ITunes embraces 3-tier pricing, will remove anti-copy software

With the lure of every song for 99 cents, Apple Inc.'s iTunes upended the retail establishment to become the nation’s top music seller in less than six years.

But the digital media powerhouse said Tuesday it would follow one of the oldest tenets of capitalism: The more someone wants something, the more you can charge for it.

Apple finally bowed to a long-standing recording industry demand and agreed to sell music downloads at three prices -- 69 cents, 99 cents and $1.29. Starting in April, iTunes customers may pay the top price for a hot new track such as Beyonce’s “Single Ladies” and barely half that for a long-forgotten song from Air Supply.

The Cupertino, Calif., company claimed some victories of its own Tuesday. Freeing 10 million songs from their digital handcuffs, Apple said it had persuaded the major labels to drop their insistence on copy protections that restrict the number and type of devices that can play songs bought through iTunes.


It also received permission to sell downloads directly to the iPhone 3G via AT&T;'s high-speed cellular network.

But Apple’s concession on pricing marks a victory for the music companies, which are desperate to stimulate digital download purchases as CD sales plummet. Consumers bought a record 1.07 billion music downloads last year, according to research firm Nielsen SoundScan, but those gains failed to offset the nearly 20% drop in traditional album sales.

“Variable pricing is all about trying to get the most that you can without losing customers,” said Sucharita Mulpuru, a retail analyst with Forrester Research.

The trio of music announcements came near the end of the keynote speech by Apple Senior Vice President Philip Schiller at the Macworld Conference & Expo in San Francisco. It was the first time in 11 years that the keynote was presented by someone other than Apple Chief Executive Steve Jobs, who revealed Monday that he was recovering from a hormone imbalance that has caused him to lose weight.


When Apple launched iTunes in 2003 with the 99-cents-fits-all price, it was hailed as a breakthrough for simplicity. At the time, many online music services offered complicated terms that sometimes involved monthly fees and a limited number of downloads.

The iPod digital music player also boosted the profile of iTunes, which surpassed Wal-Mart, Target and other traditional music sellers by last year, according to research firm NPD Group.

But the growth of digital downloads has slowed from the frenzied pace of its early years, and the music industry has begun to explore fresh approaches to spur online buying.

“The one thing that the industry has done badly is trading-up consumers,” said Russ Crupnick, senior industry analyst for NPD. “You get somebody to buy $25 or $30 worth of songs each year, when that consumer used to be a $100 consumer in the CD world. We’ve done a bad job of getting them to buy more and more.”


In a bid to spark sales, Apple introduced its Genius service in September, which examines an iTunes customer’s music library and recommends other purchases. Music executives say tiered pricing opens the door to more experimentation with digital “bundles.”

For example, Kanye West’s single “Heartless” might be packaged with a discounted track from the “808s & Heartbreak” album, or a cellphone ring tone.

“Americans love a deal -- and music consumers especially,” Crupnick said. “If you could take variable pricing and see the evolution of that into bundling and trading consumers up to buy more, that to me has potential.”

Apple’s Schiller drew applause from the Macworld crowd when he announced that iTunes would offer music that’s free of the so-called digital rights management software the labels had insisted on to try to stem piracy.


In February 2007, Jobs threw down the gauntlet. In a letter to the music industry, he argued that digital rights management frustrated paying customers by limiting the number of devices on which they could play legally downloaded songs. For example, songs purchased through iTunes wouldn’t easily play on Microsoft Corp.'s Zune device.

EMI was the first of the major labels to offer DRM-free songs, which also featured better sound quality, on iTunes in May 2007. Apple charged $1.29.

But Schiller said Tuesday that Apple had begun selling 8 million DRM-free songs at no extra cost and that the remaining 2 million in its catalog would be stripped of software locks by April. Consumers who wish to convert their existing music library will pay a fee of 30 cents a track or 30% of an album’s purchase price.

“We believe this strategy will drive additional iTunes traffic, as it removes one significant barrier [DRM] from many consumers and makes iTunes more accessible,” Gene Munster, a senior analyst with Piper Jaffray, wrote in a research report.


Also at Macworld, Schiller unveiled a thin, 17-inch MacBook Pro laptop computer featuring a new type of built-in battery that he said would deliver up to eight hours of use on a single charge and could be recharged up to 1,000 times. It will cost $2,800 when it reaches stores this month.

Apple also updated much of its software. The latest version of iPhoto scans for individual faces so computer users can label photos of friends or family, then have the computer find and bring together all images of a subject into a single file.