Estelle, the poster child for artificial scarcity

For the better part of the last decade, the major record labels have been trying to convince the artists on their rosters to make their music available in multiple digital formats and from numerous online outlets. The conventional wisdom is that you have to chase customers wherever you can find them (unless, of course, they're on Limewire.) So Warner Music Group raised eyebrows last month when it yanked a promising downloadable single and album from new U.K. chanteuse Estelle off iTunes in a bid to ... boost sales? The move certainly helped two obscure cover bands, which quickly filled the void on iTunes with their own versions of Estelle's "American Boy." (Shopping tip: Accept no substitutes.) But whether it helped Estelle is an open question, as Glenn at Coolfer observes.

Searching for a glimpse into the record company's rationale, I called Frank Luby, a co-author of "Manage for Profit, Not for Market Share: A Guide to Greater Profits in Highly Contested Markets." (I should have asked him about newspapers while I had him on the phone. D'ohhhh!)

Luby is a partner at Simon-Kucher & Partners, pricing and marketing consultants who work with drug companies, automakers, consumer products manufacturers and the occasional entertainment firm, including WMG. I asked him whether he thought pulling a popular single off iTunes led to more albums being sold. His answer: There's not enough data to know. The essential problem, Luby said, is that Apple completely dominates the market for downloadable music, and its rigid pricing doesn't let artists and labels test the strength of the demand for their work.

Luby's central assumption is that when people want to buy a song, they're insensitive to the price. That's not the same as saying the demand for music shows no price elasticity; Luby acknowledges that sales of some titles and types of music may increase disproportionately to a cut in price. But lower prices won't stimulate demand from fans of a band or a particular song, Luby argued, because they've already made up their mind to buy. In fact, he believes that labels should be raising the price of popular singles in order to generate more album sales. The right price might be $1.49 or even $1.99, Luby said. "If I've got to spend $1.99" to get each of two singles from an album, he said, "I might as well just make the leap and buy the album."

That's the hypothesis, at least. Unfortunately for Luby -- but fortunately for consumers, perhaps -- the only pricing option iTunes provides for singles is 99 cents. Most other online stores take a similar one-price-fits-all approach, although both Rhapsody and Napster have talked about taking a more variable approach. (Album prices are much less consistent.)  "That inflexibility prevents you from using price as another alternative to steer people’s demand," Luby lamented.

What about piracy? How can the labels jack up prices when they're competing with free? Luby said higher prices may cut into the volume of legitimate downloads, but it's hard to say how much. "There’s no way to know until someone’s had the opportunity to test going up. Because we know what happens when you go down with price: independent of placement and promotion, very little." Hmm. Nine Inch Nails might beg to differ, as would eMusic's David Pakman. My own long-held belief, based on a personal history of profligate spending on music, is that reducing price can inspire people to take risks on new or lesser-known artists, leading them to spend more in aggregate. But I've spent $18.99 on a CD I wanted badly, too, so Luby has a point about the fickleness of price sensitivity.

What about the long-term impact of inducing people to buy albums they didn't really want to buy? Isn't that what led to the widely held perception that most albums are 20% killer, 80% filler? Luby's answer, again, was that the labels need to be able to respond flexibly -- so that people who are just discovering an artist won't have to make an investment they could easily regret later. "You can't say `Discovery' and push that on the one side, and then have a strategy that is forcing people to exclusively buy an album," Luby said. "Ideally, you’d like to have more control over the situation so someone can sample, and they’ve got the opportunity to buy an album, or an even better version of the album." Seems like a good way for iTunes users to discover Estelle would be to sample her singles for 99 cents at their favorite online store. Oh well. There's always the Big Red remix on Amazon....

-- Jon Healey

Healey writes editorials for The Times' Opinion Manufacturing Division.

Comments

[David Pakman]

Jon,
I am confused here. The source you cite admits his point of view is absent of data to support it? eMusic's success has repeatedly demonstrated that music is elastic and that lower prices (as part of eMusic's subscription bundle) significantly increases sales of under-marketed and non-mainstream music. When we offered the early Stones' catalog for 30 days, we outsold iTunes 10 to 1, presumeably because our price model increased demand for these catalog titles.

It should be mentioned that the Simon-Kutcher firm's point of view to increase prices (and their major label clients acceptance of this) has directly led to WalMart now reducing huge amount of shelf space. They did this because they insisted the market needs lower prices if CDs are to sell. Without those price reductions, they are throwing many CDs out of their stores. That shelf space is never coming back.

These strategies will not stem the losses of the industry nor will they get growth happening again.

[Marc Cohen]

Jon -

The ease of pirating a desired track plays a big role here. Raise the price and more people will just choose to get it from P2P. Classical price elasticity models don't consider the type of casual theft that exists in the music world today.

Marc Cohen

[Paul Talbot]

I'd like to add something to David Pakman's comments above. I'm a member of eMusic, and I was very tempted to buy the Stones' back catalog as the price was very low. I don't own any Stones and I've never listened to a full album so it would have been a good opportunity to get to know them.

Unfortunately, they were only available for a short amount of time. Now that they're removed from eMusic, am I rushing to other stores to buy them for 3-4 times the price? No. I simply bought different artists' music with my subscription. I would also add that I buy many more albums now through eMusic than I ever did when I was buying CDs, due mainly to the low prices.

Artificial scarcity may have worked to some degree when it was difficult to get music elsewhere, but cannot work now. All you do is annoy your own customer base, and it's as easy for someone to download a Limewire or Bittorrent file as it is to do it through iTunes or Amazon. If record companies want to do this, fine, but don't start crying when sales go down.

[Ted Lemon]

This whole idea of gaming the customers is kind of insulting. The idea seems to be to structure the deal so that it's just barely palatable. The customer isn't quite willing to walk away from it, but they're not really very happy with it either. Wouldn't you rather have a happy customer?

Because of this kind of gaming of the deal, I've been pretty bad about following new music lately. I used to buy a ton of music, and nowadays I buy maybe five or six CDs a year. I generally order them from Amazon, because they're too expensive anywhere else.

Based on my own experience, which I admit may not be representative, I'd have to say that I really feel like the music companies are leaving a *ton* of cash on the table because they're making the purchase process so bitter.