Thursday, April 08, 2004

The record companies just really don't get it

After rounds of lawsuits and "graciously" allowing competitive pricing on online music download services, the record companies have decided to get greedy. No big surprise here, they just don't seem to understand.

This article discusses how record companies are trying to figure out ways to get the price of a downloaded song to cost $1.25-$2.49. It's funny because usually prices go down year-to-year, not up; especially when there is such an easy mechanism for obtaining the product for free.

Let's do the math here real quick: 25 million tracks in the first quarter of this year, so project that out (with no growth) to 100 million tracks this year. Assuming the record companies will be conservative and raise the price only $0.10, they stand to gross $10,000,000. Wow! That mus look really great on the screen in the board room. Unfortunately, the online downloading business is still developing and a movement upward in prices may just kill the whole industry and send consumers back to illegal trading (personal music players and digital music will increasingly more and more disruptive to traditional CD sales). Unfortunately, there is not way to quantify the loss of the online music segment, so that information does not get put up in the presentation.

The whole $0.99 per song $9.99 per album trumpeted by Apple when iTunes was released seems to have flown out the window. I downloaded the new album by Yellowcard the other day and only after I got my receipt did I realize that I had paid the full $0.99 per song (total of $12.87 for 13 songs) instead of the $9.99 for the CD. I'm glad the CD has a ton of good songs on it, and this experience will make me very conscious about costs on iTunes going forward -- you won't get one over on me again.

Some might say that iTunes is more convenient. I agree. How much is my time worth? Well, at $2.49 a song (if it gets there), my time isn't worth so much that I wouldn't burn a CD -- I do work right up the street from an Amoeba and a Borders (other people might say that the cost makes the risk of P2P less of a concern). How much is digital downloading costing record companies? Very little in infrastructure -- encode the song, send it to the digital music provider, and collect a check. The problem is that these companies still have to pay for the massive CD factories that they constructed to pump out CD's.

Let me tell you that my ceiling on songs is $0.99. If they go above that, I probably won't buy them. Or if Walmart continues to sell tracks at $0.88, I'll probably buy them there. By the way, record companies, how are you going to sell Walmart on these price increases? Isn't it Walmart that tells you what is going to be charged (and doesn't the cost of Walmart products usually drop every year)? I wonder who the largest CD retailer in the country is these days. Are you really willing to destroy the business models of your biggest champions and further alienate the very people that buy your product?

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