Why Best Buy still beats iTunes.

Why Best Buy still beats iTunes.

Why Best Buy still beats iTunes.

Inside the Internet.
Nov. 4 2003 4:17 PM

Same Old Song

The Net hasn't changed music—except maybe for the worse.

Woo-hoo, Napster's back! Well, not really. The Napster 2.0 that went live last week isn't a peer-to-peer file sharing application like its predecessor. It's yet another 99-cents-per-song store in the vein of Apple's iTunes Music Store and its Windows-only competitor, BuyMusic.com. Although RealNetworks's Rhapsody still charges a $9.95 monthly subscription fee (with an additional 79-cent charge for every song you burn to disc), it seems that the rest of the online music world is turning into the digital equivalent of a dollar store.

But wait a minute. Doesn't it seem odd that these fully automated online e-commerce systems, with software that ought to be able to track and respond to customer behavior instantly, unimaginatively mandate the same fixed price across the board? One of the Internet's supposed strengths is its ability to let supply and demand drive prices up and down in real time. Couldn't the music companies use the Internet as a way to introduce popularity-based pricing, meaning that the songs with the highest demand would cost the most? Compared to eBay, charging 99 cents for every song is price fixing. And while 99 cents for my favorite song seems fair, what about my not-so-favorite songs? Why do I have to pay a buck to hear Milli Vanilli again just for laughs? My brilliant idea: $10 each for the upcoming Let It Be remasters, a nickel apiece for the works of William Shatner.

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But it turns out that Best Buy knows a lot more about selling music than I do. The pricing models of traditional music retailers are the latest in a long ling of things the Internet hasn't changed. The predictability of consistent pricing appeals to consumers, says University of California-Berkeley economist Hal Varian. When every song is a buck, there are no unpleasant surprises (if you've ever splurged $34.99 for an import album that kind of sucked, you know the feeling). And in an online store that serves unlimited copies of every track on demand, there's no overstocked inventory to discount, nor do rare titles need to sell at a premium. As for popularity-based pricing, I've got it exactly backward: Varian thinks the most popular songs should be discounted as loss-leaders, just as in brick-and-mortar stores.

It's hip to claim traditional economics don't apply in cyberspace—Switching costs are zero! It's the click of a mouse to get to a competitor!—but the online song sites may actually exact more loyalty from their customers than conventional music retailers do. Each site is, intentionally or not, a hassle to get started with. You need to download and install software, set up an account, give them your credit card number, then figure out how to use the interface to find, download, and play your music. The stores use different file formats—AAC for iTunes, Windows Media for Napster—and they store their songs in separate locations from one another on your disk drive. (Even Musicland doesn't require you to store its CDs in a separate room from where you organize the ones you bought at Tower Records.) Once you've begun building an expensive music collection from one Web site, it's unlikely you'll want to start all over again with another.

Although he didn't buy my harebrained pricing schemes, Varian still had the same nagging doubt about online music that I did: Is 99 cents a song too much? His informal student polls, plus an equally unscientific Billboard.com poll of 9,000 people, suggest that many people think so. Earlier this year, Rhapsody's sales tripled when the store slashed its burn-to-disc price to 49 cents as a test run. There's only one problem: The major labels still charge 70 to 80 cents per song wholesale to supply Rhapsody and the other stores, according to the New York Times. Accepting less would require record companies to accept a lower profit margin from the Net than they make on store-bought CDs.

That may be inevitable. The Internet has shriveled a lot of companies' profit margins, and it may be the music industry's turn to live with less. But there's another reason online pricing needs to come down. Compared to the same tune on a compact disc, a download offers a lot less for your money. Everyone complains about the absence of cover art and liner notes, but a store-bought CD is more flexible, too. You can rip it and burn it to your heart's content without worrying about what machine it's registered for.

The compact disc is also a more reliable storage medium than your hard drive. While I was testing the new e-stores, an electric power spike in the building zapped my computer. Every single song I'd bought disappeared in an instant. While kicking myself for not making a backup, I dragged a dusty box of CDs out of the closet and slid Dzihan and Kamien's Gran Riserva into my aging disc player. Sitting on the floor between the speakers, I had to admit yet another reason people will still pay 17 bucks for a 20-year-old format: In order to make the files small enough to download quickly, some of the audio detail is stripped from a CD's songs (as I wrote last year, the CD itself is already a bit-stripped version of the artists' original digital studio recordings). And compared to the compressed song files on my laptop, CDs still sound just a little bit better.