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Music Downloads: Profit without iTunes

Posted May 6, 2008

“But with bad times comes creativity and innovation. And the world’s third largest music producer, Warner Music Group (WMG: NYSE), has decided to throw off the Jobsian price-fixing tyranny and allow the market to set download prices.” — Stephanie Grimmett

by Stephanie Grimmett

Baltimore — (TFN): It’s a concensus: Being in the music business sucks, right now.

Despite the music industry’s best attempts to vilify file sharing, the prosecution of 12 year olds for downloading music has only resulted in the vilification of the major labels in the eyes of the public. Even after the music biz managed to gut Napster, online file sharing has continued, though on a smaller, more furtive scale.

And while iTunes may have figured out a way to prevent listeners from playing each other’s downloaded music (if you try, the program will inform you that your computer is not “authorized” to play the song), the entire set up is negated by burning your downloaded MP3s onto a CD. And that’s easy enough now that all new computers come with a CD burner.

It’s a delightful set up for the impoverished (or just cheapskate) and musically inclined. But it’s hell for those megacorporation music companies that are realizing the feasting days are over and something has to change.

Music downloads: Creativity and innovation

Major labels seem to have given up on scare tactics, and now their plans revolve around developing technological fetters to hobble the rough riders and cowboys among us and optimizing the earnings they can still receive from law-abiding citizens.

Ever since Apple conquered the universe, most music producers have resigned themselves to the 99 cents per song download concept. And they’ve fallen in line to bow and scrap to Steve Jobs and the almighty iTunes, which accounts for 76% of digital music sales annually.

But with bad times comes creativity and innovation. And the world’s third largest music producer, Warner Music Group (WMG: NYSE), has decided to throw off the Jobsian price-fixing tyranny and allow the market to set download prices. With the help of Digonex Technologies, a company I really wish was public, Warner has begun experimenting with fluctuating prices on its downloads.

Music downloads: Defying iTunes for profits

Digonex will manage the pricing for Warner using its consumer-demand driven pricing system that gathers and analyzes sales data in real time and automatically sets new prices to draw interest to low-selling items and exploit consumer demand on high-selling ones. Warner Music will sell the price-fluctuating downloads through a number of thus far unspecified online music stores, although I’m willing to state with confidence that iTunes will not be one of them.

Personally, I like the idea of allowing the market to price music, especially if it’s done efficiently with an automated online program. But perhaps that’s just because I’m patient enough to wait for a price drop, and most of the time, I’m not looking to buy the most popular albums on the shelves. So market-driven pricing could actually save me a lot of money.

And charging more for albums when people are willing to pay inflated prices and less for them when the public isn’t as interested could make Warner a lot more money than its currently pulling down.

Music downloads: Like father, like son?

Parent company Time Warner (TWX: NYSE) sold Warner Music Group in 2003, when daddy TWX was still trying to break free from the earnings prison that was the AOL/Time Warner merger. Warner Music went public in 2005, and the stock has been leaking value since it peaked around $30 in mid-2006.

The company’s earnings have been abismal. And I’m not about to recommend you put it in your portfolio.

But papa Time Warner has made a few steps toward the light of late. The company is spinning off its cable division, and it could be considering a sale of its sorest spot, AOL, to Microsoft now that the software giant has dropped the bid for Yahoo.

And right now, Warner Music, which owns Atlantic, Bad Boy, Elektra and the Rhino music library, among other lables, could be following good old dad into the sunshine.

The new test with Digonex could be the first step toward freeing MP3 sellers from the absurd idea that pricing should be consistent instead of profitable. If the trial run works, and more importantly, if Warner and its compatriots (especially number one global music producer Universal and number two Sony) can organize themselves enough to bully Steve Jobs into accepting fluctuating prices on iTunes, Warner could be a profitable investment in coming years.

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Posted by Stephanie Grimmett · Filed Under US Stocks and Markets 

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