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Music download prices rising?
Music industry execs say prices, set low to stimulate demand, need to move higher: report.
February 28, 2005: 12:35 PM EST

NEW YORK (CNN/Money) - Just as legal music downloading is taking off in earnest, the major record labels are in talks to raise the price they charge online retailers for song downloads, a newspaper reported Monday.

The Financial Times, quoting unnamed music executives, said wholesale music prices, thought to be around 65 cents a song, were originally set artificially low in a bid to stimulate demand. The executives noted the success of Apple's hugely popular iPod digital music players, the report said.

The move by the music labels was said to anger Apple's chief executive Steve Jobs. Apple, which charges 99 cents a song to download music from its iTunes online store, accounts for about 65 percent of all legal downloads, according to the paper. The executives noted that prices to download mobile phone ring tones are roughly 10 to 15 percent higher than song downloads, according to the newspaper.

But just as music lovers are being coaxed into using legitimate download services, price jumps could prod them back to piracy, industry analysts said.

"I think whoever came up with this idea understands the online music industry about as well as a cow understands algebra," said Phil Leigh, senior analyst for Inside Digital Media.

"If the labels really want to fight piracy, it defies logic to increase prices and create more of a disincentive for the consumer to use legitimate providers. If they want to encourage the public to use legitimate online pricing, raising prices is about the last thing they should think of doing."

Music download sales totaled about $300 million last year, roughly three times its total for 2003, according to Josh Bernoff, principal analyst for Forrester Research. Music labels are believed to charge about 65 cents a song wholesale.

Given the threefold revenue jump, industry moguls might feel he time is right to hike the price, analysts noted, though they criticized the strategy.

"If you're looking to have this market develop, this is a really bad time to increase rates," said Michael Goodman, senior analyst for The Yankee Group. "You need to be careful about killing the golden goose. If they do raise rates, they're just getting greedy, and they're running a very significant risk of seeing those rates decline significantly."

But greed and ethics are not the issues -- supply and demand are, according to Forrester's Bernoff, who noted the music labels have been battling illicit downloading services for years.

"The right price has nothing to do with greed," said Bernoff. "It has to do with demand."

If piracy was somehow stamped out, the environment could support a price jump, but that's irrelevant so long as illicit downloading is alive and well, said Bernoff. The lure of free music was being countered by the fear of prosecution for illegally downloading, but an increase could draw legitimate consumers back to the shady world of piracy.

"People would go right back to stealing music," said Bernoff.

Aram Sinnreich, music industry analyst for the University of Southern California, said increasing prices would be a "major mistake" and that any price over a dollar would "nip the emerging consumer trend in the bud." Sinnreich said the story was probably leaked as a "weather balloon" to test the market, but it could have legal repercussions for the industry if it ever comes to fruition.

"The major labels should take care so as not to appear that they're discussing the rise in wholesale prices in any collusive way," he said, noting that illegal collusion could bring down them the wrath of the Justice Department and other regulators.

Spokesmen at Sony BMG Music and EMI declined to comment.

Officials at Universal Music and Warner Music could not immediately be reached for comments.  Top of page


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