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What Price Online Music?

By Spencer E. Ante What's a fair price for a digital version of a song? So far, the recording industry has decided on 99 cents, which most digital-music services charge to purchase a song over the Internet, although some charge more. asks either $1.09 or $1.14 for many of the top hits it's offering. The one service to go lower is RealNetworks' Rhapsody, which charges 79 cents per download -- but that's on top of a $9.95 monthly subscription fee.

But I took a closer look at the 99-cent-per-song pricing model and came to this conclusion: For most consumers, this deal just doesn't make economic sense. That's a real problem for the recording industry if it wants people to stop stealing songs through Internet file-sharing.

Here's what I did: In the past few weeks, I took the last 10 CDs I bought -- an eclectic mix of indie rock, such as Granddaddy and The White Stripes, and more mainstream hip-hop acts, such as 50 Cent, Snoop Dogg, and Jean Paul -- and did an economic analysis of what I would have paid if I had downloaded the CDs instead. True, fans of singles might find a song for cents a great deal, but for the millions of album connoisseurs like myself, current pricing models hit a flat note.

VIRTUAL DISADVANTAGE. For a regular CD, I typically paid anywhere from $10.99 to $14.99 plus tax. To me, paying more than $15 for a single CD seems unconscionable. Sure, triple CDs, like Led Zeppelin's retrospective, How the West Was Won, set me back more than $20 -- but I got three times the music.

The sad truth is, if I had downloaded my music, more often than not, I would have ended up paying the same or even more for the virtual version of the CD. That seems silly, especially considering that with a CD, I'd actually own a tangible product with better sound (plus liner notes and art), which I could transfer to other devices or use to burn as many CD copies as my heart desired, for my personal use, of course.

Consider 50 Cent's popular CD Get Rich or Die Tryin'. With 16 songs, the digital version would set me back $16. I paid $13.99 for the CD. The White Stripes fine new album Elephant has 14 songs. I paid $12.99 for that one. offers a digital download of Jean Paul's new 22-track album for $9.99, but in my experience, most albums are available only on a per-track basis. However, there's one voice of wisdom in the digital wilderness: Apple's (AAPL) iTunes Music Store, which launched its service for Windows-based computers on Oct. 16, offers album downloads for $9.99.

Meanwhile, though the record companies have loosened up on content rules, many digital services still carry restrictions on the number of times you can transfer or burn copies of digitally bought songs (iTunes is one exception).

DIVIDING THE DOLLAR. Of course, competitive pressures this year and next are likely to drive down the price of digital music. A flood of new online-music services, inspired by the success of iTunes, is about to hit the market. And even store-bought CD prices are starting to shrink after years of existing in an oligopolistic universe, where competitive pressures were nonexistent. Recently, Universal Music announced it would lower the price of new CDs by 30%.

Yet it's unclear how far the prices -- at the store or online -- will fall. For downloads, "the market will explore where the price will settle, but in the end it's going to have to be lower than 99 cents," says Harold Vogel, founder of Vogel Capital Management and author of Entertainment Industry Economics.

Some analysts are beginning to realize that lower prices could greatly expand the size of the digital-music market, still minuscule despite iTunes' success. A July survey by Jupiter Research of 2,500 adults who use the Internet found that 35% of people are willing to pay 51 cents to $1 for a song by a favorite artist; 20% are willing to pay 50 cents or less; and 19% would pay more than $1 (26% say no price is right, they'll pay nothing).

Problem is, online-music services cannot significantly lower prices without losing money. Under existing licensing deals, 65 to 75 cents of each 99 cent download goes to the labels. If the record companies lowered their royalties to, say, 30 cents to 35 cents, online music services could make a profit while greatly boosting the total market.

THE NEXT STEP. "There's a market for 99 cents, but there could conceivably be an even bigger market below that," says Jupiter analyst David Card. That view is supported by a pilot test on RealNetworks' Rhapsody service between February and April of this year. During a six-week period, Rhapsody dropped the price of downloads to 49 cents from 99 cents. Guess what? It sold three times as many tracks.

After the pilot program ended, Rhapsody lowered its price to 79 cents per download in May. But the service would like the price to go lower. "The music companies have dropped the restrictions on what you can do with the song, and they offer greater flexibility with what you can do with it," says Rhapsody spokesman Matt Graves. "Now, all they have to do is drop the price."

The big record labels deserve credit for finally pulling their heads out of the sand after years of pretending that file-sharing services would disappear. But they need to go one step further. The harsh reality of the Internet Age is that the industry will forevermore be competing against free, pirated music. If it doesn't slice digital prices to around 50 cents, the market will likely never go mainstream.

LITIGATION OR SALES? So far, most execs are reluctant to face that. "I don't think music is overpriced," says Ted Cohen, EMI Music's senior vice-president. But Cohen does think the industry should offer consumers more pricing options, such as a higher price for a very popular single. To his eyes, the digital-music market has failed to take off because the industry hasn't spent enough money on marketing. "Other than Apple, nobody has marketed to the consumer," says Cohen. "People are hearing more about KaZaA and Grokster."

Indeed, file-sharing continues to grow despite the industry's litigation blitz against downloaders, some as young as 12. During the week of Sept. 11, 4.5 million users on average were on file-sharing services on the FastTrack network such as KaZaA, according to Big Champagne, a file-sharing research service based in Beverly Hills, Calif. That was up from 3.4 million users in late August, right before the industry started suing consumers.

Seems to me the recording industry is facing an important choice: It can ensure the future of the business by helping to create a thriving online-music revenue-generator. Or it can continue to sue downloaders one by one and keep prices higher than what is needed to jump-start the retail digital-music industry. What's it gonna be, guys? Ante writes about the digital music industry for BusinessWeek in New York

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