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