Duh: Raise Music Prices To $1.29/Song; Music Sales Growth Slows

from the like-you-couldn't-predict-that dept

Last year, we warned that treating digital music sales as the savior of the market was a dangerous thing, since there were indications that the market was fragile. In fact, we had already seen that after years of major record labels pleading with Apple to let them raise prices on songs, the initial results suggested a decrease in sales. Well, shockingly enough, it looks like the basic econ 101 concept of price elasticity works in music as well, as Warner Music has finally realized that raising prices of songs to $1.29 has slowed growth in the market. The digital music market, which had been growing pretty rapidly, slowed drastically following this pricing change. Warner Music is claiming that this this is because the market has "matured," but gives no evidence of that whatsoever -- and given the size of the market, that seems highly unlikely. Now, to be clear, the market is still growing, but only at 8% as compared to 20% the year before. And market growth should be expected to decline over time once the market matures, but it's difficult to believe that the digital music market has reached the point of maturity yet. In fact, just a few weeks ago, we wrote about an economic study that suggested that if the labels wanted to maximize revenue on digital sales, they should be lowering prices. But, again, execs at major labels haven't been known to be particularly good with their understanding of economics.


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  1.  
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    oxana (profile), Feb 10th, 2010 @ 2:52am

    FREE LEGAL MUSIC

    Is this the future of the music industry? I don't think so.
    On our website with alternative quality music downloads by home users are free. Composers have decided to do this, because they manage their own rights. Only business users have to pay a modest amount of money.
    Check out http:www.villamusicrights.com

     

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  2.  
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    The Anti-Mike (profile), Feb 10th, 2010 @ 3:16am

    t's difficult to believe that the digital music market has reached the point of maturity yet.

    Can you find anyone under 30 who doesn't know how to get a torrent file of music? Why the heck would they spend money when they can so easily infringe and get something for free, saving their money for something else?

    What you are seeing Mike I think isn't a question of the price going up, as much as the true limits of the digital music online as a business. Plenty of people here have said they wouldn't pay much more than a few pennies a song. The difference between 0.99 and 1.29 isn't enough to turn people away.

    It is likely that the total size of the commercial digital music field is way smaller that you think. The potential size is huge, but the actual market of people willing to pay a reasonable price for music is nil.

    After all, to follow your logic, music in infinite. Infinite goods have no price. The only thing keeping digital music in the game in theory is some sort of convenience, but most users can download a torrent in seconds. Cutting the price in half wouldn't change that very much, would it?

    The only thing I can think of is as the users have learned to not pay for music, it won't be long before the small band of people who have been buying the scarce goods wake up and realize they don't need to do that either. Perhaps they will own too many t-shirts, or run out of shelf space for autographed books, or not have enough time to schedule one more miniputt game.

    Can you say "give it away and pray"?

     

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    Planespotter (profile), Feb 10th, 2010 @ 3:37am

    So TAM if what you think is correct and that people who use p2p are only interested in FREE why did the CRIA commissioned report show that amongst their peers the same freeloaders spend more money buying music?

    The digital market hasn't matured, ffs it hasn't even learned to walk yet.

     

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    The Anti-Mike (profile), Feb 10th, 2010 @ 4:03am

    Re:

    Link for the study, please?

     

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    AJ, Feb 10th, 2010 @ 4:14am

    Re:

    Totally agree with you here TAM, getting people to pay for an infinite good has a shelf life.... that shelf life is over... and once they own a closet full of T-shirts and autograph books, those will stop selling... I'm sure they can't think of any other way to make money, doom on us...this is clearly the end of music....

     

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    Simon, Feb 10th, 2010 @ 4:16am

    Get a clue

    Can you find anyone under 30 who doesn't know how to get a torrent file of music? Why the heck would they spend money when they can so easily infringe and get something for free, saving their money for something else?

    This implications of this statement says all we need to know about your line of thinking...

    The difference between 0.99 and 1.29 isn't enough to turn people away.

    Never heard of pyschological price barriers?

     

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    The Anti-Mike (profile), Feb 10th, 2010 @ 4:24am

    Re: Get a clue


    This implications of this statement says all we need to know about your line of thinking...


    Particularly in tough economic times in the west, why would people spend for what they can get for free? It is almost shocking that anyone would pay the price for movies or music anymore.

    Never heard of pyschological price barriers?

    I have. But I think that considering the market grew 8% anyway, it is hard to say that the price is over demand. It also gives companies and artists the choice to offer a lower price as a special.

    However, I don't think the price is important, because of where their competition is at. The competition is the torrents, and their price is zero. 99 cents or a buck 29 isn't the game changer here.

     

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  8.  
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    Anonymous Coward, Feb 10th, 2010 @ 4:27am

    Re:

    the actual market of people willing to pay a reasonable price for music is nil.

    People buying paid music downloads of iTunes aren't "buying music". They are "Voting for their favourite band" or even "voting against an act they don't like".

    It's like the voting on X Factor, American idol etc etc. (Which, incidentally, brings in a LOT of money.)

    I downloaded the "rage against the machine" single for my daughter from one of the official paid sites (hmv I think it was) before Christmas.

    I listened to the first few bars to make sure I had the right thing and then stopped. She vaguely enquired about copying the file over to her machine so she could listen to it a couple of days later - but I didn't get around to it. Since then, nothing. No one has ever listened to that download and no one ever will even though I paid 99p or something for it.
    I'm pretty sure that a large proportion of the people who bought that download did the same.

    I nearly downloaded a song I already had on CD a year or two back - to try and get it into the charts (in the end I didn't because it was a lost cause - but I'm sure many people have done this).

    The mass paid market is mostly about tribal allegiance.

     

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    Simon, Feb 10th, 2010 @ 4:29am

    Re:

    I once went to a pub in Wales, where the landlord decided to call it a night and went to bed - leaving his regulars in charge of the bar and trusting they would pay for what they drunk.

    By your thinking - when he came down the next morning both the booze and money would have been gone.

    (hint: it wasn't).

     

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    Gunnar (profile), Feb 10th, 2010 @ 4:40am

    Re: Re: Get a clue

    "However, I don't think the price is important, because of where their competition is at. The competition is the torrents, and their price is zero. 99 cents or a buck 29 isn't the game changer here."

    The number of people who know how to torrent music hasn't changed recently, but the price of music on itunes has. So it doesn't make sense to attribute the declining growth to something that has remained basically constant when there has been a huge (30%) increase in the price for legitimate music.

     

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    Planespotter (profile), Feb 10th, 2010 @ 4:43am

    http://support.crtc.gc.ca/applicant/docs.aspx?pn_ph_no=2006-1&call_id=29786&lang=E&defau ltName=Canadian Recording Industry Association (CRIA)

    There are many more reports showing similar trends, plenty of entries on Techdirt pointing this out.

    And if you want, google "p2p users buy less", funny stuff!

     

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    Anonymous Coward, Feb 10th, 2010 @ 5:06am

    "there has been a huge (30%) increase in the price for legitimate music." and "pyschological price barriers"

    $1.29 is not much money..but while I would sometimes buy music I completely stopped when the price went up. So has many people I know. My grandson would buy songs but when 10 songs went from 9.90 to 12.90 he stopped also... only so much money he is willing to give up of his allowance.

     

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    The Anti-Mike (profile), Feb 10th, 2010 @ 5:09am

    Re:

    please, point me to something a little more recent. 4 year old studies are sort of meaningless, considering all that has happened in between.

     

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    PaulT (profile), Feb 10th, 2010 @ 5:16am

    Re:

    "The difference between 0.99 and 1.29 isn't enough to turn people away."

    It clearly is... Even without this data, it's easy to see why. $0.99 is basically $1, a nice easy number to work with, both in terms of what you're willing to spend and in keeping track of what you are spending. $1.29 suddenly requires a bit more effort to keep track of, so doesn't have quite the same impulse buy effect.

    Not only that, but you assume that people are going to be thinking about buying in terms of numbers of songs rather than in terms of total amount. For example, I got a £15 iTunes voucher for Christmas. At 99p/song, I could buy 15 songs.

    You assume that at £1.29/song, I would buy the same 15 songs but spend £19.35 for them. I wouldn't - I'd spend the same £15 but only get 11 songs for the same money. In other words, sales would *drop* because of the price rise. That 0.29 makes a big difference when you're talking about multiple purchases.

    "the actual market of people willing to pay a reasonable price for music is nil"

    Erm, you're saying that NOBODY buys music through iTunes, Amazon, 7digital, Play, AmieStreet, etc.? Do you even think about what you're typing any more?

    "Infinite goods have no price."

    Incorrect. They have no marginal cost, and no inherent value. The fact that digital goods are being sold is testament to the fact that they have a *price*, it's just not something that can be enforced indefinitely, hence the need for a business model that doesn't depend on it.

    Your arguments really aren't improving here.

     

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  15.  
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    Planespotter (profile), Feb 10th, 2010 @ 5:27am

    Just google "p2p users buy less", several reports from last year, the BI (Norwegian School of Management) one to start with... hows ya Norwegian?

     

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  16.  
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    tuna, Feb 10th, 2010 @ 5:32am

    Re:

    A 30% increase probably turned a lot of people away.

    Also, I work with under thirties and have four children in that range. As soon as iTunes came online that's where they got 99% of their music.

    Peolple will pay a reasonable price for a song, they will not pay an inflated price to get 12 songs on a disk, only one of which they want.

    Get over the priacy thing: it exists and it's not going away. It needs to be factored into the indrusties business model.

     

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    Comboman (profile), Feb 10th, 2010 @ 5:36am

    Re:

    But iTunes was competing with free downloads back in the $0.99 days also. Even in businesses selling physical goods that are not competing with free downloads, raising your prices 30% during a global recession is stupidly bad idea and will definitely effect sales. Yes there are some people that will never pay for music no matter what the price, but why would you reduce the number that are willing to pay by squeezing them tighter?

     

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  18.  
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    Jerry Leichter, Feb 10th, 2010 @ 5:43am

    *Real* economics

    If we're going to talk economics - let's talk *real* economics. A seller is trying to maximize *profits*, not *sales*. Profits are the product of price and sales. Yes, if you raise the price, sales go down - but profits can go either up or down, all depending on the supply/demand elasticity curve.

    Now, the shape of that curve is pretty arbitrary, certainly for consumer products. There are "magic points" - e.g., when you cross the $1.00 threshold - where the change can be unexpectedly large. In general, no one can know the shape of the curve for a real product with any certainty - all they can do is try different prices and see what happens.

    Things are even more complex when you're looking at market growth rather than just profits for the last quarter. Is it better to forgo some profits now in order to build a bigger market for later? Maybe, maybe not. Is it better to rake in big profits this quarter by holding the price high, then dropping it later when you've "used up" those willing to pay higher prices? Maybe, maybe not.

    I have no idea what the actual effect on record company *profits* were of the increase prices. Neither does anyone else commenting here. And certainly none of us knows what will happen next quarter, next year, next decade.

    I'm just objecting to the knee-jerk "the record company execs are a bunch of idiots who don't understand basic economics" assertions. Pricing decisions are complex and very difficult to get right - even with large amounts of data. With the very limited data that's available privately - how did the distribution of sales vs. price look? What happens to sales when a $1.29 "popular" song losses popularity and moves to the $.99 or even $.69 level? - it's essentially impossible. Yes, if you raise prices, few people will buy. Duh. Unless you're living in the world of the dot com bubble - when all that mattered were "eyeballs" and mentioning "profits" marked you as an old fuddy duddy who didn't understand the brave new world - that's obvious and in and of itself uninteresting.

    -- Jerry

     

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  19.  
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    Richard (profile), Feb 10th, 2010 @ 6:23am

    Re: *Real* economics

    BUT BUT BUT

    One thing we DO know is that the marginal price of a download (from the company's point of view) is so close to zero as to make no difference.

    The 99c and the 1.29 are both pure "margin" (nearly but not quite the same as profit.)

    Since the majority of buyers now know that they will feel that :

    A) Prices are way too high even at 0.99 - but maybe that is excusable because 0.99 is (sort of) a round number and any number is basically just pulled out of the air.

    B) Any increase in price looks like greed - because the "round number" excuse has gone away.

    Trying to pretend that there is anything complicated about this is just making excuses on their behalf.

     

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  20.  
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    Richard (profile), Feb 10th, 2010 @ 6:26am

    Re: Re: Get a clue

    "Particularly in tough economic times in the west, why would people spend for what they can get for free? It is almost shocking that anyone would pay the price for movies or music anymore.
    "

    One thing I dislike about your comments is the really low opinion you have of human nature.

    You seem to think that everyone is mean and money grubbing and just out for what they can get and stuff the next person.

    Well thankfully the world isn't like that.

     

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  21.  
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    Richard (profile), Feb 10th, 2010 @ 6:29am

    Re:

    Can you say "give it away and pray"?

    Yup you can - and survive for over 1600 years that way.

    "Income

    Up to the present time the community has spent about 5 million Egyptian pounds on restoration and construction. The monastery has no regular source of income and no bank account. We do not sollicit donations, publicize the monastery's financial needs or receive financial support from any organization. And yet, when the monastery's needs are put before God in our communal prayers, donations are received daily, miraculously meeting our needs exactly. The monks therefore have no doubt that God has undertaken responsibility for this enormous work, not only in the spiritual, but also in the material realm."


    http://www.stmacariusmonastery.org/eabout.htm#d

     

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  22.  
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    FormerAC (profile), Feb 10th, 2010 @ 6:52am

    Re:

    "The difference between 0.99 and 1.29 isn't enough to turn people away."

    Yes, it is. It isn't the 30 cents. It is price uncertainty. When everything on Itunes was 99 cents it was easy to purchase music there. You just selected your song and clicked. Once you change to variable pricing you are making people question the purchase.

    Whats the price? Well, if its more than 99 cents, I can do better at Amazon, for example, so why buy now? You change the dynamic from a simple click to purchase system to one where I want to evaluate my options first.

    Personally, I have not bought a single song from Itunes since they changed to variable pricing. Changing their pricing caused me to reevaluate my relationship with Itunes. I'm much happier with Amazon now. If they hadn't changed their pricing, I may never have looked elsewhere.

     

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  23.  
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    The Anti-Mike (profile), Feb 10th, 2010 @ 7:12am

    Re: Re: Re:

    RD, if you spent two minutes reading...

    "Only 10 percent of the respondents admitted downloading music illegally from the Internet," - blorg.com

    The numbers are sort of off. The real number of downloaders is likely 20% or more (even Mike admits these numbers are low). If 50% of the filesharers won't even admit to, well... it would mean that the average spent by file sharing type is half what the report comes up to.

    "But the survey of 600 music fans who also own computers and mobile phones, conducted by the music research firm The Leading Question, shows that those who regularly download or share unlicensed music also spend an average of £5.52 a month on legal downloads through sites such as Apple's iTunes Music Store or Napster. Those who were not illegally filesharing spent just £1.27 a month on digital tracks." - Guardian.co.uk

    No indication of the splits here. Mobiles phones are computers? Remember too, if they are "music fans" but they don't share and they don't buy, are they truly music fans, or just casual listeners?

    "Ars Technica reports that researchers monitored the music download habits of 1,900 web users age 15 and above. Over time, the study found that users who downloaded music illegally from P2P file-sharing sites like BitTorrent ultimately made ten times as many legit music purchases than the law abiding users." - nturebeat.com

    This study has a ton of problems. Most importantly, the non-downloaders, are they active music fans? Are they actively listening and collecting music? Or are we making the P2P user numbers sound great because the others are not in the market at all?

    "Yet another study has shown that people who are more active in unauthorized file sharing, also tend to spend more on authorized entertainment purchases. Now, to be fair, the study was paid for by a file sharing provider" - techdirt.com

    Umm, sort of like getting your news from techdirt, you only get half the story. You don't think maybe these people might have asked questions that got them the desired answers?

    RD, I think what you miss is that anyone who is actively into music enough to spend their time looking for it should be a buyer, and should be a buyer well and beyond the average person on the street. They should be spending the money, they love music. You don't think that the average ferrari owner spends more on cars than your average Ford Focus owner? They both have cars, yet one spends way more than the other in the same category. One is a big fan, one is a casual user.

    Many of those stories seem to point back all to the same study from the Independant, which reports way too low a number for file sharers. It seems a fair number of people just didn't tell the truth.

     

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  24.  
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    Henry Emrich, Feb 10th, 2010 @ 7:15am

    Re: Re:

    Yet again, TAM whimpering about the supposed evil of "infringing". From the same troll who actually defended "clawing stuff back" from the Public Domain....

    ....and admitted to using sock-puppet accounts to create the illusion of "support" for his drivel.....

    Anyone who still gives "TAM" the benefit of the doubt, is every bit as delusional as whoever actually *is* behind that particular sock-puppet.

     

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    The Anti-Mike (profile), Feb 10th, 2010 @ 7:16am

    Re: Re: Re: Get a clue

    You seem to think that everyone is mean and money grubbing and just out for what they can get and stuff the next person.

    Richard, if you have two tables in a shopping mall, and one says "free soda here" and the other days "Soda, $1.29", which one do you think has the line up?

    Some people will pay for soda because they think they are suppose to, or the line is shorter, or they are suspicious of the free offer, but all things being equal (no line up), it is likely people will pick free.

    The reason "FREE!" works even a little is because it appeals to human nature. It gets rid of all of the reasons to say no, because there is no cost. Free is the laziest sales technique in the world, because you don't have to sell the product, just the price.

    I don't have a low opinion of people, I just have a great respect for human nature.

     

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  26.  
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    Henry Emrich, Feb 10th, 2010 @ 7:22am

    Re: Re: Re: Get a clue

    "You seem to think that everyone is mean and money grubbing and just out for what they can get and stuff the next person."

    This surprises you?
    The pernicious little twat attempts to justify re-monopolizing Public Domain content. What more do you need to know?

    Also fascinating seeing TAM say stuff like "Just because it's legal, doesn't make it right!" (which he did, over on another thread), being as he's the arch-advocate of copy"right" law, but couldn't give two liquidy shits about whether such "laws" are actually accomplishing what they were originally intended to do, etc.

    Anybody who gives TAM the benefit of the doubt, is delusional.

    Stop feeding it, RD!

     

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  27.  
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    PaulT (profile), Feb 10th, 2010 @ 7:42am

    Re: Re: Re: Re: Get a clue

    "if you have two tables in a shopping mall, and one says "free soda here" and the other days "Soda, $1.29", which one do you think has the line up?"

    Depends on hundreds of factors:

    - Is one high quality, and the other one fizzy cat piss?
    - Does the $1.29 include refills and a reusable cup?
    - Is the opinion of those who already had the free option good or bad?
    - Does the paid for table include a comfortable seating area and offer good food as well, or are they both the same?
    - Are there other services (e.g. free wifi or newspapers) that encourage people to use that area if it exists?
    - Is the $1.29 stall still doing a roaring trade despite selling less than the freebie table (i.e. making high profits despite making less sales)?
    - How long is it until the freebie option runs out (something that doesn't happen with digital but is guaranteed with your scenario)?

    There are many other factors than price and availability that determine success. In your scenario, the way to a profit is that same as with digital goods - sell the things you can make money from, don't try to claw money back from the things you can't.

     

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  28.  
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    Chronno S. Trigger (profile), Feb 10th, 2010 @ 7:49am

    Re: Re: Re: Re:

    So basically your shrugging off all of the studies because we know that people downloading music are actively into the music but we have no way of knowing about the people not downloading?

    One, downloaders and non downloaders come in all shapes and sizes and the distribution of buyers and non buyers would be the same between the two groups. It is possible to have statistical anomalies, but those possibilities are reduced to near zero with the multiple studies you just ignored.

    Two, when marketing in reality, one douse not think like you do, one looks at hard numbers. These hard numbers are all stating that downloaders buy more.

    Three, when one commissions a study, one uses that study to prove or disprove the initial theory. When studies commissioned by people on both side of the debate say just one thing, it cannot be shrugged off just because it goes against one side's initial theory. That's not scientific and ultimately self defeating if not strait out dangerous.

     

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    fogbugzd (profile), Feb 10th, 2010 @ 7:56am

    Simplistic thought

    Most corporate execs seem to have a knowledge of economics that starts and ends with "If I charge more for my product, I will make more money."

     

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  30.  
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    SureW (profile), Feb 10th, 2010 @ 7:56am

    Re: Re: Re: Re: Get a clue

    Richard, if you have two tables in a shopping mall, and one says "free soda here" and the other days "Soda, $1.29", which one do you think has the line up?

    Next time you're waiting at an airport look at how many people are buying bottle water vs stopping and drinking the free water from the fountain.

     

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    Planespotter (profile), Feb 10th, 2010 @ 8:06am

    TAM, get the same two tables and have them both say $1.29, now put someone behind one of them with a cash register and leave the other un-manned, see how many people still go and buy the soda, see how many people don't take the soda from the un-manned table.

    Your analogy fails.

     

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  32.  
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    tuna, Feb 10th, 2010 @ 8:11am

    Re: Re: Re: Re:

    We all know who the real Mike works for. Who does The Anit-Mike work for?

     

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  33.  
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    Greg, Feb 10th, 2010 @ 8:16am

    Re: Re:

    Fortunately, sales figures from the past year are very relevant. Particularly when they show that reduced prices can often lead to increased revenue.

    http://arstechnica.com/gaming/news/2009/03/ut3-steam-sale-extended-due-to-2000-play-increase.ars

     

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  34.  
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    Ron, Feb 10th, 2010 @ 8:17am

    Re: *Real* economics

    I don't think anyway disagrees with the "economics" What most huge company's forget is how to treat their customers. If you continually screw people over WE DON'T FORGET! That is why the recording industry is failing.

     

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  35.  
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    romeosidvicious (profile), Feb 10th, 2010 @ 8:20am

    Re:

    I disagree with you on your theory that the difference between .99 and 1.29 isn't enough to turn people away from buying music. Any first year economics student can tell you that, as a general rule, if you raise prices you will lose sales and the key is to price at a point were you maximize your dollars and minimize your loss of customers. Secondly there are plenty of studies that show there are "magical" price points. For instance the difference between sales for a product costing 9.99 and the same product costing 10.00 is a very measurable difference. Likewise the difference between .99 and 1.00 is the same. The change in price to 1.29 from .99 affects people who would not download music illegally to a point where they just don't buy the music because the "whole dollar" line was crossed. While logically the difference between 1.00 and .99 is a single penny and doesn't make any difference in the grand scheme of things it makes a huge difference in sales. Tack another .29 onto it and you add in people who just won't pay that much but weren't affected by the psychology involved.

    I buy all of my music, that I don't get for free legally, from amazon.com and I wouldn't pay 1.29 a song for any of it. 1.29 a song, for a 15 song album, comes to 19.35 for an album which is more than retail for a CD and you don't get physical media (a scarcity), liner notes or lyrics. Pricing digital music the same as physical media doesn't make sense. Even if you ignore the economics governing pricing you get less for your money with digital music. So yes 1.29 is enough of a difference to turn people away.

    You also mis-state Mike's logic (which isn't Mike's logic to begin with but a standard economic rule) in the infinite goods have no price. While I know explaining this to you will have no effect because you are little more than a troll, here it is, if the marginal cost of reproduction is zero then the price will approach zero in the marketplace. That's not an exact quote but it's close. Sure there are initial costs but initial costs don't set the market price. The marginal cost of an item sets the market price. It costs nothing to reproduce digital music and it will follow the laws of economics whether through piracy or whether the record companies finally figure it out.

    Your apocalyptic prediction of the music industry's downfall, based on people learning not to pay for music (provably untrue) is pretty much tripe. You cite a list of very few scarce goods and ignore everything else that an artist, or a label, can offer fans. You fall into the trap that most critics of free fall in to. You zero on in a small subset of the idea and pound it to death. If all there was too offer was t-shirts, autographs, and personal time then you would be right but the fact is that's not all there is to offer.

    I used to download all of my music over file sharing services because it was free but something changed. Sure I can find a torrent out there for most of what I want but the time involved in finding a decent seeded torrent, downloading, sorting and so on is not worth it to me. For .99 a song, and less if I buy a whole album, I don't have to deal with the hassle of going to torrent sites, firing up limewire, or whatever. I also have a near-zero risk of getting a virus downloading from amazon.com. Add that all up: convenience, ease of use, time, safety and you have a marketable product however at 1.29 (or higher if the labels got their way) it starts to become a question of worth but at .99 a song worth isn't even a blip on the radar.

    Take Suburban Home Records http://www.suburbanhomerecords.com and look what they have done. They offer digital for a good price, offer Suburban Home For Life (100.00 for access to everything they put out in digital format for as long you live or they stay in business), vinyl, streams of almost every album, and offer interesting multi-level package deals for some new albums. They are offering scarcities as well as digital and doing quite well. Virgil (he runs the show over there) gets it. He's been a fan of music for a long time and knows what fans want. The major labels have disconnected from the music and fans and are fans of making money and nothing more. Music existed before the record labels and will continue to exist as they die out because they didn't change their strategy. The .99 and 1.29 price points are just more proof that they don't get it.

    Remember three sales @ .60 makes the company more than one sale at 1.29. But I guess that's wrong somehow as well. Heck six sales at .25 makes the company more than one sale at 1.29 but that's way too low a price...for a reason no-one can explain.

     

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    AR, Feb 10th, 2010 @ 8:26am

    "Piracy" hurts and is also the scapegoat

    "Piracy" has always been around as long as people have and will never go away. the problem here is that "piracy" is going mainstream because of the actions of corporate. This has been building for a long time and is mainly backlash to their greed.

    In the 70's and 80's you had music selling for @ $8 an album or cassette. When the blank cassettes came out they said piracy would kill the business and tried to outlaw the copying of music. They lost under personal use.

    in the mid 80's they introduced the cd saying it was better quality and "would last forever". So they charged a premium of $12 to $15 per cd. This reduced piracy and increased sales because the quality could not be reproduced. Along with the huge profits, it also leaked out how cheap the cd's were for them to make. With the decrease in piracy and increase in profits the price never came down (greed is good). The industry started gloating and the people started getting pissed. Hell even the artists were complaining.

    The 90's brought the PC, Internet, and Napster. The Industry was too arrogant to be afraid and even had the Napster founder on the music awards show. No decrease in price. Then came the blank cd's and the burners. The panic set in. People had a way to reproduce the quality and portability at little to no cost. Piracy started growing again.

    Now "piracy" is just about mainstream. The price for music remains virtually unchanged. increasing slightly. Music sales are down. The cost analysis people are trying to find how much to increase prices to make up for the losses in sales, not profits they are still up, without losing even more people to piracy.

    The Music execs are blaming "piracy" to their BOD's for the situation when it was actually their own arrogance, ignorance, and greed. Their target group for sales are the 10 to 30 year olds, but the 30 to 50 year olds remember what really happened, and they teach their kids.

     

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    Chronno S. Trigger (profile), Feb 10th, 2010 @ 8:28am

    Re: Re: Re: Re: Get a clue

    Let me give you a little more realistic example. Down the street where I work there is a Starbucks. Further down the street there is a Sheetz. Starbucks sells their coffee for $4.00 where as Sheetz sells it for $1.00 (prices are approximate, I don't drink coffee in reality.) Why would I pay four times the price for the same basic thing?

    Because they aren't. Sheetz is a gas station, and while I hear they do have really good coffee, they aren't as good as Starbucks. While Sheetz has a full blown barista, Starbucks still has more options. While Sheetz is on the same street, Starbucks is closer. While Sheetz is a respected store in PA, Starbucks seems more elite.

    In any competition having the best allows you to charge more for the product. Having more will also allow you to charge more for the same product. To make this related to the article, Amazon/iTunes/others have higher quality downloads, are more organized, don't depend on someone deciding to upload for free, can offer finite goods to go with the infinite download, and (this is the biggest one) aren't illegal. Why the RIAA can't leverage that is beyond me.

     

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  38.  
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    romeosidvicious (profile), Feb 10th, 2010 @ 8:30am

    Re: Re: Get a clue

    Psychological price barriers have nothing to do with price vs demand. Here's an explanation if you need it http://74.125.47.132/search?q=cache:HZpgkqLnovIJ:srdc.msstate.edu/bst/proceedings/passewitz.pdf+psyc hological+"price+barrier"+.99&cd=3&hl=en&ct=clnk&gl=us

    The long and short of it is: .99 is WAY different to the brain than 1.00 and does make a huge difference in sales. But you don't seem to want to consider that point. You want to throw up a strawman in response (talking price vs demand when dealing with psychological price barriers is a strawman).

     

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  39.  
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    Anonymous Coward, Feb 10th, 2010 @ 9:08am

    Re: Re: Re: Re:

    "The numbers are sort of off. The real number of downloaders is likely 20% or more (even Mike admits these numbers are low). If 50% of the filesharers won't even admit to, well... it would mean that the average spent by file sharing type is half what the report comes up to."

    And we get back to the main point you always dodge: NOT EVERYONE ON THE INTERNET DOWNLOADS INFRINGING SONGS.

    Get this through your THICK head.

     

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    Coward, Feb 10th, 2010 @ 9:08am

    Past lessons

    Back in the 1970's I purchased the Beatles "White" album. Great graphics, nice poster and 4 individual photo's. The double album could also be used to separate stems and seeds, but that's another story...

    In the 1990's I re-purchased the same album on CD. Tiny case, no poster, no pics.

    With the latest re-mastering I considered purchasing it. Let's see, $24.98, no artwork, two of the Fab 4 are not going to get their royalties anyhow (and Sir Paul would just blow his portion on alimony). Michael Jackson's estate and Sony hardly need more profit.

    Heck - I'll just store an "archival copy" for a friend on my server....

     

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  41.  
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    someone who actually knows what he's talking about, Feb 10th, 2010 @ 9:11am

    the elephant in the room

    there's a difference between "sales" and "revenues". the metric they are referring to as "sales" is "digital track equivalent album unit growth"... keyword is UNIT.

    no one (here, or on ars) pointed out (or even realized) that unit sales and price and profit are not the same things. if you reduce the price, it does not necessarily correlate that you will make more revenues, because the increase in unit sales has to make up for the reduction in price. if you reduce the price enough, the fixed and up front costs (employee salaries, server costs, customer service, statutory royalties) far exceed the price, and then they're not making money on selling the music.

    there's a sweet spot for the price. to figure out how much that price is, you need insider sales/revenue/costs data. none of you have that data (including the marketing professor). i was going to say that it's like trying to determine profits without knowing what costs are... but that's exactly what it is. you're missing a huge chunk of the highly relevant data, and speculating that prices should be lower.

     

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    RD, Feb 10th, 2010 @ 9:13am

    Re: Re: Re: Re: (take 2 - hit return by accident)

    "The numbers are sort of off. The real number of downloaders is likely 20% or more (even Mike admits these numbers are low). If 50% of the filesharers won't even admit to, well... it would mean that the average spent by file sharing type is half what the report comes up to."

    And we get back to the main point you always dodge: NOT EVERYONE ON THE INTERNET DOWNLOADS INFRINGING SONGS.

    Get this through your THICK head.

    The amount of people file trading is a FRACTION of the total people using the net, and indeed, in the music-consuming public (substitute any other as well - movies, games, etc).

    You claim "most people under 30 file trade" but thats bullshit pulled out of your ass. MOST of the people I know of ANY age dont file trade or download in that manner. They might know what it is, and might use things like youtube or whatever, but the MAJORITY of them ARE NOT actively engaged in downloading infringing material. It just isnt. To say that, OF the people WHO DO download, xx% pay for it, can be a valid way to gauge but ONLY for THAT GROUP. The group of "everyone" or "everyone else" FAR SURPASSES the group that IS. By orders of magnitude. I know hundreds of people, and of them, I know maybe a few that might (and even then, cant be certain) engage in fully illegal file trading. EVERYONE else that I know well enough to know these things about them either doesnt at all, doesnt care and just does it traditional (radio, CDs), or uses "legal" sites.

     

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  43.  
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    hegemon13, Feb 10th, 2010 @ 9:20am

    Re:

    "The difference between 0.99 and 1.29 isn't enough to turn people away."

    Um, excuse me, but that is a 30% increase in price overnight. That's a ridiculous, shocking increase, no matter what the product. If I am used to buying a cup of coffee for 1.99, and it suddenly jumps to 2.59 overnight, you can absolutely bet that I will think twice about it! In fact, I would probably walk away from that coffee shop and start looking for somewhere else to get my coffee.

    (Note: This is only an analogy. I make my own coffee, so I guess I am stealing from all those poor coffee shops whose process I am imitating.)

    That doesn't even bring into account the betrayal that iTunes users feel over that broken promise of $0.69 tracks. Have you ever seen one?

     

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    Any Mouse, Feb 10th, 2010 @ 9:52am

    Re: FREE LEGAL MUSIC

    Perhaps the issue with your site is that no one can access it? Follow the register link and try it, yourself. The activation key is sent and you click the link and try to log in, only to get back 'Invalid Credentials' as an error. This is assuming that someone wants to agree to terms that should be right there on that page, not through another link.

     

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    Anonymous Coward, Feb 10th, 2010 @ 10:02am

    Re: Re:

    That's why the future will not be kind to the control freaks because the control freaks have no faith in humanity but, thankfully, the future does.

     

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  46.  
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    Anonymous Coward, Feb 10th, 2010 @ 10:04am

    Re: *Real* economics

    I know it's a dumb idea to raise the price on your goods during a global recession.

     

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  47.  
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    Anonymous Coward, Feb 10th, 2010 @ 10:06am

    Re: the elephant in the room

    Raising the price on your infinite good makes little sense in a global recession.

     

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    Chronno S. Trigger (profile), Feb 10th, 2010 @ 10:21am

    Re: the elephant in the room

    You're talking about the supply and demand chart. Where one looks to set the price where product demand and profit meet. Now, there are two sides to that chart, "supply" and "demand".

    In any normal business, if supply outnumbers demand, the price will drop. If the demand outnumbers the supply, the price will increase. Now, what happens when supply increases to infinity, way above demand? From the simplistic explanation I just said, the price would drop to $0. It's not that simple, but this is how people see it. This is why Mike created CwF+RtB, to give people a reason to see it another way.

    So it's not the elephant in the room that everyone is ignoring, it's the one everyone is talking about. If this works out for iTunes, then party on, but we predict it won't.

     

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    Richard (profile), Feb 10th, 2010 @ 10:36am

    Re: Re: Re: Re: Get a clue

    Richard, if you have two tables in a shopping mall, and one says "free soda here" and the other days "Soda, $1.29", which one do you think has the line up?

    But the people who sell "fairtrade coffee" that costs 20% more (but is otherwise similar) seem to do good business these days.

    Plus you can download the mp3s from Magnatune for nothing but, guess what, plenty of people (including me) pay the extra for a CD quality download (and pay over the minimum suggested price too) - but then of course Magnatune passes 50% on to the artist. (A lot more than the proportion they get from an iTunes download)

    The point is this - if you play fair with people - they play fair with you. You try to screw the last penny out of your suppliers and your customers then don't be surprised if they go for the free version.

     

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    someone who actually knows what he's talking about, Feb 10th, 2010 @ 10:45am

    Re: Re: the elephant in the room

    supply of digital goods is not and never will be infinite. the supply of goods is a function of the cost to produce those goods. the free knowledge guys want to act like the only cost to get the goods from studio onto your computer or mp3 player is merely the cost of a bitwise copy. it's not. you ignored that whole part about employee salaries, customer service costs, royalties, server maintenance, song marketing, etc. many of these increase proportionally to the number of copies that you sell.

    lets assume every person on the planet wanted at least one copy, and maybe repurchased a copy for whatever reason (so we round up to 7 billion copies).

    the distributor knows that for every 1000 transactions, they have Y people call in with a customer service request which costs $Z. there are usually more types of service requests -- some cost less, some cost more. but for the sake of argument, we'll just use a single transaction which has a customer service cost of $Z*Y/1000.

    then they have royalties the distributor has to pay, which based on controlled composition clauses and settlements, range from about 8-15 cents. let's just round it to 10 cents for the purpose of this discussion.

    then you have server scaling costs. a server which puts up 7 billion transactions is not going to be cheap. even if you went with some small business solution, $5k in server costs alone for 7 billion transactions is a major underestimate.

    already (and there are still more costs), the cost to produce each copy is at least $5k/7b + 10cents + $Z*Y/1000. the cost is not 0, and so the supply cannot be infinite. until you get rid of all these costs, you cannot have infinite supply. ever.

     

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  51.  
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    Mike Masnick (profile), Feb 10th, 2010 @ 10:48am

    Re: the elephant in the room

    no one (here, or on ars) pointed out (or even realized) that unit sales and price and profit are not the same things. if you reduce the price, it does not necessarily correlate that you will make more revenues, because the increase in unit sales has to make up for the reduction in price. if you reduce the price enough, the fixed and up front costs (employee salaries, server costs, customer service, statutory royalties) far exceed the price, and then they're not making money on selling the music.

    Actually, you are wrong. You claim that it was unit sales, but it wasn't. The percentage growth numbers were revenue numbers.

    And, you're wrong that we didn't recognize the difference between sales, revenue and profit.

    there's a sweet spot for the price. to figure out how much that price is, you need insider sales/revenue/costs data. none of you have that data (including the marketing professor). i was going to say that it's like trying to determine profits without knowing what costs are... but that's exactly what it is. you're missing a huge chunk of the highly relevant data, and speculating that prices should be lower.

    Indeed, we don't know Warner's specific profits, but actually you're wrong in saying that this is the most important thing in this case, but WMG's costs are mostly fixed here, and the revenue is purely incremental, so for all intents and purposes, you can judge the revenue as if it were all profit (on a marginal basis). Because if we were to get WMG's accounting profits, those are meaningless. All that matters here is cash flow, and WMG has basically no marginal cost per digital sale. So, once again, you pretend to know what you're talking about when you clearly do not.

     

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    Mike Masnick (profile), Feb 10th, 2010 @ 10:54am

    Re: Re: Re: the elephant in the room

    supply of digital goods is not and never will be infinite.

    Heh. For someone who pretends he knows what he talks about, I would suggest returning to econ 101.

    You are incorrect. A good with no marginal cost to replicate is, very much, infinite in supply. But thanks for proving, yet again, how ironic your "name" is. No wonder you still refuse to identify who you really are.

    the supply of goods is a function of the cost to produce those goods. the free knowledge guys want to act like the only cost to get the goods from studio onto your computer or mp3 player is merely the cost of a bitwise copy. it's not. you ignored that whole part about employee salaries, customer service costs, royalties, server maintenance, song marketing, etc. many of these increase proportionally to the number of copies that you sell.

    Seriously. Econ 101, friend. Difference between marginal costs and fixed costs in understanding price pressure.

    You came here and mocked us in the past for not understanding the law. But on this one, you are so far off you're embarrassing yourself.

    already (and there are still more costs), the cost to produce each copy is at least $5k/7b + 10cents + $Z*Y/1000. the cost is not 0, and so the supply cannot be infinite. until you get rid of all these costs, you cannot have infinite supply. ever.

    Ok, slowly, for the ignorant. You are totally confusing average cost with marginal cost, and this is how people fail at business.

    I explained this last night to TAM on another threat, so I'll repeat:

    Econ lesson time:

    1. In a competitive market (i.e., one where the product is NOT SCARCE) price gets forced to marginal cost.
    2. In a non-competitive market (i.e., one where product IS SCARCE) you can price above marginal cost.
    3. Average cost does not factor into pricing, but DOES factor into the go/no-go decision.
    4. So any business model has to be about focusing on building up SCARCE goods, such that you can make enough profit to surpass the average cost, but with knowledge that the pricing on NON-SCARCE goods will be pushed to the marginal cost.

    What you are suggesting is that businesses should do average cost based pricing. That's incorrect. If you do that, you will fail, because you are not pricing on what the *market* values a product, but solely on what it costs you. The problem with that is that your competition cleans your clock by underpricing you.

    Seriously, econ 101. It helps.

     

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  53.  
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    Anonymous Coward, Feb 10th, 2010 @ 10:59am

    Re: Re: Re: the elephant in the room

    The recording industry is not the music industry.

    "you ignored that whole part about employee salaries, customer service costs, royalties, server maintenance, song marketing, etc. many of these increase proportionally to the number of copies that you sell."

    You ignore that music used to be about making money, back in the 20th century. In the 21st century, it's all about making music.

    Think small. That's where music is headed. Which is great for music. Not so much for corporate-backed music but it's better than nothing.

     

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  54.  
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    Richard (profile), Feb 10th, 2010 @ 11:36am

    Re: Re: Re: the elephant in the room

    the free knowledge guys want to act like the only cost to get the goods from studio onto your computer or mp3 player is merely the cost of a bitwise copy. it's not. you ignored that whole part about employee salaries, customer service costs, royalties, server maintenance, song marketing, etc. many of these increase proportionally to the number of copies that you sell.

    WRONG - none of these NEED to increase proportionally to the numbers sold.

    employee salaries
    - all factored in to the others so dealt with later

    customer service costs
    -More or less proportional to the number of customers overall - not to the number of items they buy. Should also be very small anyway if you set up your site properly

    royalties
    - generally this will be a percentage of the take or of the profit - not proportional to number of items - remember - you're a record label - you get to write the contract!

    server maintenance,
    - yes but the actual cost is a tiny fraction even of the 99c
    Check up on web hosting services and see how much bandwidth actually costs if you don't believe me.

    song marketing,
    this is a fixed cost it doesn't change according to how many you sell

     

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  55.  
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    Nigel, Feb 10th, 2010 @ 11:42am

    Too cheap to steal

    Economics....fun stuff. I've argued for some time that the prices should go way down. With a marginal cost near zero, why not price the same way. I'd like to see songs at 5 cents. I think this price might just dry up the torrent industry (for songs at least)

     

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  56.  
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    AR, Feb 10th, 2010 @ 12:14pm

    Re: Re: Re: Re: the elephant in the room

    here is the math that everyone overlooks and is what gets the consumer mad. lets make coulpe of legit assumpions here:
    Cd price = $15
    # of songs per cd = 15
    price per song = $1
    All costs and profits are built in(quite lucratively)

    Now for digital music same $1 per song;
    remove cost of "printing"
    remove cost of medium
    remove cost of shipping
    remove cost of markup for the distributor/seller
    add cost of servers
    add cost of bandwith
    subtract money made from advertisers on your site

    I know its over simplified but you can get the idea
    why pay $19.35, instead of $15, for the same 15 songs when it actually cost less to offer them digitally??? Why pay $.99 for that matter? Its just gouging and thats what is pizzing people off!!! Thats the REAL elephant.

     

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  57.  
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    Henry Emrich, Feb 10th, 2010 @ 12:44pm

    Re: Re: Re: Re: Re: the elephant in the room

    "I know its over simplified but you can get the idea
    why pay $19.35, instead of $15, for the same 15 songs when it actually cost less to offer them digitally??? Why pay $.99 for that matter? Its just gouging and thats what is pizzing people off!!! Thats the REAL elephant."

    No, the REAL elephant is that the files you *think* you are "buying" are often broken by design. True, the IP apologists like to call it "DRM", but the fact that it presents any obstacle whatsoever to inter-operability across multiple devices OF THE USER'S OWN CHOOSING, is reason enough not to even bother.

    Anybody remember Spiralfrog? They attempted to "give away" DRM-crippled files, but nobody wanted them. (I put "give away" in quotes, because no matter how many times the files were downloaded, the "original" files were still there -- you can't claim to have "given away" something, if you still have it).

    So, people don't even want DRM-crippled files *for free*, but the corporate megaliths somehow believe they'll "buy" them?
    (Additionally, there's the somewhat odious fact that by "buying" such DRM-crippled files from "legitimate" sources, you are directly bank-rolling their infamous campaign of destroying the Public domain via copyright-term extensions and such.
    And nobody who has actually thought about these issues will feel comfortable doing that, ESPECIALLY given the fact that the file they end up "buying" (oops, I mean "licensing") could/probably will stop working, given the slightest little DRM-related glitch.

    *THAT* is the real elephant in the room.

     

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  58.  
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    AR, Feb 10th, 2010 @ 12:48pm

    Re: Re: Re: Re: Re: Re: the elephant in the room

    Point taken. I think we are dealing with a herd here.

     

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  59.  
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    Anonymous Coward, Feb 10th, 2010 @ 12:51pm

    Re:

    "Can you find anyone under 30 who doesn't know how to get a torrent file of music"

    Torrent files do not contain music, they contain information on torrents.

     

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  60.  
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    someone who actually knows what he's talking about, Feb 10th, 2010 @ 1:21pm

    Re: Re: the elephant in the room

    here comes the clue train... last stop is you. the exact wording of the metric (as i cited above) was "digital track equivalent album [b]unit[/b] growth". kafka (the author of that post) said it was revenues right after saying it was units. you repeated his error without thought.

     

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  61.  
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    PaulT (profile), Feb 10th, 2010 @ 1:29pm

    Re: Re: Re: Re: Re: Re: the elephant in the room

    It's worth noting that no major online music retailer enforces DRM any more (as opposed to rental/subscription services who do), so your argument is out of date - for music, at least (Spiralfrog was an anachronism, and failed for reasons other than DRM). iTunes, Amazon, eMusic, AmieStreet, 7digital, etc. - all DRM free nowadays.

    Stripping the DRM requirement from music was probably the best move the labels have made over the last decade, but sadly I think that having it in the first place set their growth back at least 10 years...

     

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  62.  
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    Joe (profile), Feb 10th, 2010 @ 1:34pm

    Re:

    The difference between 0.99 and 1.29 isn't enough to turn people away.

    That's almost a 30% increase in the cost of music. I'm not willing to pay $0.99 personally, so there's no way in hell I would pay 30% *more* than that. This may not apply to people who are used to the iTunes experience but it does matter for people that are just buying music.

    People will only pay for music as long as it's cheap enough to not be worth pirating. I would argue that for a good number of people, a roughly 30% increase would be enough to tip them in favor of piracy.

     

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  63.  
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    someone who actually knows what he's talking about, Feb 10th, 2010 @ 2:02pm

    Re: Re: Re: Re: the elephant in the room

    you're still defining "replication" as performing the bitwise copy. no one is disputing that the cost of THAT definition of replication is virtually zero. the actual cost of replication is what it takes to get a consumer interested to come into your store front and make the sale. you fail to separate the costs associated with creation (like studio time) and the costs which are proportional to unit sales (better servers, more customer service and software engineering man hours, advertising, etc).

    amusingly, you're not counting one of the simpler examples of proportional costs -- marketing. a couple of years ago, there were these two guys in the basement of a computer lab who came up with a search scheme which eventually made the CPMI and CPC metrics dictate how we quantify advertising leads on the internet. then companies have internal conversion ratio metrics to see how many of those leads turn into purchases. all companies advertising on the internet quantify the marketing cost per unit, and they do it more accurately than with any other medium.

    i understand the idea behind competitive/noncompetitive markets. no one is debating that here. congratulations... you know chapter 1 of econ. the part where you fail is that you're admitting that "average cost ... DOES factor into the go/no-go decision" [b]THAT IS THE DEFINITION OF LIMITING SUPPLY[/b] (albeit, it's a little colloquial). it's no different when you're selling hammers or music files. if you're not making money, you're not doing the deal, so you're not going to produce that extra copy and supply falls below infinite. continue arguing... you only look more foolish to anyone who knows a shred about pricing.

     

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  64.  
    identicon
    someone who actually knows what he's talking about, Feb 10th, 2010 @ 2:04pm

    Re: Re: Re: Re: the elephant in the room

    statutory royalties are not a percentage of the profit. they are fixed per unit: http://www.copyright.gov/carp/m200a.html

     

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  65.  
    identicon
    Anonymous Coward, Feb 10th, 2010 @ 2:15pm

    Re: Re: Re: Re: Re: the elephant in the room

    Exactly! Music and hammers are the exact same thing so it's totally fair to compare the two.

    Of course, everybody can use a hammer but can the same be said for music? I say this as someone who stopped listening to music thanks to the antics of the recording industry.

    The hammer industry hasn't pissed me off yet, so I guess we'll just have to wait and see.

     

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  66.  
    icon
    Mike Masnick (profile), Feb 10th, 2010 @ 3:25pm

    Re: Re: Re: the elephant in the room

    here comes the clue train... last stop is you. the exact wording of the metric (as i cited above) was "digital track equivalent album [b]unit[/b] growth". kafka (the author of that post) said it was revenues right after saying it was units. you repeated his error without thought.

    *sigh* I didn't just rely on Kafka's report and your reading comprehension on my writing is staggering in how badly you always seem to claim I said something. I never said anything about units. I was always talking about revenue and nowhere did I say units. I did make one small mistake, not that you noticed, but revenue was actually up 28% the year before. So the growth drop (28% to 8%) was even bigger than I reported. I'll fix that now!

     

    reply to this | link to this | view in thread ]

  67.  
    icon
    Mike Masnick (profile), Feb 10th, 2010 @ 3:37pm

    Re: Re: Re: Re: Re: the elephant in the room

    you're still defining "replication" as performing the bitwise copy. no one is disputing that the cost of THAT definition of replication is virtually zero.

    Ok! You finally got something right! Except that you do seem to disagree that this is the marginal cost.

    the actual cost of replication is what it takes to get a consumer interested to come into your store front and make the sale

    Sorry, you need to stay after school. Cost of customer acquisition is a fixed cost not a marginal cost. You still seem confused. It's ok, lots of folks without a background in economics get this wrong. But, honestly, you're making your "name" look bad here.

    you fail to separate the costs associated with creation (like studio time) and the costs which are proportional to unit sales (better servers, more customer service and software engineering man hours, advertising, etc).

    No, I separate them out exactly. Because I know the difference between what is a marginal cost and what is a fixed cost and what is an average cost. You keep confusing them.

    amusingly, you're not counting one of the simpler examples of proportional costs -- marketing.

    Marketing is a fixed cost.

    You are still confused. But, honestly, a quick econ 101 refresher migh thelp you.

    a couple of years ago, there were these two guys in the basement of a computer lab who came up with a search scheme which eventually made the CPMI and CPC metrics dictate how we quantify advertising leads on the internet. then companies have internal conversion ratio metrics to see how many of those leads turn into purchases. all companies advertising on the internet quantify the marketing cost per unit, and they do it more accurately than with any other medium.

    Indeed. But those are average costs, not marginal. Again, this is important stuff, and I understand that it's confusing when you first discover them, but repeating average cost as if it's marginal cost won't help you in business, nor will it get you a passing grade in Econ 101.

    i understand the idea behind competitive/noncompetitive markets. no one is debating that here. congratulations... you know chapter 1 of econ.

    And, quite clearly from the above, you do not.

    the part where you fail is that you're admitting that "average cost ... DOES factor into the go/no-go decision" [b]THAT IS THE DEFINITION OF LIMITING SUPPLY[/b] (albeit, it's a little colloquial).

    Ha! Dude, seriously. There are points we can disagree on, and there are points we can agree to disagree on, and there are points where you are just 100% flat out wrong. In this case you are wrong. Really, really wrong.

    I'm not "admitting" that average cost factors into go/no-go. That's a fact. I've never denied it. We're not talking about go/no-go, we're talking about pricing, and pricing on an infinite good is pressured by the *marginal* cost (a concept you still don't seem to grasp) and that is zero.

    it's no different when you're selling hammers or music files. if you're not making money, you're not doing the deal, so you're not going to produce that extra copy and supply falls below infinite. continue arguing... you only look more foolish to anyone who knows a shred about pricing.

    Oh man. You are now confusing the *aggregate market* with the individual *product*. When we discuss pricing, we're talking about the supply of an individual product -- a song, for example. Once it's created and in digital, it IS infinite. That's not up for debate. It's just basic economics.

    If someone doesn't produce a different song, then the market for THAT song is not infinite, but every other song produced is still infinite. But in pricing we're talking just about the individual song and the market for that song, not the market for all music.

    So, no, I'm not looking foolish. I'm looking like I know economics, and you... do not.

    I'm really not trying to be snide here. This is basic econ 101 stuff and you're getting it very, very wrong. For your own sake, I would suggest a refresher course, because you're really making yourself look like a fool.

     

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  68.  
    icon
    Mike Masnick (profile), Feb 10th, 2010 @ 3:48pm

    Re: Re: Re: Re: the elephant in the room

    I did make one small mistake, not that you noticed, but revenue was actually up 28% the year before. So the growth drop (28% to 8%) was even bigger than I reported. I'll fix that now!

    Oops. Correction on my correction! I looked at the previous quarter of last year. The original number was correct.

    Q1 2008: $142 million digital revenue
    Q1 2009: $171 million digital revenue (up 20% as stated)
    Q1 2010: $184 million digital revenue (up 8%).

    Again, I was stating revenue. Kafka mentioned units, and I didn't pay attention to that, but the numbers of revenue is what matters, and that's what I was talking about all along, despite your false claim otherwise).

     

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  69.  
    identicon
    someone who actually knows what he's talking about, Feb 10th, 2010 @ 8:51pm

    Re: Re: Re: Re: Re: Re: the elephant in the room

    average cost = ((per unit costs) + (up front costs)) / units produced

    marginal costs = the cost to sell one more unit.

    lets say you sell hammers.
    your hammers are $10 to produce between wood and metal. the machining tools cost you $1k. then you have electricity to run the building, but you know that for every hammer your machine spits out, it kicks up the energy bill a bit more.

    now, the $10 in raw materials is a marginal cost. i think we both agree on that.

    the $1k is a fixed. i think we both agree on that too.

    electricity is going to be partially fixed and partially marginal. it costs you $x to set up the account with the power company, and you're going to have power on in the building for the lights and what not. regardless of whether you sell 1 hammer or 1000, you have this electricity cost -- that's fixed. but you also know that it will take Y kW hours to run that machine through 1 hammer production process. the price for Y kW hours is a marginal cost, not fixed. if you don't produce that extra hammer, you don't have that extra cost. that is textbook marginal cost. it's no different than wood or metal or plastic.

    here's another simple example. let's say my company builds and installs washing machines. after the install, you get 2 service followups (i come by and oil it or change some band or something). the raw materials, the install, and the followups are all marginal costs. if i don't make the sale, i don't have those costs. the fact that they are SERVICES rather than GOODs is irrelevant. the fact that the costs arise AFTER the sale rather than before is irrelevant. they're still directly proportional on the number of units that i push. it's no difference with customer service nowadays, which is outsourced to somewhere in asia, and they bill you by volume. you know that each unit has a probability of X in hooking a service call. that's still a marginal cost.

    and maybe you haven't paid attention but some ridiculous percentage of businesses have fired most salaried workers, and only hire contract guys based on volume. contract hours are usually proportional to the number of units you push -- they're usually partially fixed and partially marginal. marketing like television is mostly a fixed cost, but marketing on the web is almost always fully marginal. but like electricity, these are almost always partially fixed and partially marginal.

    the difference between costs in itunes and p2p is that p2p either outsources the cost, or simply doesn't give the respective service. customer service for p2p? there is none. server scaling? just go see how many people on TPB are asking for seeds. you're looking at mixed costs, edging towards marginal.

     

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  70.  
    icon
    Mike Masnick (profile), Feb 11th, 2010 @ 12:22am

    Re: Re: Re: Re: Re: Re: Re: the elephant in the room

    You are still trying to shove pieces of fixed costs into the marginal cost. This is wrong. I'm really sorry, but an employee's time is NOT part of the marginal cost of making a copy of a file. Seriously. The marketing costs are NOT a part of the marginal cost. If you don't believe me, please go speak to an econ professor. I'm willing to debate you on other topics, but on this one, you are just flat out wrong. From what you've said before you're a lawyer, not an economist, so I could understand you getting this wrong, but really, for the sake of basic decency, stop claiming fixed costs are a part of marginal costs. They're not.

    Separately, I note that you didn't respond to any of my other points, or the fact that you falsely accused me (yet again) of talking about units when I was talking about revenue all along.

    I know that all you want to do is prove me wrong (and so far have failed every single time) but when you're so blatantly wrong, you could at least admit it and apologize.

    But, of course, you won't do that for the same reason you won't reveal who you are. Because you're not here for a real discussion. You're here, on purpose, to try to make me look bad. And you've failed. Yet again.

     

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  71.  
    identicon
    The Anti-Anti-Mike, Feb 11th, 2010 @ 5:40am

    Re: Re:

    What makes you think that a four year old study is meaningless? Could it be that the study doesn't support your particular beliefs?

     

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  72.  
    identicon
    someone who actually knows what he's talking about, Feb 11th, 2010 @ 7:31am

    Re: Re: Re: Re: Re: Re: Re: Re: the elephant in the room

    you're still assuming the product that you buy is only a bitwise copy. that's false.

    do you agree that any cost that increases/decreases proportionally to your transaction count when you increase/decrease your transaction count is a marginal cost?

     

    reply to this | link to this | view in thread ]

  73.  
    icon
    Mike Masnick (profile), Feb 11th, 2010 @ 10:08am

    Re: Re: Re: Re: Re: Re: Re: Re: Re: the elephant in the room

    you're still assuming the product that you buy is only a bitwise copy. that's false.

    Ok. Then I'm confused. What are you saying is being purchased?


    do you agree that any cost that increases/decreases proportionally to your transaction count when you increase/decrease your transaction count is a marginal cost?


    No, that's wrong. Those are *average* costs. Marginal cost is the cost to produce *one* more. Things that step up at certain points (employing a person for another hour or something) are not included in the basic marginal cost calculation.

     

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  74.  
    identicon
    someone who actually knows what he's talking about, Feb 11th, 2010 @ 12:40pm

    Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: the elephant in the room

    wikipedia disagrees with you.

     

    reply to this | link to this | view in thread ]


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