Steve's Generic Blog: February 2010

Monday 15 February 2010

On-line Music Pricing “You want me to pay how much?”

Why should I have to pay 69p ($0.99) per track for any music I want to download? OK if its the latest hot release from a favourite contemporary rock band, but for an old 1950's blues number that's long since paid back all the investment; that's 69p too.

You must be joking! That same 1950's blues track is available in the bargain bin of the local supermarket with 20 other tracks for £2.99 in a higher quality format. Admittedly the digital download offers instant gratification, but I'm still not going to pay that for it. For that matter even a two year old pop track doesn't really deserve the 69p price tag either. Lets face it this music is priced above what a major slice of its market, teenage kids, can afford, so they'll find other means to acquire it. Realistically few parents can afford to support teenagers' voracious appetite for listening to new music at 69p a track.

Fair enough, Apple's early and dominant position in the digital music distribution market enabled them to establish this price point, that's great for them, they took the risk and made the investment, and recouped their costs from the early adopters. Meanwhile the music business pretended it wasn't ever going to be a significant channel to market. However that was ages ago (in Internet years) and the market has barely moved on. Amazon have pushed the envelope to the extent that the DRM is starting to go away. There's less fear now that I'll be restricted to using a single device or service, and I won't have to buy the music again when I move to newer devices. But 69p a track for everything? Really?

It likely the current market price is a major factor in the number of 'illegal' downloads; purchasing the music is not considered an option for many of the potential customers. The music industry players are no longer competing against one another, they are competing against alternative supply channels, Limewire Bearshare etc. And whether they like it or not these other channels are not going away. Until the pricing is less of a barrier to the purchase than the inconvenience of finding and downloading from peer to peer networks music will continue to be downloaded for free by those who have the time and the capability; and lets face it the biggest consumers of the product are the teenagers and students who have the time on their hands.

No amount of misconceived legislation, such as the Digital Economy Bill, will make this go away. There will always be ways of copying digital data and circumventing the costly controls; the problem won't go away and the collateral damage will be costly to both civil liberties and the economy as a whole.

A new pricing model is required. Price elasticity should be recognised, and realistic subscription services should be embraced and explored. Its easy to see alternatives that could be tried. For instance how about creating a subscription service that is discounted to pocket money prices for students, somewhat like Microsoft's pricing for MS office. After all, if you sign someone up to your service when they're young enough, you may have a customer for life. There I did that without even straining, come music industry player's now its your turn.

Saturday 13 February 2010

Amazon vs. Macmillan - eBooks are not Music

February 2010 saw a major bun fight between Amazon, perhaps the most significant channel to market, and Macmillan one of the foremost Publishers. The ins and outs of what happened when are widely reported and blogged elsewhere; so I'll not re-type all that again here. This was a high stakes poker game for control of pricing in the emergent eBook market, in which Amazon may have overplayed their cards and had their bluff called. This will become an interesting case study for students of marketing.

Amazon were trying to establish a vice like control over pricing in the market through what they perceived to be their domination of the channel to market. Yes it was in fact Amazon being 'the bully' rather than Macmillan; though many called it differently. Why shouldn't Amazon take this stance? After all, this model worked fine for Apple in the eMusic market where a they managed to establish a $0.99 per track price position through exclusive control of the channel to market, and which Amazon has most likely benefited from since. The fact that the eBook is an emerging market, and that the market position of the Kindle is somewhat akin to that of the early iPod, makes fixing a $9.99 eBook price position an attractive strategy for Amazon to pursue. If they won this pricing battle they would insulate themselves from a great deal of the uncertainty of price elasticity for some time, and be in a position of control over their suppliers. An attractive, almost irresistible goal for Amazon.

Publishers provide an important service to authors, they invest in the author's book sinking cost in editing, artwork, layout/typesetting, publicity, distribution and sometimes an up front commission (yes, I know that there's a groundswell of opinion that publishing is dead in the age of the Internet, but that's a separate argument for another time). For publishers as much as any other manufacturer, the route to market is a major factor in the profit available from their goods (some of which pays the authors). The more control the channel to market has, the less control over profitability the manufacturer has.

For Macmillan it was vital that they control the price of their goods rather than Amazon. They seem to have won an important battle in retaining that control, setting the right precedent for both themselves and perhaps for other publishers. This however is by no means the end of the game; both sides it seems to me have unsustainable pricing policies.

Even if Macmillan hadn't won this battle, Amazon would not be able to sustain their fixed price position. There are two factors that work against them: They are not as unassailable as Apple were with their iTunes offer, they don't really have enough of a head start over other players in this eBook market. And secondly the eBook product currently doesn't have such a compelling advantage over the alternative printed versions as the digital music formats had over the compact disc. I don't believe eBooks will, in the short term, become the dominant media choice the way that download music has.

Macmillan have the sense to realise that price elasticity can be used to maximise profits, recognizing that there's a difference in perceived value between the latest hot book and their back catalogue (something that the music industry continually fail to realise). That said, they also seem to believe that the value of an eBook matches that of the print alternative, which I'd argue is currently a false assumption (here's another topic in its own right). In the short term whilst the cost of the eBook readers is limiting the market to (or targetted at) the early adopters, this pricing strategy is just about workable. Sustaining this pricing policy in the long term will either stifle the market with readers continuing to buy print in preference, or they will loose share to other more aggressive ePublishers.

This is an emerging market that will be entertaining to watch, this is the first of many interesting skirmishes, whilst Amazon have lost this battle they won't be giving ground too easily, after all this market has the potential to become a hugely more significant segment of their business.