This is from yesterday's NY Times. I'm posting the article and not the link because (1) you have to be a member of nytimes.com, and (2) you can only access NY Times stories for 7 days. If I should still post only the url link, let me know!
October 12, 2003
What Price Music?
By AMY HARMON
Since the introduction of vinyl records after World War II, recorded music has assumed many shapes and sizes, each one coming with a higher price tag than the last. Eight-track tapes cost a dollar more than LP's when they rose to popularity in the late 1960's and cassettes commanded a premium over eight-tracks. When CD's debuted in the mid-1980's, record labels sold the shiny discs for $18, more than double the price of what they charged for the same music on LP's and cassettes that cost more to manufacture.
Unlike these formats, which the industry adopted voluntarily and marketed vigorously, the latest shiftâ?? to digitized versions of songs that can be distributed onlineâ?? have been thrust upon it, the outgrowth of a technology it could not control. Battered by a sales slump it attributes largely to digital piracy and heartened by a limited test with Apple computer owners, this fall the record industry is trying to catch up with its file-swapping customers: the major labels and many independents have agreed to deconstruct the album, allowing anyone with a computer to buy any of hundreds of thousands of individual songs. Soon huge catalogs of every genre of music will be available for sale on the Internet from over a dozen retailers, bearing the blessing and license agreements of the major record labels.
No one knows what all the effects will be. But one will certainly be on price; music in the new format will cost at least a little less than it did in the old. The standard charge has become 99 cents a track. Albums that cost between $12 and $18 on CD now sell for about $10 online. The labels have also authorized several services to offer a kind of online lease program for music: subscribers pay a flat $10 a month to listen to as many as half a million tracks as often as they want over the Internet, rather than storing them on a computer or burning them to a CD.
And the next months are expected to bring price wars â?? in both the usual and a more figurative sense of the term. As musical recordings have increasingly shed their physical form, the record industry and its customers have been at odds over what it all should cost. Music fans complain of high CD prices and copy more music illicitly than they purchase legally, while the record companies rail against the devaluation of their product and take file-sharers to court.
Since legal ways to experience online music are only now becoming widely available, there is no established record of what the market will bear or how these innovations will be received. Will each song purchased online represent the loss of a whole CD sale in the store? Or will customers respond to the ease and selection of e-commerce by buying more, overall? One possible development is that hit songs could cost more than obscure recordings. Another is that retailers would set prices on a sliding scale, to favor students or high-volume buyers â?? a departure for an industry that has basically sold one product, in one configuration, discounted at periodic intervals, for decades.
With all these unknowns, and with all the labels in competition with one another, how did the online services decide â?? even for the time being â?? on what to charge for a song? By most accounts, the 99 cent trend started with Apple Computer's chief executive, Steven P. Jobs. One record executive who insisted that he not be identified described a meeting last winter of the company's senior management that Mr. Jobs addressed in New York. "He came in and said, `People pay $3.99 for a cup of Starbucks coffee, and it's gone in 10 minutes,' " he recalled. "If you compare it to free, then 99 cents may seem like a lot. If you compare it to a cup of Starbucks coffee, it seems like a very good value."
An executive at another label, who also declined to be identified, put it slightly differently: "Who the hell knows?" he said of the pricing decision. "It's a shot in the dark."
Ninety-nine cents is only slightly less than the cost of a song on a CD (given the usual price, around $14, and the usual number of tracks, around 12). And adjusting for inflation, it is about 10 times more than 45-r.p.m. singles cost during their heyday in the 1950's. Still, Mr. Jobs's take on the psychological appeal of the price, at least for the small, affluent audience of Macintosh users to whom the iTunes service has been marketed, may be apt. Apple said last month that the iTunes store had sold 10 million songs in its first four months of operation, about half of which were sold as full albums. The company plans to offer the service to the much larger market of Windows PC users this week.
Two weeks later Napster, which, before being shut down by a court order in 2001, was more responsible than any other factor for the vast popularity of unsanctioned file-swapping, will begin its second life. The rehabilitated service, whose underlying software is based on the Pressplay service that the software company Roxio bought from Universal Music Group and Sony Music, was shown off to the press last week and is scheduled to open to the public on Oct. 30.
Visitors to its Web site will be able to download full albums for $9.95. That's a whole 4 cents less than at the Apple store. For individual tracks, Napster has struck on the same price as Apple: 99 cents. The company's research showed that lowering the price, even to 75 cents, would not elicit proportionately more sales.
A recent real-life experiment in price-lowering produced very different results. In a six-week promotion earlier this year, RealNetwork's Rhapsody service allowed subscribers to burn tracks to a CD for just 49 cents. Sales more than tripled.
"Simple logic would say, `Well, duh, you'd make more money if you price tracks at 49 cents, or maybe less,' " said Rob Glaser, chief executive of RealNetworks. "The problem is you can't prove to these guys that the 49-cent price does not cannibalize CD sales. The experiment was successful, but the patient was worried about the side-effects."
Mike Bebel, Napster's president, said his researchers did not even bother to test the effect of prices below 75 cents, because they would not be sustainable unless the entire industry embraced a new economic model. In practical terms, record companies would have to slash the wholesale price they charge online retailers (which at present is 70 or 80 cents a track). That would mean accepting a slimmer profit margin for online sales than for CD's, which they currently seem intent on resisting. Beyond that, although their royalty percentage would be the same, artists would have to accept a much smaller check for each sale. Getting either party to contemplate those changes may be more of a challenge than anyone's ready to take on.
Meanwhile, the first users of these new services have begun to derive their own calculus of commercial value. Given the large overlap in the music that the online services carry, slight variations in how they operate may dictate which service wins the most listeners.
One of the most obvious distinctions is whether services allow users to see what other people are listening to, to read over their playlists and compare their favorites. That feature was regarded as a key to the success of the original Napster, a way to create a sense of community out of the varieties of cultural taste. It's still popular now, even when the files in question are being purchased rather than swapped. Rhapsody subscribers can e-mail each other their playlists. And eMusic subscribers gather at the
www.mymixedtapes.com site to post thematic lists of the songs they have downloaded, which can in turn be downloaded by others. (Among the current selection: "Songs to Hallucinate By: 63 minutes of sound that your girlfriend will hate" and "The Beatles Get Soul," featuring Beatles covers by blues and R&B artists.)
"Creating a viable online music service is less about acquisition than tapping into what makes music work on a social level," said Mike McGuire, research director for media at GartnerG2, who has explored Napster and several of the other new services. "Once you get beyond the transaction to that place where it's kind of magic, I think what you're doing is ensuring future transactions."
Another apparently valuable feature is the automated â?? and sometimes uncannily accurate â?? recommendations service that many online retailers offer. Todd Armstrong, 41, stopped buying music soon after college. But when MusicMatch came installed on a new computer, he signed up for the $4.95-a-month Internet radio service, which supplied additional suggestions based on the artists he selected. That's how he discovered the rap artist Nas, among others.
"The real power of it is it has a good idea of what I might want," he said. Earlier this month, the service added a feature that allows users to buy the songs they're listening to; since its debut, Mr. Armstrong has bought 20 tracks for 99 cents each.
At a time when radio selection is notoriously restricted and CD's are increasingly competing for shelf space, online services do present consumers with a real alternative: Rhapsody, which like several of its competitors offers more tracks than Virgin's Megastores, said that overall its subscribers listen to 85 percent of them on any given month. Apple says its customers have purchased 80 percent of the 200,000 tracks in its online catalog. Even so, several big acts, including Radiohead and Metallica have so far declined to allow their albums to be broken up and distributed as individual tracks, citing the artistic integrity of their work.
Some of the services are moving â?? slowly â?? to add artists without record deals to their catalogs, which could ultimately signal a shift in power away from the five major labels, which control about 80 percent of the music sold in the United States.
Napster said it would feature a handful of unsigned artists each month, selected by its staff. Apple met with independent labels in June and several, like CD Baby, are negotiating with the services on behalf of groups of independent artists.
All these features may well persuade consumers to start paying to download music. But the record labels won't have succeeded unless they can also persuade consumers to stop downloading it free.
Alan Peterson, 35, of San Francisco admits to having dabbled in downloading before subscribing to Rhapsody for $10 a month. Now he finds the old, free system too inconvenient. With his computer hooked up to his stereo speakers, he has set up playlists â?? "high-tempo soul," "low-tempo soul," "80's hits" â?? for different moods. And, he says, he can protect his investment on the CD's he does buy for the car by sampling them first.
Some find the advantages of e-commerce even more persuasive than that. Chas Schinzer, who has a $9.95-a-month subscription to eMusic, a service that features mostly independent labels, still fumes at the memory of buying a Blue Oyster Cult record in 1976 for "Don't Fear the Reaper" and hating every other song on it. "The shift to buying online music is a windfall for me," he added. "I will never buy a CD again."
Like the VCR, which the movie studios sought to ban but which turned out to provide a huge new market for them, online music could eventually be the record industry's salvation. "This is much bigger than the CD," said Doug Morris, chairman of Universal Music Group, the world's largest music company. "The CD and the LP and the cassette were all packaged goods. This is about being able to find all the world's music in one store â?? a Professor Longhair record, a Benny Goodman record. Where are you going to find that in a record store now?"
Under pressure from illegal downloading, Universal, among other labels, slashed the suggested list price of most of its CD's by nearly a third last month. Mr. Morris says he had no choice â?? "we had to compete with free," he explained â?? but he is hopeful the outcome will be higher sales overall. And though the industry may not be ready to reconceive its entire business model, it has seen fit to update some of its more archaic accounting practices. Royalties, for example, were traditionally set at a fixed rate, regardless of actual costs. (When the CD was introduced, labels charged consumers twice as much but paid artists only the same amount for many years.) This time around, however, to persuade artists to participate in the online services, the record companies have altered the formula, eliminating certain fees that used to be charged against royalties and leaving the artists with a bigger â?? slightly bigger â?? profit.
But by any measure, if the CD is giving way to the Internet as the dominant form of distribution, the industry's biggest adjustments lie ahead. Some analysts expect the industry to contract as plummeting CD sales force more specialty outlets to close and relegate music to shelves in superstores like Wal-Mart. Music, at least in the short term, will become less diverse as the industry has fewer resources to invest in new artists or those less likely to become mainstream hits.
A brighter view has the industry test-marketing artists with a few songs online, enabling the major labels to spread their resources among a greater number of musicians and perhaps increasing their odds of success.
But for the time being, record executives are still seeking to protect the more reliable, more lucrative CD business, which currently accounts for almost all of its revenue. After all, some say, antipiracy, anticopying technology may be available within the year.
If that happens, the industry is likely to back away from the kind of pricing innovations with which it is now experimenting. Already, a strain is evident between record labels that want to restrict what consumers can do with the music they buy and the new on-line retailers, which argue that people won't use their services if they can't use it freely.
"This isn't going to work if people don't feel like they own the music," said a senior executive at one of the new services, who declined to be identified because of continuing negotiations with the labels. "Doesn't someone over there realize that? Why should people pay for it if it's not more convenient â?? when they can just get it for free?"
