Variable iTunes pricing a moneymaker for artists

"For the first year or so the labels are looking at this to see how the market reacts," Gartner analyst Mike McGuire says. "It's real-time research, in effect. They need as much data as they can to try to understand where they go from here. I don't know that they have enough data to say whether this has worked or not at this point."

It will also take more time to determine what impact price changes might have on gift card sales. NPD Group estimates that about 40% of iTunes sales come from gift cards, which have set values. A teen with a $25 gift card is going to spend $25, whether that amount buys 25 tracks at 99 cents each or 19 at $1.29 each. So far, iTunes hasn't issued cards with new values, and it's too early to determine whether higher prices will lead parents to buy more valuable gift cards.

It's also not yet clear how variable pricing will affect publishers' revenue. While labels can make up for lower sale volume with higher wholesale rates, music publishers receive a fixed mechanical rate per download, regardless of price. Lower volume means less revenue. To them, lower sales volume means less money. And, of course, the biggest publishers are owned by the largest label groups.

So far the bulk of the analysis on iTunes' new pricing scheme has focused on the $1.29 tier. There's also the lower 69 cent price to consider. But just as pricing some tracks at $1.29 probably won't make iTunes users turn to illicit file-sharing, pricing them at 69 cents almost certainly won't convince file-sharers or fans of physical product to begin purchasing downloads. It may not even be the best way to get consumers to buy more music.

Labels have lowered prices on far more tracks than they made more expensive, according to multiple sources. But these changes are only starting to appear in iTunes.

Right now, finding those tracks is a hit-or-miss process. Labels have mostly lowered prices on slower-moving tracks and albums, some from acts that have other popular songs. But Billboard's analysis suggests, and label sources confirm, that lowering prices hasn't resulted in significant sales or revenue increases.

The 1971 Jackson 5 song "Maybe Tomorrow" now costs 69 cents, but it continues to sell between 60 and 90 copies per week, just as it did in February and March. Stevie Wonder's "If It's Magic" from "Songs in the Key of Life," also now 69 cents, sold fewer copies in May than in April or March. Nor did price cuts on all 10 tracks on Canned Heat's "One More River to Cross" result in any increase in volume.

So far, most significant sales increases have come from combining lower prices with promotions or making them part of a package. Universal Music Group Nashville lowered the price of six popular George Strait songs to 69 cents the same week CBS televised a Strait concert. That week track sales jumped 283% from the prior six-week average. The lower-priced tracks rose 334% while the tracks that stayed at 99 cents rose only 276%. Combined digital album sales for the three titles jumped 786%.

The same phenomenon can be seen on Amazon, which often drops the price of an artist's older albums on the day of a new release, then promotes the entire catalog on its home page.

"You need to set a price point where you're getting people to pay more for more music, as opposed to trying to extract an increasingly higher per-unit price," McGuire says.

Looking forward, the lowest price tier may also give labels the flexibility they need to develop digital products other than the album. For example, if a popular new single sells for $1.29, labels or retailers could identify four other songs from similar but unknown acts and sell them as a bundle.

Potentially, the combinations are endless. "The benefit of digital is that it gives you infinite ways of packaging content," Greenfield says. "The more the labels think about bundling in, the better."

This is one way that labels could increase digital sales, which in the past several years have begun to level off. Year-over-year growth in digital music sales has fallen from 147% in 2005 to 27% in 2008, according to SoundScan data. Through June 7 this year, track sales are up 14% from the same period in 2008. About 75% of iTunes consumers are repeat customers rather than new users, according to NPD Group. This won't make up for the big problem: Worldwide physical sales have fallen 52% in the last decade, according to the IFPI.