Apple's Five-Finger Discount

It's hard to believe that Apple (Nasdaq: AAPL  ) is cutting prices at iTunes, just as major labels are negotiating for higher price points. However, let this sink in, because lower prices can be good for both Apple and the labels.

What the heck am I talking about? Well, Apple is starting to discount albums for buyers of individual tracks. In the past, Apple's prices have been pretty rigid for its digital downloads. A single track runs you $0.99. The whole album will set you back $9.99. That changed yesterday with the introduction of the Complete My Album service.

Let's say you purchased Green Day's "Holiday" and "Boulevard of Broken Dreams" on Apple for $0.99 apiece earlier this year. If you wanted to buy the entire American Idiot record, it would still run you $9.99. Under Apple's new plan, any singles you purchased over the previous 180 days would be discounted from the CD price. In this particular case, American Idiot would run you $8.01 instead of $9.99.

This would have seemed like a ridiculous notion in the bricks-and-mortar world. No matter how many singles you bought off Michael Jackson's Thriller or Def Leppard's Pyromania, you just weren't getting a price break on buying the actual album.

However, there are a few things setting the digital world apart from the old-school music retailers. For starters, the inventory-free delivery removes the cumbersome exchanges and stocking of physical product. You also have a pricing disparity. In the days of vinyl, singles were never priced for less than 10% of the actual LP. Sure, the singles packed B-sides too, but it was a completely different value proposition. Apple's program has been driven to move singles -- more than 2 billion and counting -- over the actual full-length albums.

Addition through subtraction
How can the Complete My Album discount lead to more sales? How can it not? Buying a single is a knee-jerk reaction on iTunes. Once you do, that $9.99 price is a major turnoff. You don't want to be the one to overpay. Real-world CDs can often be had at places like Best Buy (NYSE: BBY  ) for less than what it would cost you to buy the iTunes album, and even if that weren't the case, you would probably reject on principle.

So Apple's move is brilliant. Instead of dissuading you from the album purchase, iTunes is now actively encouraging it. This is pretty much what labels wanted all along. They hated the $0.99 price point. It devalued the songs that had been traditionally used to bait buyers into snapping up a full-length CD. Apple's piecemeal approach has destroyed that illusion. We know the iTunes storefront now stocks more than 4 millions songs, but how many people know how many albums reside there? Don't look at me. I don't know the answer. And that's pretty much the point.

Google's YouTube has us consuming video in smaller chunks, just as iTunes is doing the same thing to music munchers. Online newspapers and magazines have us delving into individual articles instead of leafing through complete publications.

Apple's move may not change that trend, but it certainly tweaks the value proposition. Music labels such as Warner Music Group (NYSE: WMG  ) are seeing sales of high-margin digital downloads shoot through the roof, but it often hasn't been enough to offset the steep decline in physical CD sales. Apple's move may change things, now that the economics are more appealing when it comes to pricier albums.

Bring back the B-side, Apple
Apple accounts for 70% of the digital music being sold these days. It sets the standard. It leaves other ambitious legal download and music-subscription sites like Napster (Nasdaq: NAPS  ) , eMusic, and RealNetworks (Nasdaq: RNWK  ) to follow suit.

You know what I'd love to see? If Apple is serious about moving more albums than standalone tracks, it should bring back the double-sided single.

Yes, keep singles at $0.99, but have artists, labels, or even Apple itself pick a relevant song as a B-side track. Go for an attractive price point -- say $1.39 or so -- and see what happens.

The B-side doesn't have to be off the same CD. It can be a track that didn't make the final cut, or even an obscure tune from an earlier release. Heck, when you think about it, let's just say that a B-side doesn't even have to be from that particular band. Let the discounted B-side be the catalyst to deeper discovery. If they are paired up correctly, they could inspire digital purchases of older catalog titles or similar artists. Reciprocal artist relationships. Headline acts giving their opening bands another leg up. It can be pretty sweet.

What's that? Digital B-sides already exist on a small scale? That's OK. I'm not proclaiming to be original here. However, why isn't this being promoted better? Feeding consumers piecemeal can be far more lucrative when it's saddled with the incentive to try new flavors.

Apple has saved the music industry before. Unless I miss my mark, it's about to do so again.

A few more Apple dippers for you:

David Gardner has recommended Best Buy for his Stock Advisor subscribers.  

Longtime Fool contributor Rick Munarriz is a huge music fan, but with subscriptions to both satellite radio services, he hasn't made the move to tack on a digital-music subscription service as well. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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