Managerial Economics & Organizational Architecture 5th Edition by James Brickley, Jerold Zimmerman, Clifford Smith

تمرين 21

Consumers have been able to purchase digital music and audiobooks over the Internet through Apple Computer's iTunes Music Store (Music Store) since April 2003. The Music Store is integrated with Apple's iTunes Software, which allows users to manage their digital music libraries and to interface with their iPods-Apple's highly successful MP3 player.
Apple's stock price increased from $7/share in April 2003 to over $46/share in August 2005 (adjusted for stock splits). This 6.5-fold price increase compares to Microsoft's stock, which increased from about $21.50/share to $27/share over the same period. Apple's strong performance was fueled by the growth in its digital music business (increased PowerBook sales also contributed). In August 2005, Apple's market shares for downloaded music and MP3 players in the United States were approximately 75 percent and 80 percent respectively. Apple's net sales by product from 2002 through 2004 can be found on page 28 of Apple's 10-K statement for fiscal year 2004. (The 10-K can be obtained online from the SEC's Edgar Archives Web site at http://www.sec.gov/Archives/edgar/data/320193/ 000104746904035975/a2147337z10-k.htm.)
Since the inception of the Music Store, Apple priced all downloaded music at $.99 per song. About $.70 per song is paid to the major record companies that have the rights to the songs. The record companies were initially happy with this arrangement since it provided a way to collect at least some revenue from downloaded music. Prior to the development of iTunes, many consumers downloaded music through services such as Napster, with no royalties paid to the music companies or artists.
By August 2005, Music Store sales had become "big business" and two of the four major record companies expressed dissatisfaction with the $.99 price. Sony BMG Music Entertainment and Warner Music favored a more complex pricing scheme that would price songs by popularity. A popular new single, for example, might sell for $1.49, while a "golden oldie" might sell for substantially less than $.99. Executives from these two music companies argued that their revenue stream could be enhanced by flexible pricing. They complained that Apple had an incentive to sell downloaded music at too low a price to promote the sale of iPods. To quote one music company executive, "Mr. Jobs has got two revenue streams: one from our music and one from the sale of his iPods. I've got one revenue stream that it would require a medical professional to locate. It's not pretty."
Not all of the major record companies shared the same view. For example, as of August 2005, the Universal Music Group (a unit of Vivendi Universal-the industry's biggest company) supported Apple's desire to maintain the price of $.99 a track.
The difference in opinion among the four record companies reflected varying views on whether the rapidly expanding digital market was stable enough to bear a mix of prices-particularly a higher top-end price. Millions of consumers were still trading music free on unauthorized file-swapping networks and an increase in price would increase the incentives to engage in this practice. One music executive noted, "I don't think it's time yet. We need to convert a lot more people to the habit of buying music online. I don't think a way to convert more people is to raise the price."
As of January 2008, Apple had substantial power in negotiating with the record companies. It was unlikely that any one of the music companies would try to force Apple to change its pricing policies by withholding their music. Analysts, however, forecasted that Apple's leverage over the music companies could fall in the future due to increased competition, for example, from major wireless companies who were likely to begin offering downloaded music services to cell phone customers. In January 2008 all four major music companies agreed to allow Amazon.com to sell their entire music catalogs in the MP3 format, without digital locks that restrict users from making copies of the songs. Each of the companies, except for the EMI Group, continued to require Apple to sell their music wrapped in digital rights management software. All four of the music companies also agreed to participate with Pepsi-Cola in a free song promotion program through Amazon that would be featured during the 2008 Super Bowl. The companies participated in a similar deal between Apple and Pepsi in 2004.
Discuss other potential pricing policies that might increase the revenue from Music Store sales.