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Another Spin On The Music Industry

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Another Spin On The Music Industry

Postby bronxxbomber » Sat Nov 19, 2005 11:07 am

Price as Signal

This item ran on the Joel on Software homepage on Friday, November 18, 2005

Forbes: “EMI Group boss Alain Levy said at press conference today that he believed Jobs would introduce multiple price points for iTunes music within the next year.”

The story they're trying to tell you is that “older, less popular songs could be discounted, and in-demand singles could go for more than a dollar.”

Let's think this through, because I think the recording industry is lying about why they want different prices.

Before I start with that, have you ever noticed that movie theaters charge the same price for all movies, whether they are Steven Spielberg blockbusters or crappy John Travolta religious quackary disguised as science fiction that nobody in their right mind would want to see?

Theoretically, when a super-duper-blockbuster comes out, like, say, Lord of the Rings, there's so much demand that the movie theaters just end up turning people away. Econ 101 says that they should raise the price on these ultra-popular movies. As long as the movie is sold out, why not jack up the price and make more money?

Similarly, when stinkers like Lesbian Gangster Yoga with Ben Affleck come out, the movie theatre is going to be pretty much empty anyway ... so Econ 101 says they should lower the price and try to get a few more bucks filling up the theater with price-sensitive moviegoers.

And indeed this is what the recording industry is telling you that they want to do on iTunes. But they don't do it in movie theaters. Why not?

The answer is that pricing sends a signal. People have come to believe that “you get what you pay for.” If you lowered the price of a movie, people would immediately infer from the low price that it's a crappy movie and they wouldn't go see it. If you had different prices for movies, the $4 movies would have a lot less customers than they get anyway. The entertainment industry has to maintain a straight face and tell you that Gigli or Battlefield Earth are every bit as valuable as Wedding Crashers or Star Wars or nobody will go see them.

Now, the reason the music recording industry wants different prices has nothing to do with making a premium on the best songs. What they really want is a system they can manipulate to send signals about what songs are worth, and thus what songs you should buy. I assure you that when really bad songs come out, as long as they're new and the recording industry wants to promote those songs, they'll charge the full $2.49 or whatever it is to send a fake signal that the songs are better than they really are. It's the same reason we've had to put up with crappy radio for the last few decades: the music industry promotes what they want to promote, whether it's good or bad, and the main reason they want to promote something is because that's a bargaining chip they can use in their negotiations with artists.

Here's the dream world for the EMI Group, Sony/BMG, etc.: there are two prices for songs on iTunes, say, $2.49 and $0.99. All the new releases come out at $2.49. Some classic rock (Sweet Home Alabama) is at $2.49. Unwanted, old, crap, like, say, Brandy (You're A Fine Girl) -- the crap we only know because it was pushed on us in the 70s by paid-off disk jockeys -- would be deliberately priced at $0.99 to send a clear message that $0.99 = crap.

And now when a musician gets uppity, all the recording industry has to do is threaten to release their next single straight into the $0.99 category, which will kill it dead no matter how good it is. And suddenly the music industry has a lot more leverage over their artists in negotiations: the kind of leverage they are used to having. Their favorite kind of leverage. The “we won't promote your music if you don't let us put rootkits on your CDs” kind of leverage.

And Apple? Apple wants the signaling to come from what they promote on the front page of the iTunes Music Store. In the battle between Apple and the recording industry over who gets to manipulate what songs you buy, Apple (like movie theaters) is going to be in favor of fixed prices, while the recording industry is going to want variable prices.
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Postby JTWood » Sat Nov 19, 2005 11:26 am

Great read. Thanks for the post.

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Postby Cornbread Maxwell » Sat Nov 19, 2005 11:44 am

Yeah - thats really interesting, thanks for posting this. Definitely something to think about.
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Postby logan » Sat Nov 19, 2005 12:43 pm

this is why i really really want to murder everyone in the corporate music and movie industry. this is the sole reason i will continue to steal music unless it is a band/group/hip hop artist i want to see do well. i unfortuantely pay the ridiculous prices to go see movies but it really is over priced.it isnt even the price of admission so much as it is the fact that it costs almost the same amount for popcorn and two drinks(and i don't even like popcorn). going to the movies anymore is a $40 investment. more in other places in the country.
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Postby RugbyD » Sat Nov 19, 2005 1:02 pm

the music industry may be able to create a limited amount of artificial demand through pay-to-play, but i don't think the average person would pay 2.50 for a song sight unseen (or is that hear unheard? ;-7 ). People won't buy or pay up for stuff they don't like. I think sending a message to consumers about the quality of something based on price fools a lot more clothing shoppers than it would music shoppers b/c the conumers' ability to determine quality is higher on a more subjectively graded product.

w/r/t movies, I'm not sure if pricing would work as well b/c there are so many surprises in both directions. The first Matrix made tons mroe moeny than anyone could imagine and something like Kingdom of Heaven was a total flop compared to its budget and expectations. Also movie reviews can be a good source of infomration as far as being able to tell people that Battlefield Earth is not worth seeing even if you were paid, so a lower admission price would actually hurt the studios' income b/c they couldn't squeeze as much out of the first 5 people who went to see it without doing minimal due diligence first.
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Postby Phatferd » Sat Nov 19, 2005 1:14 pm

I'd rather pay $18 a month for netflix than $11 bucks to see 1 movie in a month at the theater.

I can't believe the attitude of the music and movie industry. They know everyone hates them and that people are stealing music, however, instead of trying to create a positive image they take a totalitarian approach.

It's sad too because music companies are making an all time high in revenues. Movie companies on the other hand aren't but that's their own fault if you ask me. Why charge $12 a ticket when you can buy the DVD when it comes out for $3 more? This doesn't even factor in the concession prices or other tickets if you're bringing family or a date.

Teens are the biggest demographic for going to the movies. Why charge $12 a ticket when most kids make $5-6 an hour?
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Postby Coppermine » Sat Nov 19, 2005 1:19 pm

What a great read, thanks for that!

It's interesting how the entertainment industry refuses to follow the economic principles of price equilibrium... it's really all based on advertising.

Think of it this way, and it works the same way with music too... sometimes the best movies make the least money while the biggest stinkers rake it in. That's all based on advertising, the "hook" if you will, and the film's star power.

Demographics for instance... the biggest one is teenagers, 14-20. Most of these kids are genre specific. If it's bathroom humor or horror, it's going to dominate the box office. Take a look at The Fog, perhaps one of the worst reviewed movies of the year. It was number 1 for a weekend (of course, it sucked so much, that after its first week, people caught on that it sucked). But you see, that's not hte point... Joe Blow movie-goer will go see any kind of garbage as long as its at the movies and isn't too "intellectual."

For instance, Good Night and Good Luck is probably the best-reviewed movie playing right now. It can't crack the $15 Million mark... why? Because people don't want to see "good" movies, especially if they're historical and are shot in black and white. How do you think the producers would feel if the studio decided to charge less for their Oscar contending film just to compete with Get Rich or Die Tryin'?
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Postby bleach168 » Sat Nov 19, 2005 6:19 pm

The answer is that pricing sends a signal. People have come to believe that “you get what you pay for.”


This phenomenon is unique to american consumers. People in other countries aren't so lazy.
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Postby Half Massed » Sat Nov 19, 2005 7:22 pm

Interesting read.

I don't think this would work so well in the music industry. Quality in music is strongly based on an individual and their tastes. Most people won't buy an expensive song they've never heard unless it's their favorite band or they've heard other good things about it. If word spreads that an expensive song is junk, it could lose a lot of those customers who feel that they'd only buy an expensive song if they've heard it and like it.
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Postby JTWood » Sat Nov 19, 2005 7:24 pm

bleach168 wrote:
The answer is that pricing sends a signal. People have come to believe that “you get what you pay for.”


This phenomenon is unique to american consumers. People in other countries aren't so lazy.

Really? I'd like to read more about that. Do you have any links that you can give me about this dichotomy?
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