Summary
o Apple's new three-tiered pricing structure will enable it to more effectively market its music based on consumer demand. o The elimination of its digital rights copy protection will facilitate the ability of users with non-Apple music players to use iTune Store music. o In the long-run Apple's iTune Store revenues should increase, even if the elimination of digital rights copy protection leads to some additional fraudulent behavior.
Analysis
The change to Apple's iTunes Store pricing and digital rights management (DRM), announced at the Macworld Conference & Expo in San Francisco on January 7th, 2009 should serve to change Apple's sales model and result in addition digital music unit sales and overall revenue for the company.
By modifying its pricing from a uniform fixed price of $0.99 per song to three tiered price of $1.29 for new and popular songs, $0.99 for some other songs, and $0.69 for the majority of its primarily older songs, Apple will receive a premium price for high-demand songs while encouraging sales of older songs by reducing their price. Furthermore, by eliminating its digital rights management protection, it is making it much easier for owners of non-Apple devices such as Microsoft Zune or SanDisk music players to play songs purchased from the iTune Store on their music players. Currently the iTunes Store was best suited for users having either an Apple iPod or iPhone.
What Apple is essentially doing its changing its model to one that is similar to the shaving industry. It is allowing its music (razor blades) to be used in many different music players (razors). Its three-tiered pricing model (titanium vs premium vs regular razor blades) allows it to vary pricing based on demand while providing an incentive for users to acquire older, not currently popular, music at a reduced rate.
Yes, Apple runs some risk that by removing its digital rights management copy protection, it will make it easier for some people to obtain its music illicitly. However, in the long run by opening up its music to non-Apple music players, it is increasing overall demand for the iTune Store and likely to increase overall revenues.
