Apple Renews 99 Cent Deal—Is That What It Takes to Compete?

by Darcy Richardson May 05, 2006

In a meeting ending Monday evening, Apple announced it would hold steady on the original 99 cent price for all of its iTunes songs. Apple pioneered the digital download market in 2003 with the iPod/iTunes perfect combination, but recently music industry moguls and overseas legislation have threatened the iTunes price bracket.

Therese Poletti of Mercury News reported “Apple Computer still reigns over the digital music world…while CD sales have continued to decline, Apple’s digital music sales and its iPod music player have been a standout success story…just as popular CDs cost more, executives have asked for the freedom to charge a premium for hit songs.”

Natalie Kerris, an Apple spokeswoman Poletti interviewed, would only say Tuesday that “the company had renewed its agreements with the major music companies.”

“We’re pleased to continue offering iTunes customers music at 99 cents per song from a library of over 3 million songs,” she said.

Four major American music labels, EMI, Sony BMG, Warner Music and Universal, have loudly expressed their desires to offer variable pricing in the past year. The concept is that newer, more popular songs would be priced above 99 cents, and some older songs below 99 cents.

But the music executives have failed to work out the kinks of when a song would become “old” (which could be within a couple weeks with the vast variety of new music breaking into the scene), what would make a new song a “hit” and what types of artists would agree to this form of pricing for their music if applicable. Poletti’s research did not reveal any comments from the music labels, possibly because jeopardizing a relationship with the very profitable Apple could mean a loss in their own profits.

“Certainly it’s a vindication of strategy in terms of pricing models and consumer acceptance,’’ said Michael Gartenberg, an analyst with Jupiter Research quoted in Poletti’s article. “The fact that Apple was able to sell 1 billion songs clearly demonstrated that it was not a model that you want to mess with lightly.”

Since April 2003, the music industry owes a great debt to Apple for solving the piracy problem. Apple found the right formula to get consumers to pay for music online with its 99 cent price. Others have tried to duplicate or outbid Apple by lowering their prices, but these companies either don’t have the right software to back up their plan or they are unable to keep up with Apple’s vast budget which can take hits and misses.

The online iTunes store had about two-thirds of the $900 million market for digital music in the past fiscal year. According to Poletti’s source, iSuppli, a market research firm in El Segundo stated iTunes sales were $600 million in 2005, up from $200 million in 2004.

“If you are going to charge more than 99 cents, how are you going to explain that?’’ asked Mike McGuire, an analyst with Gartner that Poletti interviewed. “It’s not like there aren’t a few more alternatives, both illegal and unsanctioned.”

“Record companies can hardly argue with the numbers. In 2005, according to statistics from the Recording Industry Association of America, sales of CDs and CD singles continued to fall, down 8.1 percent and 27 percent respectively. But sales of downloaded singles surged 163 percent, albums 198.5 percent.”

Most analysts see Apple as the leader in the digital music area for some time to come. There are new competitors on the horizon, but no one knows how they will fare.

Peter Sayer of reported that Frech copyright bill changes should favor Apple. “French lawmakers may dump plans to require online music stores to use interoperable DRM (digital rights management) systems to protect their songs when a new copyright bill comes up for debate Thursday.”

Sayer also reported, “The measure, proposed by the French National Assembly, is widely seen as an attack on Apple’s dominant iPod music and iTunes Music Store service. Apple refuses to license its FairPlay DRM system to other companies, but the bill as voted by the assembly would oblige it to divulge information enabling the creation of interoperable systems.”

The bill received the approval of the French National Assembly on March 21. If the Senate approves the bill at the conclusion of its debates on May 4, 9 and 10, the bill could become law after just two readings instead of the usual four: the government is rushing the text through parliament under special emergency procedures. The result could be either a huge loss for iTunes and the iPod or continued domination overseas for Apple music. Or, Apple might just stick to the stateside of the Atlantic where its iTunes/iPod combo remains untouchable.


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