iTunes and the 99 Cent Question

David Falman, Guest Columnist

October 7, 2005, 2:05 PM

David Falman is Managing Director for Odessa Mama Records of Melbourne, Australia. In this guest column, he explains from a professional perspective why the record industry's attempts at raising the price of digital music from iTunes' 99-cent ceiling would do more harm than good.

With a showdown approaching between the major labels and Apple over its 99 cent price for downloads (and now music managers in the UK becoming unhappy with iTunes pricing) I wanted to give an independent label's view on this subject, given that there are over one thousand independent labels on iTunes.

With almost 15 years experience of running one, I think the majority of my peers would agree with my views. Of course, I highly doubt that the majors will actually remove their catalogues from iTunes; nevertheless I am very concerned about the developing situation.

Let's get straight to the point. Forget about "variable pricing" issues as you can already set variable album pricing on iTunes - you can sell albums from $5.99 and up. The majors want to raise prices for new releases. They simply want to make more money now, which they are not denying and that's fine with me. After all, music is a business and they have to answer to their shareholders.

What worries me is that music industry is not out of the doldrums yet. While there are reasons to be optimistic -- legal digital and mobile downloads taking off, the phenomenal success of ring tones, and expansion of digital radio etc -- in the last five years many independents have closed their doors. I'm not talking about small one or two person operations; these were companies who in the mid- to late-1990s sold millions of albums per year.

What forced them to close wasn't Internet downloads, but CD piracy. I remember talking to one of our partners in Southeast Asia who said that within two weeks of a release, bootleg copies would begin selling in the street.

Physical sales are still falling every quarter and vast majority of downloads are still not legitimate. P2P traffic is still growing. Pirates can easily set up a CD/DVD plant in a spare bedroom. How many majors did we have just a few years ago, compared to today? How many records get released now versus the end of the 1990s?

No, its not that there is a shortage of good artists or material to release. Record sales are not what they used to be, thus making many releases not commercially viable. Today, even the "big hits" sell fewer numbers.

To force Apple to raise prices now would only benefit Apple's competitors, but only in the short term. Apple is not the only online distributor currently selling tracks at 99 cents. in fact, many are selling for less, so I presume that if Apple succumbs and raises prices, other online stores will be also asked by the record companies to raise their prices as well.

Majors are complaining that Apple makes money from iPods and not from downloads. Sure, they are making little money from music, but that's because of how much they pay us, the record companies. Frankly, I don't care if Apple makes money on iPods or music. All I care is that we get 70 cents from every download - we have no manufacturing cost, distribution costs or returned stock.

Because of this, we can pay artists (who supply finished masters) 50 percent of the revenue. If UK managers are complaining that their artists are getting only 4.5 pence on every 79 pence track, why blame Apple? They should be blaming themselves for negotiating these types of contracts for their artists! If download prices go up, would they be happy with, say, 6 pence from a download? I don't think so; it's still a very low royalty rate.