The World According to Nick
My take on Software, Technology, Politics, and anything else I feel like talking about.
Friday, April 21, 2006

Anyone? Anyone? 

After reading Elliot's post on iTunes:

The major music labels have been trying to force iTunes to charge more that .99 cents for "popular" songs.

This really pisses me off, because the labels already make more money per track from an iTunes sale than they do when they sell a CD.

Plus, there's no "supply and demand" argument that you can use for charging a premium for more popular songs because there is no scarcity to drive up the cost.

With digital music there is an unlimited supply of every song.

I was suddently reminded of this scene from Ferris Bueller's Day Off:

In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the... Anyone? Anyone?... the Great Depression, passed the... Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act? Which, anyone? Raised or lowered?... raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression. Today we have a similar debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before? The Laffer Curve. Anyone know what this says? It says that at this point on the revenue curve, you will get exactly the same amount of revenue as at this point. This is very controversial. Does anyone know what Vice President Bush called this in 1980? Anyone? Something-d-o-o economics. "Voodoo" economics.

Now then, the Laffer Curve actually refers to the point at which Government "maximizes revenue" through taxation (ugh), but there is a similar theory when it comes to price points for a product in a free market.

In this instance, a song on iTunes has a fixed cost. No matter how many units of the song are sold, it cost the same amount to make and market the song. Each song sold creates only a minimum cost for bandwidth to move it across the wire, which for all intents and purposes can be removed from the discussion. Just because there is an "infinite supply" of the song, doesn't mean the price should automatically be negligible. In reality, the company selling the song has to recoup the cost of creating it, and marketing it. Anything they make after that is simply grave. The goal for them is then to charge as much as they can, as long as people are willing to pay it. They can charge what the market is willing to bear.

In fact, even if the number of buyers decreases as the price goes up (which logically it would), the company can still increase the cost, as long as the cost increase offsets the loss in profits because of fewer buyers. There is a theoretical point then where you can maximize the profit.

For instance, if you can get 100 people to but a song for $0.99, you'll make $99. But if 90 people are willing to buy a song for $1.25, you've now made $112.50! Why wouldn't a company want to charge $1.25 then? In fact, if they increase the cost to $1.50 per song, and only 75 people buy it, they still make $112.50. But if they jack up the price to $1.50 and only 50 people buy the song, now they've only made $75. The idea then is for the company to find the point where they can maximize profit. That's what sets the price, not supply and demand.

Supply and demand is certainly an important economic concept to understand, but it isn't what drives all decisions.


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Name: Nick
Home: Wauwatosa, WI, United States

I'm a Software Consultant in the Milwaukee area. Among various geeky pursuits, I'm also an amateur triathlete, and enjoy rock climbing. I also like to think I'm a political pundit.

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