Business - Pricing systems in the music industry

SEVEN years ago, as America slipped into recession in the wake of terrorist attacks and the collapse of the dotcom bubble, Apple launched its iPod music-player. Many observers thought the company had gone mad. Apple was launching an expensive new product (the first iPod cost $399) in the depths of the worst downturn the technology industry had ever seen. It was venturing outside its familiar market, for personal computers, into the fiercely competitive field of consumer electronics. And it was taking on Sony, the giant of the industry. The iPod’s name, sceptics declared, stood for “idiots price our devices”.

The iPod ultimately turned out to be a smash hit, of course. Together with the iTunes download service, launched in 2003, it enabled Apple to catalyse and dominate a new digital-music industry. But even though sales of digital music are growing quickly, they are not growing fast enough to offset the rapid decline in CD sales. Internet piracy of music is not merely widespread; it is regarded as normal by a generation of young people who expect music to be free. Various other things have been tried: music as a loss leader for concert tickets, advertising-supported music services, even virtual tip jars that allow fans to pay whatever they think an album is worth. None of it has worked. If the record industry is to halt or reverse its decline, something new is needed. But what?

Whatever it is must reconcile the seemingly irreconcilable demands of consumers and the industry. For their part, consumers would like access to an easy-to-use jukebox of free, unlimited music: what Napster, the original file-swapping service, provided before being shut down. The industry, meanwhile, likes the idea of moving from selling products to selling services, and charging people a subscription for access to online music. Many such services exist: they provide record companies with predictable revenue, and consumers who are prepared to pay enough can have unlimited access. But in many cases they are locked in, and if they stop paying their subscription fees, they can no longer listen to anything.

New world music
Now, seven years after Apple’s appearance on the scene, and with global markets once again in turmoil, the industry may have found a way to square these conflicting demands: hiding the cost of a music subscription inside something else. The best example for this approach is Nokia’s Comes With Music (CWM) model. Buy a CWM handset and you get free, unlimited music downloads for a year. Of course, they aren’t really free: the price of the handset includes a subscription fee that is passed to the record companies (see article). After a year, you can pay to continue to download new tunes, or you can buy another CWM handset, with another year of free service. Thus consumers get their music; record companies get paid; and Nokia attracts and retains customers.

This idea can be extended beyond handsets. “Free” music can also be bundled with mobile-phone contracts, broadband service, music-players, PCs or even cars. Firms that provide these things may be prepared to chip in towards the cost of the music service in return for customer loyalty. Whether all this will prove to be a sustainable new model for the industry remains unclear: a lot depends on how the different companies involved divide up the costs and benefits.

Like Apple before it, Nokia is venturing outside its market and taking on a powerful incumbent. As with Apple seven years ago, many observers are sceptical. But the unpleasant truth is that these days many people, particularly young people, expect music to be free. The industry may finally have found a way to sustain this illusion while still getting paid.