’re trying to find a pony in the pile of horse manure that is the content of your column.

Rationalizing away the obvious fallacies in your pricing advice is not going to change the FACTS.

The FACT is that Itunes is profitable following the pricing model that you criticize.

And if indeed, you knew that the purpose of ITunes was to sell ITunes Flash Media Players, then how why didn’t you mention that in your original column? Isn’t it true that as a marketing strategy to provide content for equipment sales, it is a FACT that ITunes’ pricing strategy has been immensely succesful?

As much as you want to deny it, the FACT that the music conglomerates using all the MBA tricks of monopolizing the distribution system, withholding content, and overcharging, did result disasterous consequenses for it’s shareholders.

What galls me about Mr. “Markets” is that in every column you write, you’re always talking about “entreprenuership” and “free markets”; yet you’ve not so much as run lemonade stand in your entire life.

You remind me of your hero President Bush—the shining example of your style of “conservatism”…free markets for everyone else, family connections and ripping off the public for me and mine.

James N. Markels — June 1, 2006 at 3:05 pm

Joe: “The FACT is that Itunes is profitable following the pricing model that you criticize.”

No, it’s not. See above. Clinging to a false premise does you no good.

Joe: “And if indeed, you knew that the purpose of ITunes was to sell ITunes Flash Media Players, then how why didn’t you mention that in your original column? Isn’t it true that as a marketing strategy to provide content for equipment sales, it is a FACT that ITunes’ pricing strategy has been immensely succesful?”

I didn’t mention it because I was considering iTunes itself, which is reasonable since the viability of the iTunes business model should be compared against its own performance. Now, one thing that has obviously eluded your grasp is that iTunes may be functioning in a monopolistic fashion to prevent competition. Apple is offering iTunes at a loss in order to get people hooked on other Apple products, thereby making it difficult to compete with iTunes because competitors cannot maintain a similar service at a loss. Interesting indeed that you are cheering for a group that already has monopolized 80 percent of the online music sales market and is apparently using iTunes to seal its dominance — you know, one of those “MBA tricks of monopolizing the distribution system” you keep harping about. Doesn’t your twisted little world oppose monopolization as being bad for consumers? Or are you being, gasp!, a hypocrite?

One thing that is a fact is that taken by itself, iTunes’ pricing strategy is not profitable. If iTunes was Apple’s only product, it would not be able to maintain its current situation. Apple is using iTunes to take over another market where it makes the real money. Another thing that is a fact is that variable pricing more efficiently matches price to consumer demand. But hey, ignore these obvious facts as you will.

Joe: “What galls me about Mr. ‘Markets’ is that in every column you write, you’re always talking about ‘entreprenuership’ and ‘free markets’; yet you’ve not so much as run lemonade stand in your entire life.”

So? How many economists have ever run businesses? You, however, haven’t cracked a book in your life, it seems. It’s not galling, just funny.

Joe: “You remind me of your hero President Bush—the shining example of your style of ‘conservatism’…free markets for everyone else, family connections and ripping off the public for me and mine.”

Talking about price variability has absolutely nothing to do with nepotism. And Bush certainly isn’t my “hero.” But hey, facts aren’t really important when there’s a good rant to make! Wait…isn’t that the essence of “populism?” Better go ask your betters, like Lou Dobbs and Bill O’Reilly.

James N. Markels — June 1, 2006 at 4:48 pm

And lest Joe delude himself into thinking that Steve Jobs and Apple are some open, egalitarian outfit: http://www.affbrainwash.com/archives/018312.php

Ron Riiley — June 3, 2006 at 3:47 am

Hey, y’all, supply and demand is the capitalist way to be sure, but it fosters greed…get it!?

Jon Booth — June 3, 2006 at 2:10 pm

My personal opinion is that Itunes will eventually sell songs at differentiated prices. Why? There are plenty of sites like http://www.mp3search.ru, and http://www.allofmp3.com which are eating up the legal downloading market. Why pay $8-$10 for an album when these sites offer it for $1.27.

Alex — June 6, 2006 at 6:54 pm

overpriced albums created “illegal” online music sharing, “legal” music downloads were created to move some of that to a profitable venue (for the labels) however overpriced downloads (supply and demand be damned) will drive people right back to the “illegal” sources.

’nuff said.

James N. Markels — June 7, 2006 at 2:08 pm

Alex, it’s hard to gauge what is “overpriced” when it comes to music. People flocked to Napster for free music, but it wasn’t like there was a prominant alternative site that charged for the downloads available for comparison at the time. Charge-for-downloads sites came along later in response to the Napster phenomenon. Though there are some people who demand that music and other media now be free, most people are willing to pay some amount, and aren’t interested in violating copyright laws. The general online market seems to have settled for between 50 cents and $1 per song or so, which is a little cheaper than the typical $16.99 or so people paid for CDs.

Anyway, I actually had a thought about why a site might not want variable pricing. Say iTunes has variable pricing based on demand, and there happen to be a lot of Madonna-lovers who like iTunes. Prices for Madonna songs will thus be high in relation to other songs. If I want a Madonna song, it is in my interest to find a variable-pricing site WITHOUT a lot of Madonna-lovers on it. Thus, variable pricing can drive business to other sites.

The answer to this would be for sites to set a ceiling price for music to minimize that effect. No site wants demand to drive up its prices so much that a consumer is willing to check out another site — what you want is dedicated customers. So worries about $4 songs and the like are probably moot. But it does seem to indicate that sites might prefer a fee-based service system rather than per-song pricing, and that is where the market will eventually go.