Variable Pricing On iTunes?

21 05 2008

Steve Jobs wants to extend Apple’s lead in online music sales to the mobile market, and the 3-G iPhone expected next month positions them to make the iTunes store available everywhere you have signal. Jobs also wants in on the ringtone and ringback tones business — thoroughly impulse buys which become feasible on the iPhone only if purchasing can be done outside of a hot spot.

Trouble is, he needs some new deals from the record labels to make this happen. The record labels have some demands of their own — chief among them variable pricing. As music licensing negotiations between Apple and the labels continue, the labels hope to trade mobile delivery for variable pricing, according to a New York Times‘ source, a record label executive.

An Apple spokesperson told, “We don’t comment on rumors and speculation,” but we got a couple of analysts to weigh in on the possibilities.

“All sorts of discussions happen over time as the contracts [between Apple and the labels] expire. All sort of issues get lumped in, and no doubt [OTA downloads are] going to be one of them,” Michael Gartenberg, VP and research director of Jupiter Research told “Clearly Apple understands that its devices are dependent on getting content – music, games, movies, ringtones etc., and it’s going to work hard to make that happen. Apple’s track record with iTunes and the iPod suggests they probably will get the kind of cooperation they need.”

Still, the labels’ demand for variable pricing could be part of the deal this time around. It’s been a Jobs bedrock principle that one-price-fits-all works, and it has been hard to argue the point, what with Apple surpassing Wal-Mart as the world’s biggest music store. After all, Apple let NBC walk over variable pricing but only last week agreed to a two-tiered pricing system with HBO.

So, is the time ripe for some horse trading?

Currently iPhone owners can buy iTunes content only when they are in a hot spot. The use of AT&T 3-G makes broadband ubiquitous and that makes the OTA ringback and ringback-tone business viable. However, Apple could be forced to cut AT&T in on music sales if it wants to pipe music over the company’s wireless data networks to iPhone users.

Mobile is “clearly an opportunity Apple is missing,” said Lewis Ward, research manager of mobile consumer services for IDC,via telephone. “And Apple is going to want to do it all themselves, but these OTA music storefronts have not sold very well. Maybe there’s secret sauce Apple’s thinking about, but the track record  [of mobile music and ringtone stores that require a credit card rather than charging users via their cellphone bills] has not been impressive to date.”

“The real issue is billing,” said Ward. “People are much more comfortable with paying through a carrier [because] you don’t have to enter a credit card number or be worried about security…. That puts the carrier in the supply, and the carrier is going to want their cut, which means the margin for Apple goes lower.”

As for the labels, they want iTunes to abandon its policy of selling songs at a flat rate of 99 cents in favor of a demand-based pricing system that would charge more for hot releases and less for other tracks. The labels have already tried to pressure Apple by withholding some of their music from the DRM-free section of the iTunes store, but these mobile licensing agreements give them even more negotiating leverage.

Apple already allows HBO to sell videos at various prices through iTunes; if Jobs wants a bigger piece of the mobile pie, he could soon be forced to cave to label demands for the same options. And that’s not all.

At least one of the majors — Universal Music Group — also wants Apple to offer an “unlimited music” iPod that would allow device owners “a year or two” of subscription-style access to a large catalog in return for paying the labels an upfront fee with each iPod sold. (Will factory-replaceable batteries be the new DRM?)

Negotiations around these topics have been happening for a few weeks and are ongoing, according to the New York Times. IDC audio analyst Susan Kevorkian told us that Apple’s practice of selling songs at a flat fee has already served its purpose, which was to show the music buying public how simple buying online could be.

If that’s the case, Jobs could fold on the variable music pricing front to give Apple a bigger percentage of the mobile music market





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