ANALYZING MANAGERIAL DECISIONS: iTunes Music Pricing
MBA 540
LaTroy Middlebrook
May 22, 2016
Dr. M. Pate

1) Apple’s ingenious policy strategy in variable pricing permits Apple to increase iTunes sales profits by appraising highly regarded artists’ or songs at an elevated amount, than underappreciated artist or songs with fewer fans. For example, 2016 Grammy winner for Album of the Year, Taylor Swift, ‘1989’ sells for $7.99 and features 13 songs on iTunes. However, say that iTunes increases the price of the album to $8.99 and distributes sales of over 1000 copies. $7.99 x 1000 = $7,990 or $8.99 x 1000 =$8,990. iTunes can raise sales prices by $1.00 for every album sold over 1000 copies based on the admiration fans have placed on ‘1989’. Consequently, the price of the album will surge due to popularity, radio airplay, and iTunes sales profits will decrease on the most favored songs on the album. Despite the influx of popularity for the album, what variable pricing sales does is create substantiated revenue by generating copies of the less popular songs on the album by selling them as singles. Not to mention, Taylor Swift is a world renowned artist. Her music resonates with the old, young, and the middle-aged listener. The producers of the‘1989’ album took into account what was missing on her fifth album, ‘Red’. While the album did well in the market, it was overshadowed by other media outlets looking to profit from the internet’s popular downloading and iPhone’s contract with iTunes (the app comes free on all iPhones – Apple). Such media outlets like Google, Spotify, and YouTube all have incorporated their niche with regards to adding music to their brands with a small nominal fee. There is a bourgeoning chance many fans that listen to Taylor Swift will purchase more of her songs for a lesser price. This policy works for iTunes because revenue will increase just on the sheer volume of her fan base, and the likability of her music. Which leads to consumers buying two of their favorite songs at .99 cents = $1.98 versus only purchasing one song for $1.29, this adds additional .69 cents to each conceivable sale generated. Furthermore, we must take on that the cost will be less on the least favorite songs; therefore, this will procure revenue proceeds that are boundless which adds to the overall sales profits. 2) Apple sells unpopular songs at cheaper prices to sustain sales. Additionally, the brand moved from one price to three in order to maximize revenue sales using incrementals. This helps to bridge fans that are very probable to purchase less than popular songs from their favorite artists if there’s a superficial value. For instances, iTunes will frequently make suggestions to Grammy winners and other artist based on the purchases of sale and other related searches which feature their names. An example would be to do a search for Taylor Swift and download one of her volume of songs; iTunes will provide you with recommendations of other songs you may like from her. This is a way to entice you into buying these songs that iTunes prices less. Moreover, the three point price lets iTunes make more revenue of less popular songs at that devalued price. However, as the songs these artists sing become more and more popular, the more revenue these artists can request which in turn increases their royalties for these hits. The profit margin of a lesser known artist is probably greater at .79 cents or even .99 cents. But it won’t be as high as the more well-known super artist which can exceed $1.19 or even $1.39 per track. 3) One attractive pricing policy change to increase revenue with iTunes is to promote product bundling. “Bundling products extracts additional profits from consumers with heterogeneous product demands; this bundling can be more profitable than selling the products separately” (Brickley, 2016). For instance, iTunes can garner more revenue and sales by bundling soundtracks to movies which makes more money than regular sales of albums. One of my favorite movies is the Matrix. So I downloaded the movie to watch while I was on travel a month ago overseas. I only spent $4.99 for the movie. Now with that being said, The Matrix (1st movie) isn’t considered a classic; but The Matrix II is. The price for it was 5.99. Furthermore, iTunes offered The Matrix Trilogy of all three movies for $11.99 along with the soundtracks for $16.99 total for 6 downloads of 3 movies and soundtracks, what a deal! iTunes did a great job putting this bundle together. For the person who didn’t want to watch the 1st or 3rd movie, they would have spent too much. It makes perfect sense just to purchase the bundle even if you don’t watch the other movies or listen to all of the soundtracks. iTunes turned a profit off my purchase. I vehemently agree that bundling is a way of appealing to consumers who buy additional products grouped at a professed and lucrative value. 4) The more sophisticated pricing schemes are added to downloadable music, the more people will find other avenues to find music cheaper. This endeavor can also be risky to customer fan base that may prefer the functionality of iTunes software, website, and web security. Too many changes and charges may deter customers from buying overall, which may lead to decreases in sales of not only one product, but several. This also includes the licensing rights to certain musicians and their music. Legal restraints can drive the firm’s choice of pricing policy in a variety of ways (Brickley, 2016). What’s interesting here is recording companies can choose to sell their licensing rights of their featured artist with less favorable songs to Wal-Mart, Amazon, or Google. They can sell those songs for .99 cents versus .79 cents on iTunes. Despite the assurance of still making a profit, this can sway Apple from increasing the bulk of their sales, which happens to be an enormous cog of variable pricing. 5) Yes indeed. Every company goes into a business expecting to make profits and to have a surplus at the end of the year. The Company uses some custom components that are not commonly used by its competitors, and the Company often utilizes custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased (Apple 10-K, 2015). No record company is the same. They all have their own governance as to what and how to do business. Although the industry sounds the same, the mitigating factors that make them different are the why there’s so many companies. For example, Sony, MGM, Arista, Hidden Beach, Jive, RCA, or Motown all have great artist which have made them a lot of money. However, all of the contracts were vastly different. Despite these differences, all the major record labels are in business to make money. So if an artist is signed to Motown and Sony has a guy who sounds exactly like him; the price for that particular may be lower to increase sale potential. But, if Motown, Arista, and Jive have the same sound then that market decreases because of the similarity between them. Everyone is looking for a unique sound to brand their own music. It’s no different in the recording industry. 6) Yes it has to. Apple’s adaptation in controlling its own fate with regards to downloadable music will change in the very near future. Partly since Apple rescinded its policy of “with copy-protection” technology; also known as the digital-rights management, or DRM. The DRM allows customers to play, watch, or record, more songs on multiple devices. These devices consist of other phones and computers outside of Apple's iPods, iPhone, and computers. By having this policy vaguely regulated, recording brands run the volatile risk of fewer or depreciating sales because consumers a sharing a lot of their music. Consumers and record labels may simply apply burdened circumstances to the Apple Corporation and brand to lower or increase prices at a reduced cost the number of shared songs. In addition, the Apple Corporation has lost part of its market power it held. I truly believed this was caused by the death of Steve Jobs. After his death, it seems the innovation of the company died as well. No newer gadgets, no new inventions. The only thing that’s changing is the software. But all apples is good at doing now is improving things we already have.

REFERENCES
Apple Corporation (2015) https://www.sec.gov/Archives/edgar/data/320193/000119312515356351/d17062d10k.htm Brickley, J. (2015). Managerial economics and organizational architecture (6th ed.). New York: McGraw Hill/Irwin. Retrieved from http://online.vitalsource.com/books/9781308593197//6

LA Times (2016) http://www.latimes.com/entertainment/music/posts/la-et-ms-grammys-2016-nominees-winners-list-story.html