Listening To Reason

random musings about technologies by Andy Norris

09 May 2008

Why Apple is REALLY more expensive than Amazon

Reg Braithwaite is one of the smartest bloggers out there, but I really don't agree with his latest post, Why Apple is more expensive than Amazon at all.

Setting aside the question of whether Apple is pro- or anti-DRM, the most problematic meme that is being spread (not just by Reg, but elsewhere, as well) is the idea that the music industry is using price fixing to undercut Apple. Quite simply, this is ridiculous.

Here's the bottom line: Apple has exercised complete control over item pricing on iTunes, both in terms of setting consumer prices and setting producer prices. They have a single flat-rate deal that they offer all music producers, and if you don't like that deal, your songs aren't on iTunes -- it's that simple.

The record companies want the ability to offer variable pricing -- higher on new hits, lower on catalog titles -- and Apple has refused:

The recording industry and Apple had been at odds over Apple's insistence to keep its flat rate with some labels wanting variable pricing, including higher prices for new releases.

“Apple has all the cards, and when you have all the cards, you can play hardball,” said Ted Schadler, an analyst at market research firm Forrester Research.
AP Wire, May 2, 2006

So while Amazon is fine with selling some songs for $0.99 and some for $0.89, Apple enforces their one-price-fits-all philosophy. Record companies actually can't offer tracks to iTunes for less, regardless of what they would prefer. And while Amazon may be operating at a lower margin on some items and a higher margin on others (as they do with books, CDs, and everything else they sell), Apple always takes the same margin on every song.

So, are the record companies obligated to sell Amazon tracks at the same price Apple has fixed? If so, why? Does Apple have the right to dictate pricing for all vendors, and not merely the price at which they will purchase? That doesn't even make sense.

Are the record companies trying to undercut Apple? Of course they are. But calling this price fixing is tantamount to saying that Apple has the right to set the royalty rate for the entire digital music industry. I hope people will stop drinking that particular Kool-Aid.

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13 Comments:

At 10:16 AM, Blogger Reginald Braithwaite said...

Interesting, although there is one thing I don’t understand about your argument: Are you saying that the industry sets a wholesale price on its tracks—say seventy cents for old stuff and eighty cents for new releases— and Apple chooses to price everything at 99 cents retail while Amazon passes the savings on the discounted tracks on to consumers?

If so, I appreciate what you’re saying.

The other possibility is that the labels are charging Apple the same price for each track—perhaps 80 cents, I don’t know the exact figure—but they are charging Amazon less for old tracks so that Amazon can pass savings on to consumers.

It is the latter possibility that I am calling price fixing.

The record companies can offer tracks to Apple for less. They may not like the fact that Apple choose to sell all tracks for one flat price. And if the record companies offer trakcs to Apple for less and Apple chooses a business strategy of selling those tracks for more than Amazon, I say go out and show them what that strategy is worth to you.

But this only makes sense when and if the record companies stop price fixing. Apple does not dictate what the record companies charge Apple, it dictates its selling price. I trust you do not think that Apple executives would rather pay eighty cents than seventy cents for each track.

 
At 10:24 AM, Blogger Andy Norris said...

Reg,

I'm saying that Apple has set the price they are willing to pay the labels, take it or leave it. The labels do not have the ability to change the price they charge Apple, short of walking away.

Follow the link to the AP story for more.

 
At 10:35 AM, Blogger Alan said...

The AP story didn't say anywhere that labels wanted to be able to lower the price for any tracks, but that they wanted to be able to raise it for new releases. Do we have any evidence to suggest they would ever be happy with less than the 70 cents per track they currently receive?

 
At 10:45 AM, Blogger Reginald Braithwaite said...

I read the story when I first read your post, and what I see is that the labels wanted to raise prices with Apple and Apple refused to pay more for some tracks. I see no evidence in that article that the labels offered Apple lower prices and that Apple refused.

Now let’s move along. The price fixing issue here is this: Consider a consumer electronics company, let’s call them Apple. They sell their music player products through retailers. They consider it part of their business strategy to have a premium product, so they want the retailers to charge full list price.

What happens if they start giving better terms—better pricing, access to exclusive products, and so forth—to the retailers who charge full list price, while punishing the retailers who discount?

IIRC, people call it price fixing, and many such tactics are considered restraint of trade.

All I was pointing out in my post is that the labels are behaving in a similar manner by offering discounted prices and exclusive products (DRM-free music) to one retailer while actively denying them to another.

I don’t give a fig for AAPL, but I do believe that it is in society’s best interests for all music retailers to have access to the same low price for product and the same selection of products, focing them to compete on price and service. Just as I believe it is in society’s best interests for all music player manufacturers to likewise compete on product, price, and service, not on back room dealing to secure exclusive access to music through DRM shenanigans.

I agree with you that Apple is trying to dictate the retail price of music in its store. However, I believe that it is in our interests for Apple to have access to the tracks at the same wholesale price as Amazon and to have access to the same DRM-free product as Amazon.

When and if they have access to that product at that price, we can the see what their retail strategy is and applaud or criticize it accordingly.

 
At 10:51 AM, Anonymous Anonymous said...

Apple makes the digital music experience simple and painless. That's why they're number one. The recording industry could give a damn about the end user and it shows (let's not even get started on the RIAA witch hunt). I'd rather Steve Jobs drive the online music industry than any other player in this battle.

 
At 11:28 AM, Blogger Daniel Tenner said...

The AP story didn't say anywhere that labels wanted to be able to lower the price for any tracks, but that they wanted to be able to raise it for new releases. Do we have any evidence to suggest they would ever be happy with less than the 70 cents per track they currently receive?

Of course not, don't you know that online music distribution is very expensive and so requires a pricing model comparable to that of CDs?

Daniel

 
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