CMU Trends Digital

Trends: How should we be pricing digital?

By | Published on Thursday 6 March 2014


Few in the record industry were ever convinced that the 99 cents per download price point that Apple’s iTunes made the norm in the then emerging digital music market ten years ago was the right figure.

Most felt that the ‘one dollar per track’ thing, while good for marketing spiel purposes (which was most likely Apple boss Steve Jobs’ motivation for choosing that price point in the first place), was unsustainable long term.

Though a few mavericks suggested that the iTunes per-track rate was actually too high. Perhaps the controversial and ultimately defeated Russian service, which sold chart hits for mere pennies (albeit with disputed legality), had it right. If ten penny tracks, say, led to many more file-sharers being converted to licensed downloading, and if converted downloaders were then tempted to download ten times more content this way, the industry at large would benefit.

In the end though, the former larger body of opinion won through. iTunes was finally persuaded to allow variable pricing, which was used by the labels to quietly increase average download prices overall. That flexibility also let the record companies nurture the much-slower-to-establish digital albums market. Labels could now subtly push up per-track prices, but allow customers to enjoy lower per-track costs if they bought the LP. Ensuring the continued sale of filler tracks.

Such playing with pricing is also likely behind the recent surprise revival of the compilation album, which by all rights should be in terminal decline in the iTunes age, where consumers can easily compile their own playlists of recent hits.

To be fair to the labels, they haven’t used this flexibility to dramatically increase the per-track download fee, perhaps constrained to an extent by Amazon employing its customary loss-leading low-prices marketing strategy, routinely selling key releases at low prices to gain market share.

But it’s probably reasonable to estimate that single track downloads are, on average, about 20 cents or pennies more expensive now than a decade ago. And by winning control of download pricing, debate in the labels about MP3 prices has generally died down.

Meanwhile, debate over the pricing of subscription-based streaming services has taken over. In Europe, the Spotify pricing model has generally become the norm, even though there again you sense price-points were mainly picked for marketing reasons. As it currently stands, five pounds/euros gets you ad-free unlimited on-demand streaming, while ten pounds/euros gets you full mobile functionality.

But not everyone is convinced those price-points are right for the long term. And again, some reckon prices should be higher while others say they should be lower. Though those advocating lower pricing in the streaming space are not so maverick as their counterparts in the download pricing debate ten years ago.

The argument goes like this: while Spotify et al seem like good value to core music consumers who have always spent money on recorded music on a monthly basis, for more casual music fans the prospect of spending £60 a year to access albeit millions of tunes, or £120 a year if they desire mobile listening (which they probably do), seems very steep indeed.

And that, some reckon, is limiting the uptake of subscription services by more casual music fans. Because for all the hype surrounding streaming services in Europe in the last three years, the subscription model is yet to really ‘go mainstream’.

While the “millions” of paying users quoted by the likes of Spotify and Deezer sound impressive, those are split over numerous countries (50+ in Spotify’s case, 180+ for Deezer), and neither have revealed how many of those subscribers get the service bundled in with a mobile package. While such bundling is easy money for the streaming services in the short term, those sign-ups are not necessarily proof that the consumer was convinced of the value of a streaming music subscription in itself.

Last month a new report from professional services outfit Alvarez & Marsal attempted to put some figures to the potential uplift that could be achieved in the streaming market if monthly price points were dropped. Based on a survey of 3329 consumers in the UK, US and Germany, it reckoned that if the full-premium subscription price, currently £10 a month in the UK, fell to £5, then 2.4 million more people would sign up, resulting in £95 million in additional revenues for the music companies which licence content to the streamers.

The company’s Faisal Galaria said: “Our research shows that reducing prices will have a significant effect on subscription rates and, subsequently, be more than offset by an increase in aggregate revenues. While reducing prices may seem like a dramatic step, with the right proposition and price points in place, there is an opportunity to build sustainable interactive music businesses and even create the Netflix of music”.

But how does this talk of dropping streaming subscription fees tally with the debate that has rumbled on in the artist community in the last year that says Spotify et al are already under-selling their content and paying too low royalties into the music business.

Well, perhaps the solution is to offer more casual music fans a more casual streaming service, ie with access to a smaller catalogue of content. We all know more mainstream consumers are put off by the sheer amount of music offered by most on-demand streaming services, which is why all the key players have been putting so much effort into helping users navigate all those tracks through much hyped ‘discovery tools’. But perhaps the solution is actually to just provide less content to those paying the lower rate.

Quite how that would work is an interesting question. One service to watch is the O2 Tracks platform launched last year, which offers a very limited catalogue of mainstream content for that £4.99 a month price point (£1 a week for O2 customers). It’s powered by a company called MusicQubed, which has ambitions to take its model global through a portfolio of mobile network partners.

Galaria has advised some investors in MusicQubed so may not be entirely unbiased on the benefits of the lower-priced approach, though O2 Tracks is not the only digital start-up playing with an alternative model for subscription streaming, being another one to watch in this domain.

Whether either of these services have a winning business model, it’s far too soon to say, but they are both very interesting in the way they are trying to appeal to more mainstream consumers, and how they are going about enabling a lower price-point to do so.

But what about increasing the subscription service price-point? Speaking at MIDEM earlier this year, Deezer boss Axel Dauchez, while also advocating the need for a lower entry-point price for more casual consumers, did also tell Billboard: “There will be some up-sale in the future regarding quality”.

That is to say, as with downloads, price increases might be possible down the line. However, this time that won’t be achieved by quietly increasing standard rates under the shroud of variable pricing. Rather, as more casual music consumers are pulled in through lower pricing at entry level, more committed music fans may be persuaded to pay more in return for an added value service.

Though how exactly will value be added? Given the ad-free option is likely to be offered at ever decreasing rates, and the mobile functionality that has made premium stand out so far is not, in itself, going to be enough to justify a dramatic increase in price.

One possible way to add value is to offer increased audio quality – that is to say, dramatically increased audio quality shifting streaming up to levels equivalent to CD. Of course the labels have dabbled with selling high quality disks and downloads at a premium for years with very limited success – the audience for super-quality records on Blu-ray or WAV/FLAC downloads is very niche indeed.

But arguably one of the problems with super-quality audio in the physical and download space is that is requires the consumer to not only pay more money, but to buy new kit, or work out how the hell they can get WAV files to play alongside their existing MP3 collection. Bandwidth issues aside, streaming services can offer high quality audio at the press of a button (and the parting of more cash).

The service to watch here is Norwegian based streaming platform WiMP, which launched a high quality service at twice its usual premium rate last autumn. It’s too soon to say whether the market for such an upgraded option makes it worthwhile setting up, though WiMP say early signs are good.

And even if the average customer arguably can’t tell the difference between a 320kbps MP3 and a FLAC file, “pay us more money, press a button, and get your streams at super-top quality” is possibly an easy sell for those more hardcore music fans who signed up to streaming two years ago, and who, as users with high monthly content consumption, probably should be paying more.