Recording labels, Apple divided over pricing

Huge market share
Today, according to Apple, iTunes has roughly 80 percent of the U.S. music download market, running well ahead of rivals like Napster Inc. and RealNetworks Inc.’s Rhapsody, both of which remain focused on subscriptions.

Apple does sell albums at different prices. And some online music retailers offer song downloads as low as 79 cents. But the bulk of single download sales remain at 99 cents, a price seen as a key threshold for music fans.

“After you cross that 99-cent psychological line with consumers, you’re going to hurt sales,” said Wayne Rosso, who headed the now-defunct Grokster file-swapping service and is currently working on a new service licensed by recording labels to sell downloads.

The price of music has already become an issue for some music fans.

At least two consumer lawsuits have been filed in federal courts in New York and San Francisco claiming the labels have conspired to fix prices of online music and CDs.

Spizter probes music prices
Meanwhile, New York Attorney General Eliot Spitzer and the U.S. Department of Justice are conducting separate investigations. Warner has said it’s cooperating with the inquiries, while the other labels haven’t publicly commented.

Few details have been released, but the probes echo a federal antitrust investigation in 2001 that looked at early ventures into online music by recording companies. That probe ended after investigators found no evidence of wrongdoing.

Making a case this time would require authorities to prove collusion among labels or retailers, said James Wade, a former chief of the Department of Justice’s antitrust division and the person who led the previous probe.

“In a price-fixing case, it’s not enough to just show that ultimately competitors are just charging the same price,” Wade said. “You have to somehow show there’s an agreement between them.”

As the labels and Apple hash out their differences, Apple’s market dominance likely puts it in the best position to dictate terms, analysts said.

“The power balance at this point is probably still going to be on the side of Steve Jobs and Apple,” Kleinschmit said. “Can the record labels really afford to pull their catalog from iTunes?”

Labels could respond by threatening to cut back the special promotional exclusives that now help drive traffic to iTunes, offering them instead to other online retailers or to wireless carriers that typically sell a song download for more than $2, analysts say.

But that would be a gamble.

“We can throw variable pricing in and we can raise prices of a hit song, but it doesn’t mean consumers will buy,” said Charles Wolf, securities analyst for Needham & Co. LLC. “They have an alternative — get songs for free.”

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