Is Apple iTunes Setting CD Prices?

| About: Apple Inc. (AAPL)

Last week, we noted that the Top 5 Amazon Music Sellers Are Under $10 (You can see their bestsellers here and the sale junk here).

A friend in the industry agreed that price has become key. He anonymously explains what is motivating the price cuts: Apple iTunes. The 99 cent song and the $10 album is the prime driver.

Read on:

The biggest thing driving prices to $9.99 is iTunes. Physical retailers are pressuring the labels downward on price (of course, Wal-Mart is the biggest culprit) because they don't want to be undercut by iTunes 9.99 on all single albums. We're rapidly moving to a 9.99 world on the big sellers (the ones stocked in Target and Wal-Mart and Best Buy).

To accomplish this, I am told, particularly on new releases, the labels are doing what they historically did in the physical world and buying into "retail" programs -- in essence, paying for price and positioning or other marketing tools on Amazon by giving them functional breaks. And you'll note that 3 of the four examples you cite are EMI releases (CBR, Norah, Beatles).

EMI is in such bad shape, they are doing whatever they can to move stuff. And with Corrine's appearance on Oprah and with Norah out this week, they are pulling out all the stops to make these records big stories (CBR went from 26 to I think 4 on the chart, mostly as a result of Oprah). The hope is that they can then go back up to normal price later with a "must-have" product.

The Shins record is on Sub-Pop so they likely have a lower suggested retail price anyway to begin with (probably $13.98) so it's not really that big a discount for an indie (likely only 10% off normal wholesale to get it down).

Now Regina Spektor is a more interesting case. She's basically an unknown artist and they're trying to get some traction by giving the record away (and they're doing this more and more on new/unknown artists).

So yes, there is pricing pressure, caused mostly by the success of iTunes and the falling physical sales market. Without iTunes, the downward pressure would be substantially less.

I find it fascinating that all of the other economic competition to CDs we have mentioned - DVDs, multiplayer games, internet, etc. have been unable to force the industry to lower prices, and so they have lost unit sales. But iTunes, in the industry's own space, couldn't be ignored.

Great stuff, G. Thanks for the insight.