Tiered pricing and why it sucks

Back in January, Phil Schiller (the keynote guy at Apple, in Steve Jobs’ absence) announced a couple changes to the iTunes music store. The first one, which I covered, was to remove all DRM (supposedly) from each song in the music store. The second one, which is really only starting to appear in the last few weeks, is tiered pricing.

Great news, right? Phil seemed to think so at the time. He thought that the $.69 songs would balance out the $1.29 songs, and that most songs would remain at $0.99, mostly because music companies weren’t up to going back and retroactively repricing each song.

Let’s take a look at today’s top 30 downloaded songs:

Out of 30 songs, 5 are $0.99. But that’s not a big deal, because there are songs that are $0.69, right? As Ars points out, turns out that music companies aren’t interested in discounting music.

A couple things here. First, is it really worth the music company’s time to make songs $0.69? As we’ve seen, not many are that price anyway, and the ones that are are rarely downloaded anyway. If someone’s searching for that song, that $0.30 isn’t going to give them incentive to buy it – they’ve already made up their mind that they want that song (for whatever reason) and they’ll pay $0.99. The record companies know this – the only way $0.69 songs could really come into play is for promotions, and in this case record companies like to discount the entire album to encourage users to buy the entire album rather than individual songs.

Now back to the $1.29 songs. If you remember, way back when iTunes Plus was first announced, iTunes Plus songs cost $1.29. This was a trade-off for the record companies – they make more money per song but face a greater risk that the song will be pirated or illegally distributed. As iTunes Plus matured, Apple realized that $0.99 was a fair price for a DRM-free song, and so they dropped the price and made all songs $0.99 and record companies could choose whether or not they wanted to participate.

Then in January, Apple announced that DRM was gone. Now if you’re a record company executive, what do you choose? DRM-free and $0.99, or DRM-free and $1.29? For songs that are selling fast (like “Boom Boom Pow” by Black Eyed Peas…wow.), $.30 is a 30% increase in profits. Why would they not take it?

I think Apple screwed up. The iTunes Music Store became successful because each song was $0.99, and research has shown that people want to pay about $1 for a song (except you filthy pirates) – $1.29, especially in troubled economic times, is a lot. By instituting tiered pricing, Apple stood up for the record companies, not the consumer. If iTunes is going to be charging $1.29, they should be distributing FLAC files (or the Apple equivalent), which are completely lossless and have no built in DRM or identity management.

That said, Green Day’s new album “21st Century Breakdown” is excellent, and I bought it off iTunes for $11.99. If you’re going to buy the full album, it’s still a pretty good deal. Unfortunately, that’s exactly what the record company wants (“why download the single when you can download that song and 15 other songs you don’t like for $10?”). In terms of acquiring music legally, it’s record companies 1, consumers 0.