How Apple Can Kill Off $1.29 iTunes Tracks

Asking fans to pay 30% more per track during the worst recession in most people's lifetime is yet another ill thought out move by the major music labels. They seem to have the idea that their recorded music is an essential part of entertainment today, and thus they are entitled to a high level of revenue to keep their failing business model going.

Higher Prices Reduce Sales

Higher prices may even lead to less revenue, according to Billboard, which looked at what happened in the first few days: "The changes in chart position between Tuesday and Thursday, however, clearly show that higher prices had forced many songs to cede chart position to lower-priced songs."

What's more, it is not in Apple's interest to help the major music labels to promote more expensive music. Apple wants to promote people having more music - of preferably higher quality. This takes up more memory and therefore sells ever higher capacity iPods.

Those wonderful heads of the major music labels have forgotten a major lesson from Marketing 101. If the organisations you are relying on to market your product have interests opposite to yours, the marketing campaign won't work. Even worse, in this case the customers, the people paying for the music, can easily move to free.

The Upgrade Conundrum

Asking fans to pay 30¢ to "upgrade"' their libraries to better quality, DRM-free tracks was yet another case of wanting a few more dollars now and forgetting about the future. The current bosses seem to be interested only in hanging on for the next bonus rather than growing the business.

If the labels really wanted to have music lovers buying from more distributors, they would have waived all fees so that everyone could upgrade their library to iTunes Plus for nothing. Everyone could then easily migrate away from iTunes and iPods.

As it is most people will only upgrade some tracks, those that they really want at high quality, and will stick with "good enough" for the rest. This means they will also stick with iTunes and iPods as long as those too are, at least, "good enough".

The iTunes Store is easily the largest distributor of paid digital music and makes a profit, but it is not a major source of Apple's profit. Indeed Apple always talks about having it break even. It is there to make it easy for iPod customers to buy music, so they don't have to buy CDs and transfer the tracks they want to listen to, and so Apple can deflect legislation from organisations wanting to tax iPods because of P2P downloads. It also keeps customers buying regularly from Apple. All those successful small buys keep bringing them back to a website where the new higher margin products are ready waiting for them.

The App Store

The time when all those small buys were music has passed, and now the music industry no longer has any kind of hold on Apple. The App Store fills the role much better. More importantly the apps only work on Apple products, and, at the current rate of growth, the number of apps downloaded per month should be greater than music downloads within two years.

The apps are mainly written by small companies and people who are happy to make money and accept standard Contract Terms and Conditions. This avoids long negotiations with companies that seemingly can't recognise that all they own of value is a back catalog, and it is in their interest as well as Apple's to make money from it.

Like apps, music can and should be an instant purchase. Hear a great track, and if you don't know it, use Shazam and buy it. When tracks cost more, that loop is quickly broken. Instead customers add it to the shopping basket and may buy it later, so a good part of the advantage of letting 30 million customers buy on their iPhone and iPod Touch has been lost.

Killing $1.29 Tracks

All Apple has to do to kill the $1.29 track is fill the iTunes Music Store landing page with the "best buys" and let customers see the most popular tracks by price, so instead of Top Songs it becomes Top Songs at 69¢ and Top Songs at 99¢. Feature more of the good bargain albums.

As Apple doesn't accept or need payments from the record labels to subsidise the home page, it can do what it wants, and now it's best to sell bargains. People can buy two tracks at 69¢ for pennies more than one $1.29 track. Phil Schiller's keynote stated that there would be many more tracks at 69¢ than at $1.29; this probably means that the labels have to cut the price of 2 or 3 other tracks for each expensive track and perhaps have to provide a percentage of cheap tracks for all tracks uploaded.

We can be sure that Apple won't be depending on the labels generosity for what's sold cheap, so they should choose classic tracks. As soon as the labels learn that expensive new music doesn't sell but that tracks priced cheaply do, 99¢ should again be the top price - and more people will buy instantly.

When music ruled, there was no competition. If you wanted to spend time on the phone with friends, you had to do it at home. As soon as you got in the car, you put the radio on whatever station was hot at that time of day.

Music now has plenty of competitors for non-working minutes, if the music is more than wallpaper. Games come with soundtracks. Facebook, email, and tweets all take up time. If the labels didn't have their heads in the sand, they would use what little leverage they have to get Apple to allow music apps like Pandora and Last.fm to run in the background on iPhone and the iPod touch.

Marketing Music

Another good approach is with paid podcasts and "trusted guides". People need to hear good - and preferably great - music often to want to spend more of their day with it. The labels just don't know how to promote music any longer - they keep on doing it the same old failing way, but expecting a different result.

So what has been achieved by raising the price of new tracks? Even less revenue for the music labels, as the average selling price of tracks will go down. And as soon as the labels can no longer afford to pay large advances to bands, little new music will be released through them. Their only future is in releasing and monetising their back catalogs.

They need to digitise quickly and provide to iTunes, Amazon, etc. at least their share of the 40 million + additional tracks that Gracenote supports. Then start working with Apple and "trusted guides" to introduce all the wonderful tracks to a new audience and who knows, buying music may once more be something that most teenagers do.