iTunes: The 99c Question

iTunes: The 99c Question

An Independent Record Label’s View

by David Faiman,

MusicDish Network Sponsor

With a showdown approaching between the major labels and Apple over 99c price for the downloads, and now UK’s Music Managers Forum also unhappy with iTunes pricing, I want to give an independent label’s view on this subject, given that there are over 1000 independent labels on iTunes. With almost 15 years of experience of running an independent label, I think that the majority of my peers will agree with my views. Of course, I doubt very much that the majors will actually remove their catalogues from iTunes store; nevertheless, I¹m very concerned about the developing situation.

Let’s come straight to the point. Forget about "variable pricing" issues, you can already set variable album pricing on iTunes: you can sell albums from $5.99 and up. The majors want to raise the prices for their new releases. They simply want to make more money now, which they are not denying and it¹s fine with me. After all, the music business is business and they have to answer to their shareholders.

What worries me is that music industry is not out of doldrums yet. Yes, there are reasons to be optimistic: legal digital and mobile downloads are taking off, the phenomenal success of ringtones, the expansion of digital radio, etc. But in the last five years many independents have closed their doors. I’m not talking about small, one or two person operations, but companies who in mid-to-late Œ90s sold millions of albums per year.

What forced these labels to close wasn’t so much the Internet downloads, but CD piracy. I remember talking to one of our partners in southeast Asia, who said that within two weeks of one of their releases, they would see bootleg CDs of their compilations selling on the street. Physical sales are still going down every quarter and the vast majority of downloads are still not legitimate. P2P traffic is still growing. Pirates can set up a "CD/DVD plant" in a spare bedroom.

How many majors did we have just a few years ago, and how many do we have today? How many records get released, say, today vs. the end of the Œ90s? It¹s not that there is a shortage of good artists or material to release. Record sales are not what they used to be, so it makes many releases not commercially viable. Today, even Œbig hits¹ sell fewer numbers.

To force Apple to raise prices now will only benefit Apple’s competitors, but only in the short term. Apple is not the only online distributor currently selling tracks at 99c; in fact, many are selling for less, so I presume that if Apple succumbs and raises prices, other online stores will be also asked by the record companies to raise their prices. How is this going to help online stores to stay in business, if many of them just started to turn profit or are still in the red?

I think that the issue is that majors are mostly concerned with Apple’s dominance in the market (after all, revenue from digital downloads is still insignificant) and that they have lost "control." I¹m almost certain that "variable pricing" for individual downloads will only lead to actual price reductions down the road. Some labels will reduce prices for the new releases, in effect , to "buy" their way onto the charts, and others will have to follow. So, instead of selling tracks for 99c, we¹ll be selling them for 79c or whatever the bottom-range price will be.

Majors are complaining that Apple makes money from iPods and not from downloads. Sure, they are making little money from the music, but that¹s because of how much they pay us, the record companies. Frankly, I don’t care if Apple makes money on iPods or music. All I care is that we get 70c from every download.  We have no manufacturing cost, distribution costs or returned stock. Because of this, we can pay artist (who supply finished masters) 50 percent of the revenue. If UK managers are complaining that their artist are getting only 4.5p on every 79p track, why blame Apple?! They should be blaming themselves for negotiating these type of contracts for their artists! If download prices were increased, would they be happy with, say, 6p from a download? I don¹t think so; it¹s still a very low royalty rate.

Most importantly, I like the fact that Apple maintains "editorial independence" on what records get featured on iTunes (and I hope it stays this way), so independent labels, too, have a chance for success. If you look at the main Top 100 chart on iTunes, you will see mostly big name acts, as major labels will always dominate with their marketing muscle – fans buy what they hear on the radio and see on TV. However, if you look at the genre-specific charts, you’ll see a large number of independent releases. Earlier this year, we’ve had three albums on Top 100 Dance Albums on iTunes US at the same time, and we¹ve had a few more Top 100 positions since. I could never imagine, even a year ago, that this could ever happen. It just goes to show that with online distribution, given a much wider choice, music funs buy what they like rather than what has been forced upon them previously.

Increasing prices now obviously isn’t going to increase number of downloads and, in fact, might stall the whole market, and this is my main concern. At US 99c (actually more in UK, Europe and Japan), it seems that many fans are reasonably happy with the price, so why "rock the boat" now and just alienate them? We need to remove the incentive to steal/copy/buy bootlegs and instead create a "culture" of paying for music, which has unfortunately eroded in the last few years. There is actually a significant proportion of fans who are paying, not because they can¹t get it for free, but because they want to do the "right thing." And some fans simply can¹t be bothered to search for free music, when they can easily find it and buy online. Of course, if you raise the price, this purchasing "proportion" will decrease – everyone has a price. (Perhaps the major’s executives should read a few posts on forums and see what fans are saying.)

Yes, sales are rapidly increasing as more people buying iPods, MP3 players, Sony PSPs, and music phones, but relatively speaking, few people are actually buying downloads. It¹s common sense that increasing prices will only drive some people who are already "payers" away from legitimate online stores.

Finally, with or without Apple, digital distribution would have happened sooner or later. There are many other great companies who are involved in the digital music distribution, but as a matter of fact, without Apple, it would taken a few years longer to hit the mainstream. But by then, it would have been too late for many of us in the music business.

David Faiman

Managing Director

Odessa Mama Records

Melbourne, Australia

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