Pricing of mobile content

I had an interesting discussion yesterday with Lucas Hrabovsky, CTO of Amie Street.  If you don’t know Amie Street, they’re a new independent music store that has a rather unique pricing scheme.  Songs start out free, but gradually rise in price as their popularity increases.  It’s a pretty nifty algorithm, and a hook that’s gotten them plenty of press.

I was talking to Lucas because we’re working on a way for MyxerTones and Amie Street to work together to provide the same kind of variable pricing scheme for mobile content (ringtones) as is currently provided for full track desktop downloads.

In a world where Steve Jobs all but set the global retail price of a digital full track download at $0.99 (oh, he’s just added a $1.29 option for DRM-free tracks…more on this later!), the variable pricing model of Amie Street offers quite a contrast.  But, as I pondered pricing issues with mobile content (thanks to Lucas for a follow-up email that piqued my interest),  I realized that neither the fixed price model of iTunes nor the variable price model of Amie Street really allows the artist any control over the retail pricing of their products.  While I have heard justifications offered up for why fixed pricing is a Good Thing for the Consumer and the Industry, none have been really compelling, and I think it’s really a regrettable accident that isn’t helping anyone.

At MyxerTones, we have a fixed retail price for each ringtone or other mobile content item, but we’ve always let artists choose what that retail price should be.  Let’s call it artist-controlled pricing.   Artists can either give away their content for free, or they can choose to charge between $0.99 and $2.99 per download.  We did this because, well, we had no idea what the right price for an arbitrary piece of mobile content should be, and we suspected different content was worth a different amount of money, so we figured we’d let the artist do whatever they thought was best.

What do they choose?  Well, perhaps not surprisingly, the majority of the content available from the MyxerTones catalog is made available at no charge, as this pacman chart shows:

This means most of the ringtones are used as promotional content; artists create them, then send out MyxerTags in bulletins to their fans on MySpace, or give out MyxerCodes at their shows, so that their fans can load them onto their phones in a show of support.  It’s a great use of mobile technology to connect bands with their fans, and we’re happy to provide these delivery services for free, based on on ad-supported model.  There’s probably similarly poised PacMan chart on some MySpace presentation somewhere, that shows how many bands are chosing to give away their songs as downloads from their profile pages.

But a relatively large percentage of our artists choose to monetize their works by charging for the ringtones they offer . Of this premium (non-free) content hosted by MyxerTones, the distribution of retail prices (chosen by artists) looks like this:

So we see that, more than half the time, artists are chosing the lowest (non-free) price for their content, which is $0.99.  Second in line is $1.99, probably owing to the popularity of that price point for ringtones on the mobile operator’s deck.  Together, those two prices make up more than three quarters of all items; the rest are variously priced up to $2.99.

What’s interesting is that when you look at the actual transactions taking place on MyxerTones, the items being purchased by consumers don’t match up with this pricing distribution at all.  In fact, more items are sold at $1.99 than at any other price point, despite the fact that far more less-expensive content is available on the site:

(Note that this pie chart sizes each slice based on the total number of transactions at the given price point, not based on the total value of those transactions.  This data is from the first three months of 2007.)

You can see the discrepency between what artists are most often asking for their ringtones and what consumers are actually paying when you look at a histogram that compares the two side-by-side:

Despite having only half as many items priced at $1.99 than at $0.99, there were more sales at this higher price point than at the lower. There’s a bit of hypothesizing going on here, but I think what this data means is that, for those people willing to pay for premium mobile content, the difference between $0.99 and $1.99 is relatively unimportant. Presumably, the higher priced content is more desirable in some way (higher quality, more established artist, etc.), but prior to this analysis, it wasn’t clear to me that people would be willing to shell out two bucks for something they really want, even when they can probably get something they just want for half the price (and tons of other stuff completely free on the same site!).

It also leads me to believe that a lot of MyxerTones artists could do better, revenue-wise, if they chose a higher price point (such as $1.99), for their mobile content.

Of course, there are lies, damn lies, and statistics, so one has to be careful about jumping to any firm conclusions with this data.  But what strikes me is that this quick and simple analysis I’ve just done on MyxerTones mobile content pricing and resultant consumer behavior is possible only because we allow artists to set their own prices, and cannot be effectively performed on the dominant pricing models for full-track downloads.  Whereas I was able to take a half hour of work and come up with an optimized trajectory for revenue generation (“encourage more artists to charge $1.99 for their content instead of $0.99 and it should increase their (and our) total revenues”), the music industry is handcuffed and blinded by their existing pricing model.  It certainly seems careless of them.

I’m no economist, but I think a healthy, reactive free market in which prices can float and adjust based on the wisdom (or whim) of crowds, including half-baked analysis like this – will ultimately benefit the industry more than any pricing structure enforced from the top down.

Of course, fixed pricing is probably far from the biggest problem preventing the music industry from continuing its download spiral into lower and lower sales numbers.  The biggest problem is DRM, and it looks like that problem’s finally going to get some attention.  Hopefully I’ll be able to give it some attention here shortly.

For now, Amie Street’s variable pricing is novel and has a lot of benefits, especially for emerging artists.  It isn’t quite a free market, and the feedback loop is rather limited, but it’s certainly a great experiment and I’m looking forward to working with them and others, and playing our part in evolving the economics of mobile content.