August 17, 2004
It's Called a Price War, and It is Very Good
Posted by scott at August 17, 2004 02:49 PM
Slashdot linked up news of the first shot in what may turn out to be a full-blown price war:
On Monday, [Real Networks] said it would temporarily slash its price for song downloads to 49 cents — 50 cents less than iTunes.
Yes, temporarily, but still, it's movement. And the crack at the end about "losing money"? Not if Real has cut some sort of deal with the labels. I do so love markets...
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Well, the biggest thing to consider here is how much is the song costing either Apple or Realplayer. The reason I say this is that there are other factors to include in the calculations to figure out who'll loose money. Specifically, things to look at are:
-Sell side margin
-buy side margin
Basically, if the sell price (selling margin) is close to the purchase price, then you can manipulate the others to make money. I know this because my entire industry sells products for less than it costs to buy them - and we all make money.
From what I understand, Apple breaks more or less even on the deal. The majority of the cost of selling music online goes to the record company, followed by Apple's cut and the rest going to the artist. The theory behind Apple's strategy according to Jobs himself is to sell more iPods which have a much more margin.
So, iPod makes it's margin on the units and Real makes money on the songs (and since it's doing a much larger volume of songs), it makes profits on leveraging cash flow. A win for the consumer, a win for Real, and a loss for Apple - well, at they're used to playing second fiddle...
I'm not sure it's a loss for Apple. Especially since they lead online music sales by a substantial bit. I can't believe Real could have struck a better deal with the record labels than Apple.
My loss assumption come from the lost revenue that they're going to be missing from the lost sales - or the permanent loss if they have to lower their prices to match. It's entirely possible that they were making 50% profit on the songs they were buying, so this'd represent almost a complete eliminatino of the revenue on the songs - potentially moving their profit down to the single digit ranges, which is okay if you move huge amounts of stuff and slowly get to that point. however, the public market doesn't take losses to earnings projections very well at all.
again, pure speculation on my part - so it'll be interesting to see if I'm on the money or not (couldn't resist it...)