What iTunes’ tiered pricing scheme means for Amazon, the record labels, and consumers

At last week’s Macworld Expo Apple announced that they are transitioning all of the music in their iTunes Store to DRM free. This means no more arbitrary access restrictions, no more having to “authorize” computers, and that finally all of Apple’s music offerings can be played on non-iPod devices. Along with the moves comes a switch to variable pricing: back catalog songs will go for $0.69, midrange songs for the standard $0.99, and new hits for $1.29. This tiered pricing model was previously rejected by Apple, but appears to have been their tradeoff with the labels for the ability to sell music without restrictions on usage.

A year ago Amazon.com launched their own music store, the Amazon MP3 Store, which provided exclusively DRM-free music downloads, priced competitively with most albums selling for $8.99 and most tracks for $0.89 (Apple generally charged $9.99 and $0.99, respectively). The Amazon MP3 store never had the depth of catalog as iTunes, but does currently host over 3 million tracks, including most all currently popular major label music.

Record industry players were at times coy, but it seems clear that their goal with giving Amazon access to unrestricted music along with the ability to sell at lower price points was to attempt to dislodge iTunes as the market leader. I have always maintained both that Amazon is the better value, and that if Amazon overtook iTunes, their prices would very quickly rise to at least meet the iTunes price points. Which is to say, the cabal was continuing to fix prices, this time to give Amazon an unfair competitive advantage in order to topple iTunes.

It didn’t work. One year on, the Amazon store is a distant second to iTunes, holding only 8 percent of the digital download market. Meanwhile, iTunes sold somewhere in the range of 2.4 billion songs in 2008. ITunes remains the market leader, the iPod the dominant music player. And by withholding DRM-free music from iTunes, the record industry was shooting itself in the foot: the more tracks consumers purchase through iTunes, the more locked in they are to the iTunes-iPod empire. The best hope for the record labels, rather than stifling Apple’s attempts to sell unrestricted music, is to encourage, nay demand the practice.

The newly announced compromise in which Apple allows tiered pricing and the labels allow all iTunes music to be DRM-free looks at first blush to be a win for consumers, but it is bad news for Amazon. It means, in short, that the experiment is over, that their preferential pricing is no longer necessary or desirable for the industry. And sure enough, search for albums today on the Amazon MP3 store and you will see that most of them are selling for $9.99 instead of the previous $8.99, and single tracks have gone up to $0.99 from their original $0.89. If Apple does well selling hits for $1.29, expect to see that tiered pricing reflected in the Amazon store soon enough. And expect, in general, to pay at least a buck more per album, sometimes substantially more. The era of pricing competition in digital music sales is over.

4 replies on “What iTunes’ tiered pricing scheme means for Amazon, the record labels, and consumers”

  1. And yet, out of spite more than anything else, I’ll probably continue to buy music from Amazon but not iTunes.

  2. @sy: Who are you spiting? And why?

    @Danny: In exchange for the tiered pricing, Apple also insisted on and gained the ability to sell tunes over the air (3G and EDGE). I think this is equally, if not more, important to Apple (in the long run) than the DRM-free concession.

  3. I can see buying music from Amazon if it makes you feel like you’re “sticking it to the man.”* But the 256 bps AAC iTunes uses is higher quality than MP3 at the same bit rate. I’m going for the better encoding.


    * I always thought “the man” was Microsoft. Ultra powerful, ultra competitive, subjecting its customers to activation and WGA. I read the description for WGA; it reads like it’s doing me a favor!

  4. ?sy?

    Out of spite toward yourself? Because the labels were trying to push you to Amazon to help control Apple who wouldn’t budge on prices. Or am I missing something? Apple has done nothing wrong (except to give in finally) and you want to punish them?

    Don’t get me wrong. Apple didn’t do this because the care. The have fought price hikes because reasonable prices mean more sales of both music and players, but in the end they are fighting for my best interest regardless of the motivation.

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