Amy Harmon gives some good background and perspective on the issue in the NY Times:
- Since the introduction of vinyl records after World War II, recorded music has assumed many shapes and sizes, each one coming with a higher price tag than the last. Eight-track tapes cost a dollar more than LP’s when they rose to popularity in the late 1960’s and cassettes commanded a premium over eight-tracks. When CD’s debuted in the mid-1980’s, record labels sold the shiny discs for $18, more than double the price of what they charged for the same music on LP’s and cassettes that cost more to manufacture.
Unlike these formats, which the industry adopted voluntarily and marketed vigorously, the latest shift – to digitized versions of songs that can be distributed online – have been thrust upon it, the outgrowth of a technology it could not control. Battered by a sales slump it attributes largely to digital piracy and heartened by a limited test with Apple computer owners, this fall the record industry is trying to catch up with its file-swapping customers: the major labels and many independents have agreed to deconstruct the album, allowing anyone with a computer to buy any of hundreds of thousands of individual songs. Soon huge catalogs of every genre of music will be available for sale on the Internet from over a dozen retailers, bearing the blessing and license agreements of the major record labels.
No one knows what all the effects will be. But one will certainly be on price; music in the new format will cost at least a little less than it did in the old. The standard charge has become 99 cents a track. Albums that cost between $12 and $18 on CD now sell for about $10 online. The labels have also authorized several services to offer a kind of online lease program for music: subscribers pay a flat $10 a month to listen to as many as half a million tracks as often as they want over the Internet, rather than storing them on a computer or burning them to a CD.
….A recent real-life experiment in price-lowering produced very different results. In a six-week promotion earlier this year, RealNetwork’s Rhapsody service allowed subscribers to burn tracks to a CD for just 49 cents. Sales more than tripled.
“Simple logic would say, `Well, duh, you’d make more money if you price tracks at 49 cents, or maybe less,’ ” said Rob Glaser, chief executive of RealNetworks. “The problem is you can’t prove to these guys that the 49-cent price does not cannibalize CD sales. The experiment was successful, but the patient was worried about the side-effects.”
….by any measure, if the CD is giving way to the Internet as the dominant form of distribution, the industry’s biggest adjustments lie ahead. Some analysts expect the industry to contract as plummeting CD sales force more specialty outlets to close and relegate music to shelves in superstores like Wal-Mart. Music, at least in the short term, will become less diverse as the industry has fewer resources to invest in new artists or those less likely to become mainstream hits….
The industry is being forced at gunpoint to enter the digital millennium, there is no guarantee greed won’t prevent them from truly taking advantage of this opportunity: high volume, low margin, and additional value is the best way to compete with “free.”