NYT, September 10, 2007
By DAVID CARR
We talked before about the battle going on among McDonald’s, Starbucks and Duncan Donuts for the breakfast business with some powerful learnings (McDonald’s seem to be doing quite well with their recent dividend increase --thank you very much!!).
Right now, Apple seems to be in the driver’s seat as you will see from the article. When you read about their flat pricing strategy for downloads, keep in mind their current strategy seems to be a new twist on the invested base profit model (Gillette blades vs. razor) –they are using the iTunes network to encourage the purchase of iPods. At some time in the future, the situation may change and the ubiquity of the iPods will create the profit base for the on-going download business from iTunes. My question to you is what will then happen to the download pricing and will Jobs be able to contain the content folks? Also, after reading the article, what would you do differently considering what I think apple's strategy is in this arena. Please share your thoughts. Enjoy.......
Let me get this straight: Steve Jobs insists that songs on iTunes cost 99 cents and television episodes cost $1.99 because consumers crave simple pricing.
Except, of course, when it comes to Apple’s own products.
On Thursday, I was at the massive Apple temple just off Central Park. From a pricing perspective, it was chaos — a very lucrative form of chaos. The day before, Mr. Jobs had dropped the price of the iPhone, introduced the iPod Touch, re-priced the original iPod, and introduced a new Nano with video capability.
The tables contained both new and old versions of the devices, but the signs listed the old prices.
“These signs are wrong,” said Bryan, a clerk in sort of general-announcement mode near the mob at the iPhone table late in the afternoon. “The price just dropped $200, and you should get ’em while the getting’s good.”
There were wrinkles created by all the dynamic pricing. Customers who paid $599 when the iPhone came out two months ago saw their status drop from early adopter to, well, sucker, after Mr. Jobs cut the price of the device by a third. After Mr. Jobs was crucified for playing it too cute on the so-called “Jesus phone,” he issued a non-apology apology and a $100 store credit to help those early buyers salvage some dignity.
A pricing error? Absolutely. And when you think about it, the media companies Mr. Jobs is fighting with want the opportunity to make the same mistake.
Earlier this summer, the Universal Music Group, owned by Vivendi, said it would not renew its contract with iTunes because it wanted more flexibility in setting prices. Last week, NBC Universal and Apple issued dueling press announcements, with Apple saying it would not carry television shows from the coming NBC season because the network wanted double the $1.99 price and NBC saying that was not true. (the battle between the infrastructure and content guys) .
“Apple is not telling the truth. We never asked to double the wholesale price of our shows," said Cory Shields, a spokesman for NBC Universal. “Our negotiations were centered on our request for flexibility in wholesale pricing, including the ability to package shows together in ways that could make our content even more attractive for consumers.”(My guess is Jobs really doesn't care about how attractive the content is; he wants to control the customer interface via accessibility and pricing of iTunes downloads to meet his strategic goals).
Content creators are supposed to hold all the cards, but in this shootout the advantage rests with Apple so far. With a ubiquitous installed base — iTunes has been downloaded 600 million times and there are more than 100 million iPods out there — Apple has the biggest media application on earth. Networks and music companies have some bullets, but Mr. Jobs owns the gun. (at least for now)
Paul Saffo, a Silicon Valley forecaster who has seen a few revolutions come and go, is not someone who feels the need to own an iPhone, but he thinks Apple is just reaping long-earned rewards. “They won this before the first iPod was sold,” he said. “They figured it out. And now he is getting monopoly rent.”
You could speculate that Apple slashed the price on the iPhone to gain additional leverage in peddling songs and episodes of “Heroes,” but the company is in the tchotchke business, not the media business. ITunes, for all its ubiquity, is not a big profit center (at least not now--remember my comments on his strategy -- Jobs is probably looking at the profitability of the whole system, not each segment. He may change the relative profitability down the road between the iPod and iTunes businesses). Mr. Jobs wants to be the king of all media as a way of making sure that there is a cheap, rich source of software — music, television shows and movies — to animate his devices and drive further sales.
His arguments against variable pricing (flat rates draw new customers and lessen the appeal of piracy) may have worked a couple years ago, but they are starting to sound a little self-serving (Duh, why shouldn't it). The Web, after all, can easily enable infinitely customized pricing. eBay proved that people will not only track prices closely, but act in their own consuming self-interest.
Should buying media be any different than bidding on a canoe or last season’s Banana Republic sweater? It seems a stretch to believe that the iTunes version of “Stronger,” a breakaway hit by Kanye West, and “The Last Duet” by Barry Manilow and Lily Tomlin — an audio science project at best — are both worth precisely 99 cents. (clearly, his strategy is not value pricing for iTunes downloads at this point)
And as someone who travels a great deal, the opportunity to watch episodes of “The Office” on my iPod seems worth a great deal more than $1.99, and I would pay accordingly....
But NBC Universal has significantly more leverage in this fight than music companies. Fat file sizes have insulated video-content providers from the disruption that overtook the music business (though the clock’s ticking on that firewall). NBC already has many of the top-selling shows on iTunes: the company put its market share there at 40 percent, while Apple said it was 30 percent.
And Apple is not the only near-monopolist that media companies deal with. Wal-Mart, which used cheap media prices to draw people into its stores, will be none too happy to be undercut in the long run. NBC announced it would deal with another behemoth, Amazon.com, to get its media out there. The network’s coming partnership with Fox in something called Hulu.com may create a destination for popular streams. (the battle is REALLY starting)
Sure, versions from Amazon.com and Hulu.com won’t play on the iPod. But Mr. Jobs can only own pricing if episodes of “The Office” have nowhere else to play. Apple has built a hardware-based kingdom, rendered beautiful to the touch. But my love of the iPod is still driven by all the things I can put on it. If the gated community loses a lot of cultural real estate, will I need to keep my address there?