Rising music download prices...or just lower margins

Includes: NAPS, RNWK
by: David Jackson

According to an FT.com article (subscription required), the wholesale price for downloadable music is set to rise. Details and commentary from The Media Stock Blog:

According to the article, the major music labels initially set
wholesale prices artificially low at $0.65 per song in order to
stimulate demand.  Now that demand for music downloads has exploded,
the major music labels are planning to increase their prices to $0.99
per song, a 52% increase.  Steve Jobs is reportedly furious.

Quick comment:  Most articles on the subject have assumed
that the price increase will be passed along to consumers, possibly
resulting in increased music piracy or slowing demand. But it's quite
possible, even likely, that digital music retailers will bear much of
this increase.  After all, the music download space is already crowded
with Apple (NASDAQ:AAPL), Real Networks (NASDAQ:RNWK), Napster, Wal-Mart (NYSE:WMT) and
others offering essentially the same product.  The likely outcome is
slightly higher prices for consumers and lower margins for retailers.
It's no wonder why Steve Jobs is upset.  Here's a simple calculation:

Current scenario:
iTunes price: $0.99
Cost to Apple: $0.65
Profit: $0.34 (53% margin)

New scenario:
iTunes price: $1.25
Cost to Apple: $0.99
Profit: $0.26 (26%)

interesting element of this story is the implication that all five
major music label are on-board.  Remember, it wasn't too long ago that
Sony Music (NYSE:SNE), EMI Group, Warner Music (NYSE:TWX), Universal Music (NYSE:V),
and Bertelsmann were accused of price-fixing.  Eventually, they settled
by agreeing to pay a $67 million fine and distributing $76 million
worth of CDs.  It will be curious to see whether similar suspicions
arise in this case.

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