WMG Sees Premium Pricing On Apple's iTunes

Warner Music Group (WMG) says it is pushing for premium pricing on Apple's (AAPL) iTunes. WMG also sees phone handsets and wireless as the growth driver of the future. Those and other trends noted on Warner Music Group’s FQ408 conference call:

Q: You talked about the premium product pricings with iTunes and how that was helpful for your pricing strategy. Is there still sort of a hope that you could move at some point to a variable pricing strategy with iTunes?

A: I think variable pricing is appropriate for all kinds of content including music content. I don’t believe that every song is worth exactly the same thing and it’s worth the same thing to different consumers… or at one particular time versus a later time. I think artists and record companies should have the right to experiment with pricing and consumers will tell us we’re underpricing more pricing, whether we get it right or we get it wrong. The consumers should have that right. So long term I do hope that that will be an opportunity to have variable pricing in the industry and no question about it.

Digital/online growth drivers:

Our Digital revenue growth overall it grew 28% to $167 million, or 20% of total revenue, up from $131 million or 15% of total revenue in the prior-year quarter… Approximately 65% of our total Digital revenue was generated in the US, and 35% was generated in the rest of the world. Online continues to be the primary growth driver of our Digital business.

Softer revenue performance in the September quarter from our US recorded music businesses is tied to ongoing recorded music industry transition pressures as physical declines are not yet being offset by digital growth.

Internationally, strength in Japan and modest gains in France and Italy were more than offset by weakness in Spain, Germany, and the rest of Europe.

Decline in retail sales:

Q: Sizing the overall economy it looks like we’re seeing a pretty significant decline in CD sales in the calendar fourth quarter due to either floor space cutbacks or potentially weak demand.

A: We think that the weakness that we have seen so far is really due to a reduction in floor space but just I think lower traffic in the stores.

The future is in mobile phones/music players:

While Mobile was weak in the US, we did see a pickup in Mobile internationally over the prior-year quarter... As new mobile products and business models are rolled out on a global basis and as device capability and network technology advances, we believe Mobile revenue growth will accelerate. We are already seeing this acceleration in Japan where the Mobile Music space has a compound annual growth rate of about 34% over the past 3 years. In addition, Mobile accounts for 91% of Japan’s digital music revenue and over the year download revenue there is more than 3 times greater than it is in Europe.

We have now arrived at a very significant point in the evolution of digital music, the launch of access models that bundle the purchase of a device with access to music. Several of these models are just now being launched including Nokia's "Comes with Music" and Sony Ericsson's PlayNow plug [ph].

The growth of improved handset devices and networks are definitely going to alter and increase content consumption. Whether it is in sales on a per download basis or through other models like Nokia's "Comes with Music."

If you look at the amount of content consumption and frankly sales on the iPhone versus other handsets, it is multiples greater, in some cases 10 or 20 times greater than it is on a regular phone… I think the business model of owning essentially for nothing the content with the price of the device is a very attractive consumer offer which should also be attractive [to] device manufacturers. So, I do think that we will see an acceleration in mobile over time.

Ring-tone revenue continues to lag expectations in the US and Europe.

Comments

[brewer:]

Variable pricing would take all the convenience out of using iTunes. There is no way an album should cost more than $10 when there are no product costs!

A CD is $13 or $14. You mean to tell me that it costs less than $3-$4 to produce, ship, etc...?

I think established artists should, if possible, go direct to iTunes and leave these WMG types to think about their contribution to the industry.

2008 Dec 02 11:00 AM

[Timeline St...:]

Brewer, you are right on. The WMG types are still thinking about how to extract maximal rent from customers while adding zero additional value.

Think back to that little adhesive theft-prevention strip that appeared on CD's. It was symbolic! It may have prevented theft, but it massively inconvenienced the 99.9% of customers who were not planning to steal CD's. A smart music shop would have offered to remove it as you made your purchase. After all, it's the definition of a negative-value transaction; something providing no value, but that you have paid for, and that costs you additional time as you seek to reverse it.

This type of thinking is the guaranteed hallmark of an industry that hates its customers, and you can see it continue here.

2008 Dec 02 12:41 PM

[Timeline St...:]

I just re-read the comments by WMG and I add....other than looking at customers as gouging targets, what value delivery is proposed?

None, zero, zip, zilch. These people deserve everything that they are getting.

At least Steve Jobs gives you VALUE when he proposes something. Convenience, portability, organization, social value, convergence, whatever. That's why Apple will continue to separate.

2008 Dec 02 12:45 PM

[kris23:]

I think variable pricing is a terrible idea. Half the appeal of iTunes is its consistency and that the consumer can count on knowing every song is a dollar. WMG adds nothing to this entire process except a higher price, there is no value delivered, like TimboM said. I see a huge drop in AAPL sentiment (predictwallstreet.com/...) if this happens. Apple is also forecasted to close UP today according to predictwallstreet.com. In my past experience there forecasts have been accurate. Apple shouldn't hurt its stride now! Do away with variable pricing!

2008 Dec 02 02:20 PM

[BerkeleyBob:]

The only variable pricing I am interested in when purchasing music on line is a premium for lossless format, like ITunes plus WAV, or HD. I still purchase most music in CD or vinyl format, but agree that ITunes is convenient, as is Amazon. I support low revenue or niche artists where possible by direct purchase of CDs at a live gig. The recording industry has played accounting games and screwed over working musicians for many years; their business model is broken and increasingly irrelevant.

2008 Dec 03 05:29 PM