Amazon has just announced that they will start selling music for $0.69 per track in an effort to gain market share and compete better with Apple iTunes. iTunes sells individual tracks for $0.99 or $1.29. It appears that Amazon has hovered around 10% of the digital music sales market for a long time, versus iTunes dominance of close to 70% of the market. Amazon are now determined to change that picture. In our opinion they attempt to do so on the backs of producers of music – such as artists and their associated labels.
A little history as we see it: Amazon was probably THE first internet-age company to change the way we shopped for our wares in a way that signaled that a new era had arrived. Aside from the general idea of buying stuff through an internet site, they also introduced the idea of customer ranking of products, customer reviews etc. They were a forward-looking company, even revolutionary back in the day when the company was first launched and have, as such, been important in the switch to the digital economy.
However, while they were doing all of those good things, they still resembled a brick and mortar business in many fundamental ways. The majority of their sales were based on people purchasing physical items – such as books – and having them shipped to them in physical packages.
So while Amazon has certainly been an innovator as an internet company, and a company that’s delivered a great service to it’s many loyal customers – us included – for many years, they have not, in our opinion, been an innovator when it comes to digital delivery of content such as music.
There’s a reason why Apple has become the leader in that area. If we scroll back to the late 90ties, when the CD sales were plummeting, and remember the service called Napster – a peer to peer network that allowed people to swap huge quantities of music for free – then we all remember that this new technology threatened to undermine artists and producers ability to be paid (back) for their services, and thus continue their efforts to deliver great music to the fans.
Napster was in part, of course, a reaction to the fact that CD prices had gone up and up. This was all controlled by 5 or 6 companies (major labels) that had a stranglehold on the market, was making huge profits, and felt that whatever they wanted to squeeze down peoples throats – both in terms of the pricing and the music itself – was what people were obliged to accept.
Students and other young people, who are large consumers of music, certainly could not afford to purchase music at the prices that the industry proposed back then. Maybe at best one cd per month, which was nowhere near what they wanted to consume. So the peer-to-peer technology intersected with a demand for music that the major labels had no intention to service: To make it more reasonable for people intent on buying LOTS of it, and that it be easy for them to obtain it and carry it around. Reasonable demands, one would think, from the people that supports the artist in the first place! But greed took precedence over servicing the customer..always a short-term strategy!
Apple saw the writing on the wall immediately, being perfectly placed as a digital technology company AND a company that has always had a solid foot placed in the world of arts – whether it be music, photo, video or other art forms – and of course with the visionary Steve Jobs back at the helm. So when they launched their first iPod, they also launched the service iTunes that in a very neat way not only allowed people to purchase music online, but also allowed them to organize all of their old cd’s neatly as digital music by importing them into iTunes. And then carry it around easily on their iPods.
The labels fought them in every way they could, but were unable to come up with any alternate strategies or better solutions to the new world they suddenly found themselves in, and which they had been utterly and totally unprepared for. iTunes succeeded not because of the labels but despite them in many ways. Apple almost literally had to drag the ass to the iTunes-well! And while iTunes weren’t perfect from the outset, with files only being 128 kbps and thus sounding pretty horrible, the system was so sleek and easy to use, so elegant, that even people who had no idea what peer-to-peer was, or barely knew how to turn their computers on and off, could use it. And they did!
In those days Apple took what can only be described as a leap of faith. They bet their whole system on the idea that people would want to own the music that they wanted to consume. They also bet that people would be willing to pay $0.99 per track. Just a psychological point below $1. The labels, still living in another era, forced Apple to introduce DRM technology on the files, so that they couldn’t easily be transferred even between different computers in the same household, and generally made the transition more painful than it had to be.
But even despite of this the allure of iTunes were so strong that Apple literally created – or at least serviced – the market for digital music all by itself. And they stuck by their pricing even though there has been cheaper services out there for a long time, as well as competing ideas of how music should be delivered to fans (music streaming etc). And they succeeded.
Now Amazon feel like they want to own a larger slice of that market which Apple has serviced so well. And while we are all for competition, and like Amazon overall as a company, we can’t help but feel that just lowering the price on the music for sale in their store - that’s their only marketing strategy, there’s NO other market innovation to go along with this move – is just going to serve to once again devalue music in the eye of the consumer.
Because what will happen? Amazon will sell the same music for $0.69 that Apple attempts to sell for $0.99 or even $1.29. IF they somehow succeed in capturing a major slice of the market due to this move, which we doubt, then it will force Apple to follow suit. Then Apple iTunes will STILL be a better service than is Amazon, it won’t change Amazon’s position overall, Apple could afford to sell this music for 10 cents/track no problem, and the end result will simply be that music is even cheaper. Amazon is peeing in their own proverbial pants, and music producers will have to clean up the mess.
Some consumers may say: “What’s wrong with music becoming cheaper – it’s better for us isn’t it”? Well, first of all, it does seem like people were largely happy to pay $0.99/track, because otherwise Apple wouldn’t have 66-70% of the marketshare…unless that can be explained simply by how great iTunes is. So Amazon certainly doesn’t HELP us producers by doing this. Secondly, most music is already produced at a loss to the producers, and further undermining budgets by such a large margin might make the bottom fall out, literally. I sincerely believe that many labels will be forced to throw in the towel of producing great music having to try to recoup costs at 70% (what they are paid) of $0.69 per track (=$0.476). It will mean that niche music, such as jazz, will be even further under threat, because there is no proof at all that Amazon will INCREASE the market by lowering the price. We don’t believe they will, because there are already services out there that are cheaper than iTunes, and they don’t seem to be gaining in marketshare.
And, in a strategic sense, that is what a company like Amazon – who is a major player – ought to consider when they make a move like this: What effect will this have on the overall market AFTER we win our market share. And also – what effect will this have on our partners who produce this music?
They’ve probably considered this, because they aren’t stupid. And our feeling is that they’ve decided that music – a product that everybody consumes and which will always thrive and be popular – shall be their loss leader to regain traction serving peoples digital needs. The world is increasingly digital, less and less physical, and Amazon is under threat since their bread and butter is physical. Who buys DVD’s these days with Netflix doing so well? And the Kindle clearly is too limited to compete with the iPad even as a reader….anybody who doubts this just ought to purchase Al Gore’s book “Our Choice” to witness what an iPad can do to the future of what a book will be, versus what the current iteration of Kindle can do. It’s no contest. And that’s why, we believe, that Amazon is resorting to desperate, and rather cynical, measures such as attempting to finance their marketing campaigns on the backs of artists and producers of music.
We will not be selling our digital downloads through Amazon, but will continue to sell through iTunes and our own webshop. We hope other producers of music will help send a clear message to Amazon that this strategy of theirs is unacceptable to us by also refusing to sell through their store! And we also hope you will leave your comments, and let us know if you agree with our thoughts, or if we ought to rethink this position?
UPDATE: Here’s a story from Digital Music News” on the same issue. Click here to read it.
UPDATE 2: There are now numbers to support that digital music is going UP in revenue. The moment this happened seems to coincide with when iTunes brought The Beatles into the store. Read the whole story here. It’s not surprising that The Beatles would be a success story for digital music sales & iTunes, but it shows, again, the shrewdness with which Apple plugs peoples excitement for great music to bring about the digital revolution. They didn’t lower the price, saying “this sucks so we want you to pay little to nothing for it”, they instead said “now the place to get the most popular group in the history of music is via digital download”. And, once again – it worked!