The 99-Cent Question
Journal on Telecommunications and High Technology Law, Forthcoming
39 Pages Posted: 17 Dec 2006
Take a tour through the most heavily trafficked music download services and you will quickly notice a pattern. The price for most songs is the same - typically 99 cents. The most popular songs are 99 cents - take, for example, "Control Myself", from LL CoolJ's 2006 album "Todd Smith", which recorded the highest total sales on the particular day of this writing (April 15, 2006), on the most popular download site, Apple's iTunes. And so are a huge number of songs that might not have sold a single copy on iTunes (or on any other download service) that same day - for example, "A Spoonful Weighs a Ton", from a 1999 album, "The Soft Bulletin", released by the Oklahoma City band The Flaming Lips. That song is also 99 cents on iTunes, despite the fact that it might sell many more copies, and yield more revenue (and profit, since the marginal cost of providing a download is near zero), at a lower price.
This is a puzzle. Why would we see a hit song priced the same as one that is unpopular? Typically, we expect pricing of goods and services to vary according to demand, and demand for songs varies widely. Yet prices for songs - more specifically, for song downloads - don't vary much at all. And failure to price according to demand likely means that both the download services and the major record labels are leaving money on the table.
In addition to price, we see a number of other non-price characteristics of the download product - audio fidelity, for example, which can change along with the bitrate at which the digital file is encoded - that could vary but do not. We might expect download services to offer downloads of varying fidelity, with more expensive high-fidelity versions for audiophiles willing to pay for quality, and cheaper standard versions for the iPod-wearing masses. Yet we see little product differentiation of this kind. Is there some explanation for this puzzling price and non-price uniformity? That is the 99-cent question that this paper attempts to answer.
Part II of this paper briefly examines the price and non-price uniformity that characterizes the selling of music on the download services. Part III then considers several possible explanations for the high degree of product uniformity we observe currently in the market for music downloads. I review a number of explanations related to consumer behavior in the market for music downloads, but find that none of the behavioral explanations sufficiently account for current uniform pricing or elements of product quality such as audio fidelity. Part IV considers industry structure - in particular, the existence of substantial bilateral market power (exercised by the "big 4" (as I will refer to them throughout this paper) record companies, acting jointly, on one side, and Apple, with its dominant iTunes download service, on the other) - as a possible explanation for uniform download pricing and product characteristics. This final part provides an account, at this early point necessarily tentative, of how the competitive interaction of the big 4 record labels and the dominant download service, Apple's iTunes, leads to an inefficient regime of uniform pricing and product quality.
Keywords: intellectual property law, cyberlaw, music, downloads, drm
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