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Music Pricing

Apple put out a press release last week saying that iTunes is now the number two music retailer in the US, behind only Wal-Mart. Wal-Mart, for it’s part, is making rublings:

Wal-Mart stirs CD pricing pot with multi-tiered plan – Yahoo! News:

Wal-Mart… has proposed a five-tiered pricing scheme that would allow the discounter to sell albums at even lower prices and require the labels to bear more of the costs.

(Via Andrew Sullivan.)

Wal-Mart has seen Apple beat retailer after retailer on this, and sees the writing on the wall: buying online is cheaper and faster, so there’s no reason to buy from a store. If they want to keep sellng music, they need to change the rules. And that’s what they’re proposing.

But, as the article makes clear, that’s only if they want to keep selling music, and that’s not necessarily true:

One label executive said, “This sounds like the Hail Mary pass, and if it doesn’t work, they could be out of the music business; or maybe they reduce music down to a couple of racks” from the 4,000 titles carried by Wal-Marts with larger selections.

That’s a huge play for Wal-Mart, and it sounds eminently reasonable from Wal-Mart’s perspective. Basically, the Labels have given Apple the sweet deal (cheaper prices) that Wal-Mart is used to getting, and because Wal-Mart is all about cheaper prices, they’re not able to compete. And if they can’t, then they’re willing to cut off the non-competitive part of the business. Wal-Mart is nothing if not ruthless.

Note, though, that there’s a giant gap between “non-competitive” and “not profitable,” and therein lies the interesting part. As long as Wal-Mart is making money selling music, why would they care if Apple is making more money selling music? Unless Wal-Mart is just feeling stilted about not being given the best price, it has to mean that they don’t think they can fend off Apple given the current pricing scheme. And seeing as how Wal-Mart’s online music store did have the lowest price when they were still in business, I have to guess that it’s the later.

All told, it’s great news for Apple. Wal-Mart is in a reactionary position, but if Wal-Mart wins against the labels and holds onto the number one slot, Apple can argue that lower pricing is better for sales and demand it themselves. If new pricing doesn’t keep Wal-Mart up top, it’s Apple who takes the crown. On the other hand, if Wal-Mart doesn’t get better deals and does cut their music shelf space, Apple catapults into first place, and again has more leverage.

And of course, this is really bad news for the labels, who are going to have to choose to lower their margins or lose a chunk of business, or both. Couldn’t have happened to a nicer group of guys.