Thursday, September 16, 2010

Dynamic pricing startup Amie Street acquired by Amazon

Amazon recently acquired this startup that sells music online using dynamic pricing. What are some of the advantages/disadvantages of their pricing strategy? What type of pricing would you prefer if you were a music artist? Amazon?

On Amie Street, the community determines the price of music. Every song starts cheap (or even free!) and increases in price up to 98 cents as more and more people purchase it.


  1. Takaaki Sato (Muddy)September 17, 2010 at 7:31 AM

    I think the way of pricing is interesting. There will be no income unless they become popular. Therefore, among artists, strong motivations to make contents to attain popularity will rise. However, since it becomes a premise that the objective of contents producing is to make them popular for all people, songs will be not much artistic or attractive but rather more commercialized music.

  2. Ha, in such a model, it literally pays to discover the band before they're popular ;) This is a very good deal for music aficionados who pride themselves on this exact behavior of being the first to find a good artist.

    But, from the artist's perspective, is it any easier for a new artist to get themselves discovered? What if you only appeal to small niche of listeners, but never quite breakthrough to mainstream popularity? Do you substantially benefit from such a model? I'm not convinced that you would.

    Still an interesting pricing model, nonetheless.

  3. It seems like this price model would encourage a more dynamic selection of music. There will be a group of people who are willing to sort through the free music and “vote” (by purchasing) for it. There will be another group of consumers who want to come in and simply purchase the top rated new music. Both sides would receive benefit in this equation.

    As an ‘undiscovered’ artist I would prefer this model of pricing. However, if you already have an established fan base, you may do better to remove yourself from the more volatile market price and set a static price for your goods.

  4. Full track stores are a very challenging business. I looked at building one earlier in my career and we decided not to move forward because the economics were so difficult to make work.

    Major labels typically charge a wholesale price of $0.79/track, at least when I was in the business. I believe Apple gets a little bit better deal than this, but I think this is what pays. At the benchmark price of $0.99 / a track, you need to sell ~10,000,000 tracks just to recover the development costs on a ~$2,000,000 website (based on marginal revenue of $0.20/track), which only buys you a straight-forward website, given the security and other requirements imposed by the labels. And that doesn't even begin to cover any of the operational costs, like staff, bandwidth, etc. In fact, it doesn't even allow you to show lyrics, cover art, or other related properties (all of these are an additional charge and royalty). It's very hard to grow to tens of millions of downloads without marketing spend, so there are a number of factors suggesting that only a handful of companies will ever be able to hit the minimum efficient scale.

    In contrast, using unsigned or independent artists can be a great strategy to get out of the cost structure imposed by the major labels. But to ever command any sort of premium, sites have to provide some value to users beyond the ability to find and download content (MySpace has provided this service for these artists for years, after all). However, there are very few artists that will stay in the unsigned and independent world once they are discovered, so it's very difficult to get ahead with this strategy -- you are basically playing in a fad business and you have to be ahead of all of the trends, because you won't be able to make any money off of them once the artists get popular.

    For my money, I would not enter the full track business unless doing so supported another, profitable business line (e.g. hardware purchases, other online purchases, etc). You just don't have any market power in the space as a small player (i.e. any market participant except Apple), and you end-up taking prices that require unattainable scale to achieve profitability. I don't believe it's possible to return cost of capital on a full track download website, and I've personally witnessed the collapse of a number of sites in the space. I think the strategic insight here is to see that retailing mainstream music is a commodity business.

  5. From my experience in the digital music business, it's basically a price-taking business for everyone except Apple. You see a lot of start-ups that come up with novel pricing and make a lot of claims about how it will lead them to profitability. But the truth is that the margins on mainstream full-track music are so thin that only a handful of companies will ever achieve minimum economic scale. Which means that the start-ups, in spite of all of their public statements, are mostly focused on developing innovations that will help them get acquired by major providers because they are unsustainable on their own due to their small scale. The start-ups' pricing comments are mostly attention-grabbing techniques and attempts to justify high earnings forecasts to gain better exit multiples. But none of these guys are making any money, at least not the full track providers. Even with the big players, you still see a tendency for them to use the full track business to support other, more profitable business lines (e.g. hardware sales, online shopping, etc). On its own, full track music stores ends up being a low-margin, capital intensive, commodity business.

  6. In Korea, any online music site doesn't use dinymic pricing. Most of them use versioning or bundling instead of it. Online music site encourage users to use monthly auto payment in order to keep their users easily. Users can use online music service only if they register on this service one time. They make users prefer this service through versioning or bundling. Ecah music download, monthly music streaming and each background music service are generally more expensive than bundling or versioning price.

    In korean online music market,most of sales comes from major portal sites. Background music sales revenue accounts for almost 40% of total online music sites revenue; friends or any other visitors can listen musics when they visit in their blogs.

  7. This model seems to be very interesting. But in actual case, I don't know whether it is going to work fine or not.

    As a new customer of the site, you may be interested in finding new decent musicians with a very love cost or even free of charge if you are really early. If that's the case, you may be locked in and will bear with all the "wrong" trials you may encounter afterwards.
    However, if your initial trials were not so successful and you were not satisfied with the free or lower cost music that you tried, you would never be bothered again by this service becuase you may not find the value for the time you put in.
    So it will be very critical in success of the service how fast and how continuously they can bring decent new songs into the song pool so that they can keep the hit ratio of new customers high, which seems to be not easy to manage.

    Also, people tend to think that the value of digital content is what you pay for. So even if some people say they like the songs downloaded free a lot, it may mean they like the songs a lot for the value they pay for which is zero. So it doesn't necessarily mean that they like the songs more than the ones in the billboard top 10 that you may have to pay almost a dollar perhaps.

  8. This model is like a group pricing, with differences among groups very subtle and invisible, which, in my understanding, is the time opportunity cost of people searching online for good songs. Those initiatial listeners have low time cost,and maybe higher price elasticity, and are charged lower; while the later listeners who just want to listen high-ranking songs have higher WTP in return for saved time in searching.

    But I think there is a price cap on pop songs due to competition from other online music vendors. Not sure how Aime cooperates with record labels, royalty or profit-sharing. The former model will certainly squeeze profit room for Amie.

    But this is a very interesting innovative pricing strategy. I see certain similarity between this and Adwords in Google, where hot words are charged higher