The world's largest music store, Apple's iTunes, plans to boost the price of many hit singles and selected classic tracks to $1.29 on April 7, breaking the psychological barrier of 99 cents in what could be the first big test of how much consumers are willing to pay to download individual songs.
Although the date for higher prices has not been publicly announced, Apple has been notifying record labels it will go into effect on that date, industry executives said.
The move, part of a new "variable-pricing" strategy that will also lower the price of selected songs, is an attempt by the music industry to wring more revenue from digital downloads in the battle to offset declining CD sales. Label executives contend the new pricing will allow them to offer packaged downloads of songs that might entice consumers to spend more on music.
Some music industry veterans are criticizing the 30% hike price, saying the timing is tone deaf because it comes in the midst of a recession and at a time when spending for online music appears to have reached a plateau.
"This will be a PR nightmare," predicted former EMI Music executive Ted Cohen, who is managing partner of digital media consulting firm TAG Strategic. "It is for the music industry what the AIG bonuses are for the insurance industry."
Jim Guerinot, who manages such bands as Nine Inch Nails, No Doubt and Offspring, said the industry's pricing was moving in the wrong direction if it hoped to compete with still rampant music piracy.
"Wouldn't it make sense to try to price it cheaper instead of squeezing the handful of people who are still willing to pay for music?" he said.
Apple Inc. set the 99-cent-per-song rate in 2003 when it launched the iTunes Store. The company long resisted pressure from the music industry to allow flexible pricing, arguing that it would inhibit sales. Apple changed its tune in January, however, announcing that it would begin selling music at three prices: 69 cents, 99 cents and $1.29, based on wholesale costs set by the labels.
In exchange for flexible prices, the digital tracks will be offered free of anti-piracy software, enabling the buyer to make unlimited copies and play the songs on any device, which is not currently possible.
True to supply-and-demand economics, the price of music downloads will be geared to the artist's popularity. Releases from new artists would receive the lower pricing, while tracks from popular acts would get slapped with the higher rate. Even classics, such as Bruce Springsteen's "Born in the USA," could retail for the higher price. Most of the 10 million songs in the iTunes catalog are expected to remain at 99 cents.
The willingness to experiment with pricing is a sign of a maturing market, said Russ Crupnick, a senior analyst for NPD Group. U.S. digital music sales topped $1 billion for the first time in 2008, up 27% from the year before, but Crupnick estimates that average spending has leveled off at $41 per consumer.
"If you're not drawing new people and your spending isn't growing, it's a natural part of the product life cycle" to raise prices, Crupnick said.
Crupnick said he doubted a 30-cent price increase would prevent iTunes customers from buying a hot new release from artists like Kelly Clarkson, Flo Rida or Lady Gaga. He noted that offering a discounted second track packaged with a premium priced song from the same artist could boost sales.
But altering the dollar-store allure of the digital download might prove more challenging than the record labels are betting.
"The power of 99 cents will be harder for the labels to overcome than it would have been if they'd had this ability [to change prices] a few billion downloads ago," said Frank Luby, a pricing expert with Simon-Kucher & Partners consulting, who has done work for Warner Music Group. "The longer a habit like that lasts, the harder it is to break."