Why are all songs the same price on iTunes?

99 cents, but the deals expire in two months.  Apple insists on keeping a single price across the board.  Why might this be?  Why might the retailer care more about price predictability than the wholesalers?

1. The confusion and resentment costs of different prices might be blamed on Apple.  But surely we see different prices in many other retail arenas.

2. Perhaps Apple is solving a status game problem.  If everyone else is selling for 99 cents and your song sells for $1.20, yours looks special.  Music companies might set prices too high, not taking into account the lower demand for iTunes, and music, more generally.

3. Could Apple be enforcing music company price collusion, while receiving implicit kickbacks in the rights agreements?  This would require the complainers to be in the minority.

4. Apple makes much of its money on hardware, especially iPods.  Low song prices  cross-subsidize the hardware, to some extent at the expense of music companies.  That said, some music companies wish to charge lower not higher prices.

5. Hit songs are kept at artifically low prices to discourage people from moving into the world of illegal downloads.

6. Price is a signal of quality and Apple doesn’t want to admit it carries "lemon" songs.  But won’t demand for the hits go up?

7. Uniform pricing is a precommitment strategy for a durable goods monopoly game.

We must distinguish two aspects of the problem.  First, Apple wishes to control retail prices.  Second, Apple wishes to make all retail prices the same.  Which of these features is more important for understanding the problem?

Here is a proposal for determining prices by auction; no way will we see it.  Here are rumors that the uniform pricing will end.  Note that the Japanese store already has two tiers of prices.  How about keeping the price the same, but bundling hot songs with less desirable ones?  Way back when, we used to call these "record albums"…

Comments

In bricks & mortar music stores, CD prices range from $5 to $20-- one is left with the feeling that CD pricing is quite arbitrary and that the 'real' price of a CD must be close to, if not actually equal to, zero. Personally, I never buy a CD at 'list' price, the 'it's a ripoff' voice in my head is too loud. This feeling is supported by the contrast with prices of DVDs, which are only a little more expensive than CDs but provide far more data/dollar.

In contrast, a constant $.99/song suggests that what you're buying has a real, fixed value.

Great discussion starter. I think #4 is certainly big. And I think they like the psychological effect of 99 cents, under $1 too.

The pricing mode could also be a recognition that the differential pricing on CDs was arbitrary and capricious. The record producers tried to put hype into some songs and not others. Apple, like Shakespeare, seems to be saying "A song is a song is a song, but a song offered by friends of the RIAA would not sound as sweet."

A second comment. iTunes pricing, if you think about it, actually discourages piracy. The post by nelsonal (above) seems to reflect some notions that are simply illogical. I currently have two iPods - one to travel with and one for my car. Between them I have bought about 600 songs but on the larger one I have 6000 items. The other 5400 are divided up into three categories - 1) Songs of CDs that I have purchased outside of iTunes and collected into my iTunes files, 2) Podcasts and Vodcasts - taken down from the Apple site, and 3) Videos purchased from Apple. In spite of the claims of RIAA which might suggest that the shifting aspect of the CDs that I have purchased are somehow illegal - iTunes has actually encouraged me to purchase more music (notice that all of the music on the iPods is legal). The simplified pricing encourages me as a consumer to go on the iTunes site when I think of an artist that I would like to hear. The unbundling of songs does the same thing - I can buy an album (where there is the possibility of a couple of clunkers) or I can buy individual songs. Were this not so iTunes would not have sold more than 1 billion songs.

There is zero evidence for #4, namely that any music company will if given the chance charge *less* than $.99. There is ample evidence that they will try to charge more.

Another possibility: Apple understands marketing in a long tail market better than the music companies. Niche tracks may not be worth $.99 to the latest-hits-buyer, but they are worth it to a certain subset of buyers. By keeping a uniform, competitive price, they prevent the music companies from pricing the service into unprofitability.

Maybe the problem is "reselling" of illegal copies. All illegal copies(substitutes of iTune-files)have the same "price", just the search costs and costs of doing something illegal. Maybe iPod only can attract consumers which want to prevent extra search costs and costs of illegality. These costs are the same for all illegal copies.

I've always felt 99 cents is actually pretty pricey for the quality of track. When you buy a song from iTunes you are buying a mediocre lossy 128kbps copy. If I want more than 5 or 6 songs from a given CD I'd still rather pay $12.99 to have decent quality recordings. Even if I wanted just 2 or 3 songs I'd probably pay $7.99 for a used CD rather than go to iTunes. But of course I'd have to spend my time to physically go and find that CD, or wait for Amazon to deliver it. So I believe the 99 cent price point works only because it is low enough to encourage impulse buys - it's the price you're willing to pay for the convenience of instaneous gratification. If you go above a buck you will lose a lot of customers like me.

I think it's got to be #1. The other arguments just don't seem to hold water. And many of them are arguments for why pricing should be low, not uniform. For anyone who is interested, I tackle them one by one over at my blog (econball.blogspot.com).

The author of that Slate article knows jack about prices.

I don't want to derail the conversation, but on a related topic - does anyone understand why bookstores sell high-demand titles at a steep discount? Harry Potter is the obvious example.

This practice seemt so take several steps further along the path of fixed-price songs, into a kind of bizarro-world where increased demand lowers the price.

A variation on #1: The confusion, whether it is blamed on Apple or not, will force the customer to think about price each time he picks one to buy, and the effort of thinking is part of the cost. By keeping the prices uniform Apple may be removing that cost to the customer and consequently increasing its overall sales. This may be at the expense of particular tracks but Apple is more interested in overall sales than the owner of particular tracks. That may be what Tyler means by "blamed on Apple" but if so it wasn't clear to me.

Furthermore, making all the tracks a uniform price makes it possible for Apple to advertise on price. It can say, "visit iTunes, just 99 cents a song", instead of having to say, "visit iTunes, 99 cents for some songs, a buck 20 for others, sixty cents for others, well here's the itemized list blablabla - [four hours later the commercial ends]."

"does anyone understand why bookstores sell high-demand titles at a steep discount"

(warning: noneconomist speaking) There are many explanations I can think of but the one that seems best is this: bookstores like any business must sell their books at above cost. But the longer a book stays on the shelves, the higher its cost to the bookstore. So books that sit on the shelves must be sold at a retail price well above what the bookstore paid the distributor. However, high-volume books are sold quickly: the bookstore holds the books for a very short period of time before the book is sold. So the book takes up space in the bookstore for very little time. So the bookstore can afford to sell it for something much closer to the distributor's price.

As far as why the bookstore doesn't just charge full price anyway, the reason is competition. Like any business, bookstores are forced by competition to sell for not too far above their own costs - which includes the cost of keeping the book on the shelf for however long it's there.

Additionally, there could be price drops upstream as well. The more copies of a book that a publisher prints, the lower the cost of printing per book. This is an instance of the general fact that mass production can lower production costs and therefore lower prices. But I don't know how to fit that into a regular supply curve. The standard supply curve goes up: the higher the price, the greater the supply. My guess is that to model the effects of mass production you need something different or more involved than just a supply curve and demand curve.

howardl,

The cost of creating a song (writing it and recording) are fixed costs, independent of how many iTunes are sold. The marginal cost of an iTune is the cost of duplication, which is 0.

I think the appropriate way to price something that has free (if illegal) alternative sources is to price each song the same, since the opportunity cost, the time you spend to find and download an illegal copy of a song, is roughly the same for each song you download. If anything, "rarer" songs that are harder to find should cost more. Although I guess if you d/l torrents then the opportunity cost is more like proportional to the size of the file (if you have to maintain a ratio). Would be interesting if 320 kbps rips cost more than 128 kbps...

I think differential pricing would encourage illegal downloading, because people then can judge that some songs are "unfairly expensive", like people that say "I only download illegally because it's a ripoff for CDs to be $18.99, but if they were $9.99 I would buy lots of them".

User Experience, i.e. branding. Apple's brand is all about simplicity and making things easy. It's the same reason you buy complete systems from them rather than assemble Macs from parts.

Apple's music gamble was that by aligning themselves with the user and creating a compelling, easy experience they would move into a position in the value chain that is the raison d'etre of labels, but had largely evacuated or taken for granted in the digital domain. This allowed them to introduce much more user-friendly DRM than anyone else, which turned out to be the key to opening up the market. They are still calling the shots, and there are bigger issues at stake for the labels than a few cents here or there. They can't ditch Apple yet. And by the time they can (when other systems catch hold), Apple might be in a position of pretty strong distribution dominance akin to a large cable operator.

At the consumer end, annoyance from the bargain hunters is of minor impact compared to the people who are subconsciously relieved that they don't need to invest in making a decision about how much their Amerie song is worth. Once again, Apple reduces decision costs, and this allows new users to enter the market. Online music is still a growing market, and acquisition is still more important than profit for the moment - especially with the high switching costs to competitive platforms.

Showing my age, I remember when there was a thriving singles market. IIRC all those 45's were priced the same.

MW, for movies the ticket price is a small part of the expense. Most of the cost is the opportunity cost of time. It probably isn't worth it for theaters to set up a pricing scheme.

I think differential pricing would encourage illegal downloading, because people then can judge that some songs are "unfairly expensive", like people that say "I only download illegally because it's a ripoff for CDs to be $18.99, but if they were $9.99 I would buy lots of them".

I'm in this camp too. Most people are taking this attitude right now with gasoline -- in which case, unlike the one we're discussing, there is a clear and immediate scarcity problem to price ceilings. This same huge majority of the public is sure not going to understand things any better when it comes to the tricky long-term issues associated with pricing of super-cheaply reproducible intellectual property. Much better for reputation just to act like socialists who believe in a stable, objectively just price.

Three possible Reasons

1. Apple does not want to be seen as a competitor to the brick-and-mortar stores that Music companies sell their CDs through. If it cuts prices on certain songs and increases it on others the existing retail network may see it as a threat and affecting their demand. Apple does not want to be seen as shaping the consumer demand at this point of time. From Apple's point of view the entire iTunes is as it is a huge step for the music companies, the last thing they need is an opposition from their exiting retailers.

2. Since it is an industry effort Apple wants to be seen as price neutral towards all record labels.

3. iTunes is at an experimental stage right now. Getting into differential pricing -- assuming record labels agree -- would require more resources in managerial time the way it happens in say amazon or any other online retail venture. Apple wants to keep that cost to minimum right now. If one believes the line of thought that it is the iTunes+IPod combination that makes IPod a success then one can look at the cost of runing ITunes as a part of selling expenses for iPod and if you keep that down your profit on every iPod will be higher.

Plus, usually you have already decided to see a movie before you go to the theater. Why would the theater give you the choice pay less than you have already decided that you are willing to pay.

Wuh? By this logic whenever you come to the register the cashier should charge you a million dollars, no matter what you're buying.

Let's try that again:

Brian Tiemann had a post about pricing of music at the ITMS (which I can't find), where he said that if the record companies create two-tier pricing, it will lead to bad things. The record companies will make new releases a higher price ($1.99, for example), which will then become a signal to buyers for "quality"; record companies will be able to use the threat of releasing new music at 99c to start, dooming the music to be considered crap, and probably lowering the royalties received from individual buyers.

Is it just me or is it cheaper to buy/download a "whole album" of 14 songs individually for .99 @ ($13.89) or buy the "whole album" listed at $16.99??? What does one gain from buying the album by itself other than not clicking buy now 14 times?

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