Variable iTunes pricing a moneymaker for artists

Simply increasing the price of music on iTunes won't make up for that decline. To do that, the music industry would need to increase digital revenue across the board, not just the part of it that comes from downloadable tracks.

Of the people who now buy music in any format, two out of three still buy CDs exclusively, and they are buying fewer of them, according to NPD Group. Those who do purchase digital music mostly buy it by the track -- which has left more lucrative album sales in decline as well.

"We're not going to have $14 billion in iTunes and Amazon sales no matter what we do," says NPD Group VP/senior industry analyst of entertainment Russ Crupnick. "There's still tens of millions of people who haven't tried the digital music model. Half of them have digital music players. Some of them use. We're not making the case for them to buy as many CDs as they used to and not making the case for them to buy anything from digital. Variable pricing is irrelevant."

This is where other new digital business models could come into play, such as Nokia's Comes With Music model and the kind of collective licensing being pioneered by Choruss, both of which would bundle the cost of music into other services or products. Both rely less on a revenue-per-unit model and more on revenue-per-user. Or "pricing the consumer versus pricing the content," as one label digital executive puts it. "We think the real story around price as it relates to the audience for digital music is with respect to the new business models that are user-based as opposed to wholesale price-based."

These efforts are still developing, of course. Variable pricing is here, and it's already responsible for a 10%-15% increase in revenue on average for affected tracks, according to label sources.

"With the business continuing to be so hit-driven, having the flexibility to price inventory online the way you do in the traditional world makes a lot of sense," Pali's Greenfield says. "Maximizing the profitability of digital through variable pricing is critical."