April 13, 2009, 4:47 PM — So the first real analysis of variable song pricing on iTunes is out, and to absolutely no one's surprise it turns out that charging more for things results in fewer sales. The results of this study, by Glenn Peoples at Billboard, have been picked up pretty widely.
What seems to have been less remarked, though, is that record company profits have very likely gone up on most of the more expensive songs. That's because while prices increased 30%, sales dropped only about 3.5% on average. That's just a guess, since Peoples doesn't have access to actual sales numbers, but his assumptions seem reasonable and his conclusion is probably correct. So in the (very) short run, it looks like variable pricing might be paying off for the record labels.
What remains to be seen is whether or not higher prices will decrease sales by more than a few percentage points in the long run. The labels are obviously betting not, and they might be right. Songs get noticed mostly for reasons other than price, and buyers might well decide that $1.29 (or $11.99 for an album, which seems to be a popular choice for premium selections) is still worthwhile. On the other hand, one of the ways songs and albums do get noticed is by sales rank, so it's possible that losing a few spots could do significant harm if it keeps people from discovering a new artist in the first place.
At the other end of the scale, there are now at least a handful of $0.69 songs on the iTMS (iTunes link). Some of them are featured on the front page of the store, and they're not all junk. But they're mostly second- or third-ranked songs from popular artists, and they're not at all widespread. Looks like an attempt to drum up some interest in older bands and to show that "variable" doesn't always mean "higher." But there's nothing to suggest that the long tail of pop music will be getting an across-the-board price cut. I guess the labels don't think demand for music is so elastic after all.
What's more interesting for Apple nerds is the effect all of this will have on the iTMS's dominance and on sales of iPods. We've long heard that the music store is a break-even proposition for Apple, though some estimates suggest it may do significantly better than that. If Apple's making good money from the store, and if its profit is tied to song prices, it might benefit upfront from the higher price of popular songs. But if the real point is to sell more iPods, Apple could take a hit from anything that drives sales volume down, even if music-related revenue goes up.
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