Labels making more money from iTunes

In April, soon after Apple gave labels the ability to set different prices for their songs on iTunes, every track on Pink Floyd’s “Dark Side of the Moon” was raised to $1.29.

Labels making more money from iTunes

Some music fans complained about these price increases, and many technology executives and bloggers proclaimed that labels were making the wrong move. But while sales of individual tracks from “Dark Side of the Moon” dipped by 11%, album sales remained steady.

And all sales combined generated about 12% more revenue in the six weeks after iTunes implemented variable pricing than they did in the six weeks before.

These are the results labels were hoping for when Apple relented and began selling music at three price tiers: 69 cents, 99 cents and $1.29. They certainly put enough work into getting there: It took years of negotiation to get Apple to break its one-price-fits-all format.

Playing with pricing won’t solve the music industry’s biggest problem: Digital revenue is increasing too slowly to compensate for the decline of CD sales. But variable pricing will help labels bring in more money from online downloads, according to the results so far.

A Billboard analysis of Nielsen SoundScan data on February-May sales of hits and a sample of popular catalogue songs shows that “Dark Side of the Moon” isn’t an anomaly. While variable pricing made sales volume decline, higher prices compensate for that to create more revenue.

Not surprisingly, results vary. The demand for more popular tracks is less sensitive to higher prices, so sales don’t decrease as much. Most less-popular tracks suffer a larger sales decline and see only marginal revenue gains. There are also notable, if isolated, examples of songs that sell so much worse at a higher price that they bring in less money overall.

The maths is simple. So long as sales for higher-priced tracks don’t fall more than 29%, labels take in more revenue from $1.29 tracks, after factoring in wholesale rates, distribution fees and mechanical royalties.

Sales of the weekly top 40 tracks – most of which now have the higher wholesale rate – fell about 11% in the six weeks after the launch of variable pricing. But retailer revenue from those tracks rose about 10% after the price hike. That means labels took in 20% more revenue for those songs.

“A $1.29 vs 99 cents price point has not made a notable difference in consumers appetite for online music,” say Pali Research analyst Richard Greenfield. “On the album side, you’ve seen variable pricing for a while and it’s not clear that it’s had a notable negative impact, so I’m not sure why the single environment would be different.”

Experimental pricing

Prices are expected to keep fluctuating as the labels continue to experiment raising prices for different songs. The decision to raise the price of a song is “a mix of art and science,” according to one label source, meaning that it’s based on sales data and gut instinct. But label executives wouldn’t say more about how those choices are made.

Some labels, including Warner Music Group and Nettwerk Music Group, as well as the digital distributor INgrooves, have used pricing analysis services such as Digonex to help inform their decisions. So far, though, most variable pricing decisions have been made through a process more akin to throwing pasta against the wall to see if it sticks.

“For the first year or so the labels are looking at this to see how the market reacts,” says Gartner analyst Mike McGuire. “It’s real-time research, in effect. They need as much data as they can to try to understand where they go from here. I don’t know that they have enough data to say whether this has worked or not at this point.”

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