I don’t work in e-commerce. Well, not exactly. For all intents and purposes, I work in promotion. And I guess in some ways that means I sell stuff, so in a sense, yes, I work in e-commerce. Anyway, there’s this thing that’s been bugging me for a long long time, and now that I’m working at a record label, it bugs me even more – mostly because I still don’t have the slightest inkling of an answer.

How in the hell are music prices determined?

Let’s look at a little case study here: the new album by Bill Frisell, Disfarmer (I won’t review it here, but this album is pretty sweet). The album came out just a couple weeks ago, and was released in both CD and a few digital formats (read on).

Now first, let me point out something before we go on: this is not a mainstream album. It’s jazz, it’s a little on the avant garde side, and frankly will never hope to compete with the Jonas Brothers. Because of this, one would expect that the album may be priced differently than your typical Walmart 10 dollar albums. Actually, I’m sort of surprised that Walmart carries it at all, but that’s really another article altogether. I digress.

Anyhow, let’s take a look at all the different ways you can buy the album, and then I’ll discuss how absolutely bizarre these pricings are.

Straight from the label
Disfarmer was released on Nonesuch Records, a part of Warner Bros. Records, and is available directly through the Nonesuch store. I should point out that the Nonesuch store is really an incredibly resource for anyone interested in modern jazz or classical recordings from the last 50 years or so. Nonesuch has always been one of my favorite labels, and I’m really excited to be working alongside them.

The Nonesuch store sells Disfarmer in the following formats:
$14 – 320kbps MP3
$16 – 320kbps MP3 + CD

Amazon.com
The album is available in both CD and MP3 from the respective parts of the Amazon site, at the following prices:
$11.99 – 256kbps MP3
$12.99 – CD

iTunes Music Store
Available in the proprietary Apple AAC format, DRM free
$13.99 – 256kbps AAC

Brick and Mortar Stores on CD
The album is available on CD in a variety of stores. Here are some of the prices I’ve found:
Walmart – $14.88
Best Buy – $13.99
Target – $12.99

Why the pricing differences? Well, for starters, price fixing is not legal. List price for the CD is $18.98, but in order to remain competitive, these gigantic retailers buy huge volumes, for a lower unit price. Giant retailers also have the ability to retain a stock of these discs for quite some time at very low marginal cost.

But that doesn’t explain the oddities in digital pricing. I can buy a 320kbps MP3 version – the “highest quality” MP3s available, in quotes because it is almost the data contains redundant or extraneous information, and for the average listener is indistinguishable from V0 or even 256kbps formats – directly from the label that released the album for 14 dollars, the highest price for a digital format among the three retailers offering. iTunes’ price is only one cent lower, comes in a lower bitrate, and is encoded using Apple’s proprietary AAC format (although it is DRM free). Meanwhile Amazon offers the lowest price, just 12 bucks, in 256kbps MP3 format.

We seem to be forgetting one very very important detail here: if you buy the CD, you can make your own digital files, in any format/bitrate you want. The pricing here would suggest that the album is being pushed in its physical format before the digital format. After all, I can get the album for just a couple bucks more, and even download the digital files instantly so I can listen while I’m waiting for the CD to arrive in the mail.

I’m all for choice, and I believe that retailers should be allowed to sell products as they wish, so long as they aren’t doing anything unfair or unethical. But something seems extremely counterintuitive here. Logic would suggest that if I buy the music directly from the label that created it, the overhead on that purchase would be less, and the artist would get paid more (in reality, it’s a lot more complicated than that, but let’s assume this to be true). Why, then, is the label’s price the highest of any retailer, in both physical and digital formats? Most likely it is due to volume of sales. Yep, the sheer number of transactions made by third parties (aka middlemen) makes the price lower, and therefore the vast majority of sales result in lower payouts to the label and artists (at least this is what logic tells us).

This complicates what I believe to be the cardinal rule dictating the sale of music today:

Fans want to support the artists they love, but will almost always opt for convenience and competitive pricing.

In many cases, of course, the convenience/price factor leads fans to pirate the music. But those who choose to legally purchase the music have only a couple of choices: they can pay more to support the artist, or opt for the convenience of online music stores and their lower prices.

There’s something very important at play here: the public fundamentally distrusts the middleman, whoever that may be. Given an option, I’d bet most fans would buy the CD at a show rather than buy it from Walmart. And I’d bet fans want to buy digital direct from the artist, and not iTunes.

I think there are about a hundred and one other factors that go into this pricing, but I, like most music fans, remain absolutely baffled by it. And as a savvy consumer, I always want to explore my options before I buy anything. Personally, I’ll still take this on a case-by-case basis, depending on price, availability, and a few other factors (I’ve recently been on a vinyl kick, and love the vinyl+MP3 options on many new releases).

How do you feel about this? Would you rather buy the physical copy and make your own digital versions? Do you opt for the lower priced MP3 options? Would you prefer to order directly from the label rather than Amazon or iTunes? Leave your thoughts in the comments.

Week one at my new job is complete, and I’m finding myself knee-deep in the same old conundrum: you can’t just tread water, you’ve got to swim. Sure, I’ve been thinking about music and the business thereof for nearly my entire life, certainly since the day I picked up my axe way back in 5th grade. But this business of music is tricky. It’s not the same old song and dance, if you’ll pardon my awful pun.

I’ve spent the better part of the past week mulling over the state of music online, and in particular the state of fans. Ostensibly my job is one of making fans happy. After all, if you want fans to love and buy music, they need to love everything about it. They need to know that they’re getting a quality product from a source that is reliable, fair, and responsive to the consumer’s needs. It’s not a whole lot different from buying a vacuum cleaner, in that regard. But in one very important way, the music industry – and indeed any type of entertainment industry, from movies to sports to comedy – needs to respond to fans by providing three extremely important features.

1. Exclusivity
Anybody can go to a store and pick up a record. Anybody can log into iTunes and download an artist’s latest single. Anybody can watch the videos on MTV. What fans want is something special, something truly unique and rare.

The most recent trend to exploit this is the explosion of premium products and packaging. We’ve seen a massive influx of box sets, replete with full-color books, full-color picture vinyl, and a wide variety of trinkets and gadgets that fans love. In some cases, these packages can make up a huge part of the sales of new releases: Nine Inch Nails latest release, The Slip, consisted only of a free mp3 download or deluxe digipack or double-gatefold vinyl. In other cases, these packages supplement the release on traditional media.

Added value features are nothing new exactly (free mp3 downloads with vinyl purchases have been commonplace for a while now), but what makes some of these packages really interesting is their price point and their rarity. The CD version of The Slip retails for $22, packaged with a DVD and hand-numbered booklet and sticker pack, and only 250,000 copies were produced. This isn’t a one-of-a-kind item, but it taps into the very nature of the rabid fan, the collector, the fanatic, the person who has to have every version of every release an artist ever made. And as it turns out, this type of fan is more than happy to shell out the extra bucks for that level of exclusivity – in some ways the high price serves to reinforce that aura.

Exclusivity can take a variety of other forms, too. Fans will gladly jump through hoops to get something as simple as a sticker, so long as they’re one of the few fans who has one. I witnessed this with my work at the X PRIZE Foundation as well. Fans will wait in long lines, braving weather, financial hardship, or whatever else, just for the chance to get those front-row tickets. Fans will go to great lengths for the simple pleasure of knowing that they are the most accomplished member of a street team. In the end, it all boils down to the idea that the fan has proven himself, pushed himself, or sacrificed in order to attain something that no other fan has.

I’m only speculating here, but I imagine a large part of the appeal of exclusivity is the ability to live vicariously: if a fan can prove herself as the “ultimate fan” then she is only one step removed from the fame and stardom of the artist she idolizes. In some cases, being the ultimate fan can bears its own rewards, usually in the form of recognition among other fans and sometimes from the artist or label. Fans don’t want to sit by on the sidelines, they want to be a part of the action, which leads to the next important feature of fandom.

2. Access
I am lucky to live with one of these “ultimate fans.” I admit, my sister’s fandom is not for a band that I particularly like, but it happens to be the kind of band that serves as a perfect example of rabid fan behavior. I’ve had many a conversation with Lisa about what drives her, and one motivator is always at the forefront: the ability to have access to a seemingly untouchable entity.

We see this kind of behavior manifest itself in a variety of ways, most notably the typical groupie stereotype. You’ve seen Almost Famous, and you’ve listened to Bret Michaels talk about it (ok, you probably haven’t, but this is really funny). This is, of course, extreme behavior, and certainly the vast majority of fans aren’t groupies. But I think this type of mentality is just a pronounced version of the kind of access that every fan desires.

Another great example of fans’ desire for access is the “meet and greet,” a common reward handed out to devoted fans who have gone to extraordinary lengths to promote the band, or to contest winners. My sister often talks about this as the greatest kind of reward, the ability to simply meet the artist, and perhaps take a photo with them. We also see this at things like in-store CD signings. Many fans want little more than 30 seconds to just say hi to the artist in person and thank them for all of the great music that has influenced his or her life.

Some artists have taken this desire for access and converted it into an actual revenue model. Just a few months ago, drummer Josh Freese of A Perfect Circle and session musician around LA offered up a variety of ultra-premium access packages to fans: a lunch date with Freese at PF Changs, or getting drunk with the band and hanging out at his dad’s house, or going mini-golfing with some of Freese’s friends like Maynard James Keenan of Tool and Mark Mothersbaugh of Devo. The price? Anywhere from 100 bucks on up to $75,000. I honestly have no idea whether anybody actually purchased these, but the point remains: fans are willing to go to extreme lengths just to meet a superstar (and come to think of it, Josh Freese isn’t exactly a household name). And we’re now starting to see this type of thing with other celebrities as well: Tony Hawk is selling similar packages for his charity the Tony Hawk Foundation.

Of course the idea of having access to a band can be a much more simple endeavor, and indeed the internet has enabled this in a way that is cheap, ubiquitous, and powerful. The rapid influx of artists to services like Twitter has proven that fans can directly connect with artists, regardless of geography or money or anything else. Twitter case studies like Josh Groban, Questlove, and John Mayer are pointed to on a regular basis as perfect examples of how fans can interact with the bands they care about. Interestingly, the internet provides an equally powerful method of keeping fans at arms length. After all, if a fan has 24/7 access to an artist, then where is the exclusivity in that?

Other artists have used technology to give fans a piece of the creative process. Imogen Heap’s upcoming release was almost entirely created on webcam, with Heap pushing out video updates via 12seconds and Twitter. Even the liner note artwork was crowdsourced, with a contest allowing fans to submit images related to the album lyrics via a Flickr group. This type of access allows fans to not only feel directly connected to the artist, but to feel as though they have a pivotal stake in the creative output as well. You can’t buy access like that.

3. Connection
My final bullet here is really a combination of the two previous points, but with a bit of a twist. You see, while fans strive to feel a strong connection directly to an artist, they also want to be part of something much larger than themselves. They want to be part of a fanbase, a worldwide community of people just like them who obsess over and devour the work of an artist. It’s not very unlike any religious organization, and it is really a typical function of the human animal.

We are, at our core, social beings. We want to be part of a group. We want to be connected to other people, and in particular those who have similar interests to ourselves. Fans have a built-in common interest, created instantly and informally. These types of communities tend to be self-organized, self-regulating, and self-perpetuating (read Clay Shirky’s newest book Here Comes Everybody: The Power of Organizing Without Organizations, which gives an excellent overview on the nature of these types of communities). Connection is what drives concertgoers to post their videos to YouTube and write up their experience on their Facebook pages. We want to share the experience and we want our friends to do likewise.

As Community Director, it is my job to see that these types of communities thrive, and that fans are provided with the necessary interactions and rewards to drive them and to help them feel connected to the music they love. It is certainly an ongoing process, and an admittedly new one at that. It’s a bit of uncharted territory, but the concepts haven’t changed much since the days of paper newsletters and unofficial fanclubs. We just have a few new tools at our fingertips to make sure fans stay engaged, stay happy, and keep on rocking.