Amazon predictions, part 2: Selling digital music and CDs together

6 minute read

In my previous post I speculated how Amazon’s rumored entry into the digital music market (e.g., through a possible acquisition of eMusic) might initiate some changes in the way music is sold online. In this post I make some specific predictions about how Amazon might integrate digital music offerings into its current online store. To repeat the disclaimer I made previously: This is all fevered speculation and nothing more; I do not have any inside information about a possible Amazon acquisition of eMusic, nor about other future plans of Amazon or eMusic. However speculation is always fun, so let’s start imagining the Amazon music store of the future:

Single digital tracks will be sold in a variable pricing scheme based primarily on the perceived demand for the track, both on its own and in relation to the demand for the album containing it. Rather than try to come up with such a scheme on my own, I’ll simply point to Digital Audio Insider’s proposal for variable pricing that aims to be friendly to labels while being acceptable to customers. The basic idea is simple:

Allow variable pricing for individual songs based on purchase order. That is, charge more for the first track a customer downloads from an album, but then charge that customer less for additional downloads from that same album.

In this scheme a given track does not have a fixed price (since the price may vary based on purchase order), but we can take the price for the first track purchased from an album and reference that as the nominal per-track price. Such nominal track prices would further vary from album to album, for example between new releases, mid-line releases, and budget releases. More specifically, my prediction is for nominal per-track prices as follows:

  • 60-75 cents for back catalog material and for albums containing a large number of tracks of relatively equal importance (as is the case for many classical CDs)

  • $1 for the majority of releases

  • $2-3 or even more for albums containing one or two hot singles plus a fair amount of filler, as well as for albums with a small number of very long tracks (as in the case of many CDs of electronic music, as well as many CDs of classical symphonic music)

Note that the prices we’re discussing here are list prices for a la carte purchases; users signing up for a subscription plan will get significant discounts, as discussed in my next post.I’ve estimated a minimum price of at least 60 cents based on eMusic’s current pricing for booster packs ($5.99 for 10 tracks, or 60 cents per track). Since booster pack downloads never expire and can be used at any time. I’m guessing that eMusic set booster pack per-track prices high enough to cover the minimum royalties demanded by the independent labels eMusic deals with. Major labels will of course want more, and for at least the immediate future they will no doubt get it; hence the predicted $1 nominal per-track price for most releases, consistent with current practice in the iTunes Store and elsewhere.

** All digital tracks will be sold in a single high-quality DRM-free MP3 format.** In other words, I think that Apple’s current plan to offer both DRM-restricted and DRM-free versions of a track at two different prices is simply due to legacy issues. If Amazon were to offer digital downloads then I see no reason why it should offer DRM-restricted tracks, given the likelihood of other major labels following the lead of EMI. The format will be MP3 because that is the universal format understood by all digital music players (including of course those sold by Amazon itself). Again, I think the choice of AAC for the iTunes Store DRM-free format is an Apple-unique decision due to Apple’s own championing of the format as part of the Fairplay scheme and its desire to disadvantage non-iPod players that don’t happen to support AAC. Finally, I doubt that most customers know of or care about the sound quality differences due to different MP3 bit rates, fixed-rate vs. variable-rate MP3 encoding, and related factors, so offering a given track in multiple levels of sound quality will just confuse them. The default format (whether 192Kbps VBR or something better) will be high-quality enough to satisfy the vast majority of customers. Anyone else can just buy the CD and rip it themselves.

Digital albums will be sold both as a discounted alternative to buying single tracks and as an low-cost add-on when buying a CD. As with the iTunes Store and other digital music stores, those buying all their music in digital form will have the option to buy an entire album at a price lower than that of buying all the album’s tracks separately. However unlike the iTunes Store (and like Amazon’s current CD pricing) digital albums will be sold in a variable pricing scheme analogous to that used for single digital tracks. Digital album prices will range from $2-3 at the low end to a maximum of $10 at the high end; however over time the maximum price will be forced down to the range of $5-7. As in the current Complete My Album feature of the iTunes Store, people who have already bought digital tracks through Amazon will get credit for their track purchases when buying the albums containing those tracks, so that in total they will never pay more than the price of the album.

At the same time, those buying a CD of an album will be offered the option to also get the digital version at a low fixed incremental cost, perhaps $2-3 or so. This extra charge will be justified based on the convenience of getting the digital version right away (i.e., before the CD arrives) and avoiding the need to rip the CD once it’s received. The digital option will also tie into the Amazon-provided backup scheme discussed in a future post.

(Incremental pricing like this will of course require changes to the current royalty regime, since both labels and music publishers will naturally want to continue to be paid full royalties on both the CD and digital album considered separately. This change can be justified on the basis that otherwise labels and publishers would not see any incremental royalties at all, since customers buying CDs would balk at paying full price once more for a digital version of the same album, and would just rip the CD themselves.)

CDs will be sold both on their own and as an upgrade to digital albums. Amazon will of course continue to sell CDs as standalone items for those who wish to buy them. However at the same time it makes sense to sell CDs as an incremental upgrade when a customer is buying a digital album. The cost of doing so should be (and I think will be) such that a customer adding a CD purchase to a digital album purchase will pay the same total cost as a customer adding a digital album purchase to the CD purchase.

Ideally it should not matter whether the purchases are made at the same time or different times. In other words, a customer should be able to buy a digital album, listen to it, decide they want the CD, and then come back to Amazon and purchase the CD at an incremental price identical to what they would have paid if they had purchased the CD at the same time as the digital album.

Over time the list price of digital albums will be driven down below the current $10 per album standard, with CD prices possibly dropping a bit as well. Thus it’s possible to imagine purchasing a CD and digital album combination for the same price or even less than Amazon charges for CDs today. In the meantime Amazon has another possible way to sell digital music at discounts below present-day list prices, namely to adapt eMusic’s subscription model to Amazon’s own business model, as discussed in my next post.