Slate's Adam Penenberg has a problem with 99-cent downloads: they're cheap and they cost too much. Why charge buyers of an obscure Jelly Roll Morton track the same amount that fans of Eminem pay for the rapper's latest release?
Penenberg's solution? A commodity exchange for music downloads, where price is a function of demand. "Music prices would oscillate like stocks on Nasdaq," Penenberg writes, "with the current cost pegged to up-to-the-second changes in the number of downloads."
Certainly, the idea seems sensible. After all, if physical record stores can have discount bins, why can't digital stores do the same? Market pricing would also hush some of the clamoring by labels for flexible (read: higher) pricing, while giving consumers both transparency in pricing and incentive to discover under-appreciated (and thus under-priced) music.
Penenberg isn't the first to float this idea. In 2001, a team of PhD-level psychologists, tinkering with "the social impact of digital file transfer," launched MusicRebellion, which employed "dynamic pricing," in which consumer demand pushed the price of a song up and down along a set algorithm.
Apparently, the idea was too sensible to work.
MusicRebellion's "inquiry" (see what happens when PhDs launch a business?) doesn't seem to have produced profitable answers. Last spring, the company ceded its major label business to MSN Music. It continues to sell independent label tracks as MyRebellion.com. The company had to refund MusicRebellion account holders that it couldn't lure to MyRebellion, where tracks from the top five releases were selling for between 10 and 18 cents apiece this evening.
I couldn't find the exact details of what went wrong with MusicRebellion, but it occurs to me that there's something fundamental missing when you try to make a music store behave like the Chicago Mercantile Exchange: buyers have no incentive to see prices rise. Unlike most buyers of cotton contracts, music buyers actually intend to consume what they've bought. To date, there's no secondary market for downloaded music. You can't buy a futures contract on 50 Cent's next release. And, since every track can be downloaded an infinite number of times, scarcity can't affect prices.
Perhaps the average MusicRebellion member bought popular tracks someplace where prices were fixed, such as iTunes or Wal-Mart. That member probably used MusicRebellion for deeply discounted tracks, yielding some exposure for obscure acts, but little to elevate MusicRebellion's beyond the status of academic exercise.
Many have suggested that downloads should cost 50 cents. I wouldn't be surprised if MusicRebellion's "inquiry" led to an equilibrium price point not far from that number. Water does indeed find its own level.
1. Tommy - great to see you blogging!
I think you're right on - supply of a particular digital music track is basically infinite. So why should rising demand for the music raise the price? And as you said, there's no secondary market.
Supply and demand models don't work with digital product pricing. And exchange markets created to match supply with demand don't seem to work either.
Penenburg states "If a single climbed to $5, consumers couldn't complain that it costs too much, since they would be the ones driving up the price." What? Again - when supply/demand models are out of the picture, increased demand SHOULD NOT drive up the price of something. That makes NO sense and I'd be PO'd if I was a customer and I saw that.
In general - you can either price on cost or something else -- perceived value, economic value-add. Cost doesn't really allow you to charge different prices for different acts. So it may be "perceived value". But the problem with that is that perceived value is different for each person but price discrimination won't work in this scenario because the product is too simple and prices too transparent.
I honestly think subscription pricing might be a better answer. Or maybe a simple "tiered" pricing based on overall popularity. But then people with "ecclectic" taste have a distinct advantage --- hey, maybe that's a good thing. :)
Posted at 6:00AM on Dec 19th 2005 by Kayvaan