Business Matters: Is Amazon's 69-Cent Song an Act of Price War?
Business Matters: Is Amazon's 69-Cent Song an Act of Price War?

Is Amazon's 69-Cent Song Pricing an Act of Price War?
-- Is Amazon really starting an MP3 price war, as some media reports have suggested? No, probably not. Instead, it appears Amazon has other priorities.

Last week, Amazon lowered the price of 204 popular songs to 69 cents. That means consumers can get considerable savings on Lady Gaga's "Born This Way," Cee Lo Green's "Forget You" and Lady Antebellum's "Need You Now" and others.

But judging from the placement of sale items and products on the Amazon MP3 home page, Amazon's priorities are, in order, Cloud Drive, inexpensive MP3 albums, free MP3s and, finally, the 69-cent tracks.

The most prominent item on the MP3 page is Cloud Player, the music player feature to the Cloud Drive online file storage service. It occupies the banner that stretches across the top of the page, the top-center section of the page's wide middle and a display ad in the top-right corner of the page.

The next most visible item is the MP3 Daily Deal item at the top-left corner of the page. It's a prime piece of real estate because the human eye naturally gravitates to this place on a page. On Tuesday the album on sale is "Helplessness Blues," the new album by Fleet Foxes that Amazon has priced at $3.99. At midday Tuesday the album is ranked #1 on Amazon's list of top MP3 albums.

Then we come to the item that some have suggested is evidence of a price war. To the right, below the Free Song of the Day and above the top sellers section, is a display ad for the 69-cent songs. It says, simply, "The best new songs only 69 cents. Learn more." If Amazon is engaging in a price war, this is certainly a subtle way to engage in battle tactics. The fact that Amazon is not trumpeting these low prices suggests 69-cent tracks are not a great priority right now.

One has to wonder about the merits of getting into a price war on popular digital tracks. As we've seen since track prices rose to $1.29 two years ago, consumers have proven to be fairly immune to high prices for the most popular tracks. According to the RIAA, track sales were up 2% by units and 17% by value last year. If consumers were wary of higher prices, unit sales probably would not have been so good and the value of track sales would have fallen. So if consumer demand for hits is rather rigid, the same might be true of lower prices. In other words, people will buy the most popular songs regardless of price.

Consumers do love to save a bit of money. However, sales bumps tend to come not from a lower price but from the way that lower price is communicated to customers. Both Amazon and iTunes have long done a great job at drawing attention to special prices. They give them prominent, front-page placement that would help boost the sales of any title regardless of its price.

Rather than compete on price, Amazon and others will offer value in other ways. Amazon's Cloud Drive and Cloud Player are examples of value-enhancing services that will make the Amazon MP3 store stickier. Back in January, JP Morgan estimated Amazon's average revenue per customer was $189. With customers spending that kind of money, it pays to have sticky products.

20 Million Satellite Radio Subscribers Can't Be Wrong

-- Its often forgotten when talking about paid music subscriptions, but satellite radio continues to put up impressive numbers. Sirius XM Radio added 373,000 net subscribers in the first quarter of 2011 ("net" because the company is always losing some subscribers but gaining new ones) and brought its total to 20.6 million.

To put that in perspective, Netflix has 23.6 million subscribers (as of March 31), Spotify has one million subscribers (although that figure is getting a bit stale and the real number could be a bit higher by now) and all subscription services in the U.S. have 1.5 million subscribers (according to the RIAA).

Of course, there are many differences between Sirius XM and the handful of companies - many of them startups - that have created cloud-based music offerings. The most obvious difference is cloud music services don't have as much money as Sirius XM. Going back before their merger, Sirius and XM were very well capitalized companies operating in an industry that requires a high degree of capitalization (satellites don't' come cheap). The merged company had revenue of $727 million in the first quarter and considerable costs related to operating a satellite radio company - including $126 million in subscriber acquisition costs. These numbers dwarf anything at cloud music companies. Then again, there's a huge proven market for radio products (to that point, Pandora made $138 million in its last fiscal year, about $18 million of that from paying subscribers). And a huge market is needed to generate the kind of revenue that can maintain a company like Sirius XM.
( Press release)

The Publishing Industry's Digital Boom

-- As ebook readers and tablet sales take off, the book publishing industry is the midst of a digital boom. The ebook revenue of French conglomerate Lagadere, owner of the book publisher Hachette, now accounts for 22% of its publishing revenue in the U.S., up from 8% last year, and 5% of its U.K. revenue. Ebooks accounted for 8% of Hachette's total revenue in 2010, up from 3% in 2009. The division's net sales down 4.5% last year, although the drop was expected because of unusually strong sales of the "Twilight" series of books in 2009.
( First quarter earnings release)