Although Apple Inc. announced this month that some songs sold on its market-leading iTunes online service would be available for 69 cents instead of the 99-cent tag Apple had insisted on for years, the change won't necessarily put more money into the pockets of music lovers.
In fact, record companies are the ones that plan to come out ahead.
While some songs will be 30 cents cheaper, popular songs likely will be marked up to $1.29. That price breaks a psychological $1 barrier and prepares consumers for a new strategy by labels to bundle songs, videos and other exclusive content together — all in the hopes of reversing years of falling music sales.
According to NPD analyst Russ Crupnick, the music industry has been faced with a vexing question as fans bought more digital singles but fewer albums: "As the album as we know it goes away, how do we replace a $12 or $13 item with something that costs more than 99 cents?"
If the new variable pricing can make several songs packaged together seem like a relative discount, it could finally entice some consumers to pay more.
"You've got them spending $4, when yesterday they were spending 99 cents," Crupnick said. "Is this going to be the salvation of the industry? No. But all these incremental things that we do will be helpful."
Music sales have declined in seven of the last eight years. The industry peaked in 2000, only to face the advent of the file-sharing program Napster, which made it easy for people to trade songs for free. Since Apple CEO Steve Jobs introduced iTunes in 2003, downloads of single digital tracks have exploded, but not in the volumes necessary to offset what last year was a 20% drop in sales of physical albums, which hold 10 songs or more.
The ability to increase online sales by charging 69 cents for some tracks, while reaping higher profits on more popular songs at $1.29, was so important to record labels that until last week they had withheld licensing of over-the-air downloads to Apple's iPhone, keeping it a somewhat dysfunctional mobile music gadget. Wireless music purchases on the iPhone had previously been possible only inside Wi-Fi hot spots.
Now that Apple and the music business both got what they wanted, the pricing changes figure to be replicated on other song-selling sites as their existing music-licensing deals expire.
"I think it's going to affect everyone's pricing but I don't think it's negative," said Bill Nguyen, co-founder of music retailing site lala.com, which sells songs for 89 and 99 cents and songs that can be played only online for 10 cents. "You're going to get more bundling. There'll be more discounts."
Some bundling has already worked.
Warner Music Group Corp.'s Atlantic label, which posted an industry first by growing its digital revenue past its CD sales, has sold bundles on iTunes for artists T.I., Jason Mraz and Death Cab for Cutie before their full albums were released. In Mraz's case, Atlantic offered four singles and two EPs — groups of four songs or more — in the three months before the May launch of Mraz's album We Sing. We Dance. We Steal Things. People who had already bought those were more likely to upgrade their purchases to the full album with the extras included, for $19.99 minus what they had paid already. In the first week of release, the bonus-laden album outsold the standard $9.99 one by a 3-to-1 ratio.
The risks of the strategy — that consumers will be confused or turned away — are thought to have declined a lot since Apple launched iTunes. Back in 2003, Apple sought the simplicity of a single price as it tried to make its service ubiquitous.
That succeeded. Apple has an estimated 80% share of the digital download market and about 71% of all portable music players sold in the United States.
"Uniform pricing made a lot of sense especially in the early days of the iTunes store," said Michael Gartenberg, a technology analyst and vice president at Jupitermedia in New York. "Now the market has been educated about digital downloads. Apple understood that."
It also became apparent that consumers weren't entirely concerned about price and were more influenced by whether songs they bought online worked easily with their portable music players. For instance, for more than a year, Amazon.com Inc. beat iTunes on price, with song downloads at 79 and 89 cents and most albums between $5.99 and $9.99. While those songs could be transferred seamlessly to iPods with a downloadable program, most consumers haven't bothered to make the switch.
Recording companies noticed. While none would comment on the record for this story, privately they say that Amazon's inability to become the dominant force in song sales indicates that consumers aren't considered "price sensitive." In other words, people are willing to pay more.
A spokeswoman for Amazon declined to comment.
Another reason Apple is likely to be defining a new pricing system for the whole industry is that it also announced that all of its tracks will soon be free of copy protection, enabling other manufacturer's devices to play them.
For now, though, rival Microsoft Corp. says it won't be changing its mostly static price of 99 cents for songs in its online marketplace. Microsoft is also emphasizing a $14.99-a-month unlimited song subscription plan.
"This doesn't have any immediate effect on us other than the fact we'll have some songs on our service that'll be less expensive than some songs on their service," said Adam Sohn, Microsoft's director of marketing for its Zune music players. "That's the way we price right now."