Behind the Apple-EMI Deal

[whooleytoo]

I get the strategy, I just think if the bitrate was completely up to them they should have offered a Lossless option, at least at that premium price.

I doubt most people could tell the difference between 256Kbps AAC and lossless, but the filesize would be far greater - certainly not suitable for iPods.

Not only would you fit fewer tracks (obviously), but for hard-disk based iPods the cache would fit fewer songs (two, at the very most) meaning a greatly reduced battery life.

 

[Avatar74]

I get the strategy, I just think if the bitrate was completely up to them they should have offered a Lossless option, at least at that premium price.

Problem with Apple Lossless is that it's essentially VBR. Datacenter management is a lot more complicated when you can't do simple math to know exactly what your requirements are at any given time.

But for that matter, arguing that a higher price should be "at least" a certain bitrate is kind of silly since there's a threshold above which the marginal difference really isn't perceptible. For AAC, that threshold exists around 128kbps to 192kbps. At bitrates above that, the marginal difference becomes near impossible for the average user to distinguish... or cost justify.

Since users will claim all sorts of things about their own powers of discernment there's no straight rationalization to introduce considerably higher bitrates UNLESS the market demand is ostensibly there. The poor sales of 24-bit DVD Audio and SACD relative to 16-bit CD don't paint a very promising picture in terms of what additional revenue Apple might hope to get by clogging up their datacenters at great cost to themselves, and clogging up users hard drives at little perceivable marginal benefit to them.

 

[snowmoon]

I doubt most people could tell the difference between 256Kbps AAC and lossless, but the filesize would be far greater - certainly not suitable for iPods.

But... as others have pointed out... you can convert it to ANY format and not take the double (lossy)compression hit and make perfect CD's from it.

 

[Diatribe]

I doubt most people could tell the difference between 256Kbps AAC and lossless, but the filesize would be far greater - certainly not suitable for iPods.

Not only would you fit fewer tracks (obviously), but for hard-disk based iPods the cache would fit fewer songs (two, at the very most) meaning a greatly reduced battery life.

Problem with Apple Lossless is that it's essentially VBR. Datacenter management is a lot more complicated when you can't do simple math to know exactly what your requirements are at any given time.

But for that matter, arguing that a higher price should be "at least" a certain bitrate is kind of silly since there's a threshold above which the marginal difference really isn't perceptible. For AAC, that threshold exists around 128kbps to 192kbps. At bitrates above that, the marginal difference becomes near impossible for the average user to distinguish... or cost justify.

Since users will claim all sorts of things about their own powers of discernment there's no straight rationalization to introduce considerably higher bitrates UNLESS the market demand is ostensibly there. The poor sales of 24-bit DVD Audio and SACD relative to 16-bit CD don't paint a very promising picture in terms of what additional revenue Apple might hope to get by clogging up their datacenters at great cost to themselves, and clogging up users hard drives at little perceivable marginal benefit to them.

You're right for AAC, the difference in bitrate grows smaller the higher yuo go. I do hear quite a difference going to Lossless though. And even though some people don't hear a difference (while some do) they still won't buy lossy music. I think Apple is missing out on business here. I for one, and many people I know, buy the odd tune from the iTS but still spend 99% of their money on CDs. With Lossless I think almost all of those people would never buy a CD again.

 

[Avatar74]

I don't think $1.30 is competing. $.99 was the sweet spot, I think a lot of people won't go for the $1.30. I think a single like this is still cheaper than it was before iTS but raising prices like this is never a good idea.
Although I understand the tactics involved it sets a dangerous precedent that you can't explain away with bandwidth or storage cost. So next time Apple goes Lossless they'll just raise the price again to $1.50?

It's not about the price itself, it is about raising the price for a "premium", which by the way is the worst way to describe something that you already get in form of a CD.

Do people really think that companies do pricing by throwing darts at a wall?

A lot of market research precedes retail pricing like this. The price point was more than likely derived from various studies, market surveys, test marketing, focus groups, historical sales data from similar business cases, etc. to figure out who the target market is, what additional margin they're willing to pay, and what else they may want to see in the product in order to justify the price point.

As an unscientific observation in general, I think many would agree that the subset of consumers who are most conscious about DRM are also considerably more likely to demand higher bitrate files. It is this subset of consumers whom Apple is targeting with this product so in a sense, yes, a lot of people WON'T buy it... not initially anyway. But if it does take off, Apple's got considerable wiggle room to reduce the margin and remain competitive against other services that might provide it. If it doesn't take off, the margin gives them proportionately more revenue for less product being sold.

Additional factors that went into the margin would include the marginal cost of data warehousing the 256Kbps AAC files, managing the content, managing the UI changes/updates for iTunes, etc.

 

[snowmoon]

Do people really think that companies do pricing by throwing darts at a wall?

I don't think you want people to actually answer that question.

 

[Diatribe]

Do people really think that companies do pricing by throwing darts at a wall?

A lot of market research precedes retail pricing like this. The price point was more than likely derived from various studies, market surveys, test marketing, focus groups, historical sales data from similar business cases, etc. to figure out who the target market is, what additional margin they're willing to pay, and what else they may want to see in the product in order to justify the price point.

As an unscientific observation in general, I think many would agree that the subset of consumers who are most conscious about DRM are also considerably more likely to demand higher bitrate files. It is this subset of consumers whom Apple is targeting with this product so in a sense, yes, a lot of people WON'T buy it... not initially anyway. But if it does take off, Apple's got considerable wiggle room to reduce the margin and remain competitive against other services that might provide it. If it doesn't take off, the margin gives them proportionately more revenue for less product being sold.

Additional factors that went into the margin would include the marginal cost of data warehousing the 256Kbps AAC files, managing the content, managing the UI changes/updates for iTunes, etc.

Two things:

1. Apple is one of the few companies that actually almost does not do any market research.
2. Apple has had almost no raise in cost per song by the bitrate change. I would say $.01 if I were to exaggerate, so why again are they charging $.30 more?

 

[whooleytoo]

But... as others have pointed out... you can convert it to ANY format and not take the double (lossy)compression hit and make perfect CD's from it.

Sorry, I missed that point earlier. That's certainly true, that would be a definite benefit.

My guess is the "gain" in this case (ability to transcode and duplicate perfectly) isn't worth the "pain" (extra bandwidth, unsuitability for iPod use). Unless Apple built into iTunes the ability to automatically create lossy music files for iPod use, it would add to the complexity of the system for the general, non-audiophile user.

 

[Avatar74]

You're right for AAC, the difference in bitrate grows smaller the higher yuo go. I do hear quite a difference going to Lossless though. And even though some people don't hear a difference (while some do) they still won't buy lossy music. I think Apple is missing out on business here. I for one, and many people I know, buy the odd tune from the iTS but still spend 99% of their money on CDs. With Lossless I think almost all of those people would never buy a CD again.

You're falsely assuming that fidelity, rather than convenience, is the driving factor behind today's CD purchases for the average consumer. This may have been true 20+ years ago when first movers were purchasing CD players in the mid-80's but it is no longer the case. CD has also matured as a format and has gradually been leveling off and then declining for nearly ten years now. I saw the figures in 1996 and the writing was on the wall then.

Convenience trumps fidelity with the average consumer... There are formats in greater fidelity than CD audio that are readily available on DVD and SACD and today most DVD players either also play SACD or DVD Audio discs... yet the adoption of these two formats has been abysmally low. People aren't willing to pay the marginal cost for what most of them can't identify as a substantially perceptible gain in clarity.

But iTunes is growing because the UI design and purchasing system is idiot proof. Push a button, boom, your track downloads and works with your computer, your iPod, your AppleTV.

Even in the discussions with self-professed golden ears in here who insist that fidelity is important and they can tell the difference between 128Kbps AAC and 16-bit LPCM (a barely perceptible difference if you understand how digital encoding systems actually work)... Not one of them has thumbed their nose at Lossless or even 16-bit audio in deference to the ostensibly superlative SACD or DVD Audio formats. The crowds aren't exactly flocking to stores to pay more for these higher fidelity formats.

 

[whooleytoo]

Do people really think that companies do pricing by throwing darts at a wall?

Knowing the RIAA and their ilk, a dartboard would be an improvement.

 

[gnasher729]

what's gonna happen when people find out that it was Apple's idea to raise the price? then they'll think, oh we're just paying $0.30 for higher quality music when we could have been paying the same price.

What is under Apple's control is the price that Apple charges. However, what EMI didn't mention is what Apple has to pay for every track. I doubt that has stayed the same. Obviously Apple is free to sell every track at a 25 cent less if they wish to do so and EMI won't mind, but you wouldn't really expect them to do that, would you?

 

[snowmoon]

Sorry, I missed that point earlier. That's certainly true, that would be a definite benefit.

My guess is the "gain" in this case (ability to transcode and duplicate perfectly) isn't worth the "pain" (extra bandwidth, unsuitability for iPod use). Unless Apple built into iTunes the ability to automatically create lossy music files for iPod use, it would add to the complexity of the system for the general, non-audiophile user.

iTunes already has the ability and adding a "You have downloaded a high quality album, would you like me to create smaller files for iPod?" ( Yes/No ) would take almost 0 effort.

There are soo many benefits to Apple as well.

1) Backdoor price increase as more studios go "premium"

2) Most users will just notice that their iPod's/Mac's are filling up and get new, bigger iPods/Mac's.

3) Fends off criticism in the EU about anti-trust violations.

4) They probably watermark/tag the AAC and that would be difficult with Apple lossless

5) Now only a small fraction of a percent of potential users can complain about quality.

Studios win because

1) They make more on singles

2) One more nail in the coffin of the CD format

 

[gnasher729]

Two things:

1. Apple is one of the few companies that actually almost does not do any market research.
2. Apple has had almost no raise in cost per song by the bitrate change. I would say $.01 if I were to exaggerate, so why again are they charging $.30 more?

allofmp3.com, which can sell music cheap because they don't pay the record companies/artists a penny, charges 3 cent per MB. For a typical four minute song, this is $0.24 per song at 256KBit. For a 60 minute record, it is $3.60. Since Apple pays $0.70 per song with DRM and an unknown amount without DRM, I think that Apple is actually cheaper once you remove payment for the artists from the equation.

 

[Diatribe]

You're falsely assuming that fidelity, rather than convenience, is the driving factor behind today's CD purchases for the average consumer. This may have been true 20+ years ago when first movers were purchasing CD players in the mid-80's but it is no longer the case. CD has also matured as a format and has gradually been leveling off and then declining for nearly ten years now. I saw the figures in 1996 and the writing was on the wall then.

Convenience trumps fidelity with the average consumer... There are formats in greater fidelity than CD audio that are readily available on DVD and SACD and today most DVD players either also play SACD or DVD Audio discs... yet the adoption of these two formats has been abysmally low. People aren't willing to pay the marginal cost for what most of them can't identify as a substantially perceptible gain in clarity.

But iTunes is growing because the UI design and purchasing system is idiot proof. Push a button, boom, your track downloads and works with your computer, your iPod, your AppleTV.

Even in the discussions with self-professed golden ears in here who insist that fidelity is important and they can tell the difference between 128Kbps AAC and 16-bit LPCM (a barely perceptible difference if you understand how digital encoding systems actually work)... Not one of them has thumbed their nose at Lossless or even 16-bit audio in deference to the ostensibly superlative SACD or DVD Audio formats. The crowds aren't exactly flocking to stores to pay more for these higher fidelity formats.

Well, you're logic is flawed. The "crowds" don't exactly have all nice stereos nor a possibilty to play these discs as they need special players.
Lossless doesn't need another player. It plays on the same stuff you have right now. And besides, although I admit that there are more people not caring about quality than people caring, there are still a lot of people that simply won't buy lossy music and Apple is losing out at that end of the market.

 

[gnasher729]

2) Most users will just notice that their iPod's/Mac's are filling up and get new, bigger iPods/Mac's.

Since even a 4GB iPod takes $500 to fill at 256KBit, that is unlikely to have much effect.

4) They probably watermark/tag the AAC

Unless you have any evidence of this I would call it unproven ********.

 

[Diatribe]

allofmp3.com, which can sell music cheap because they don't pay the record companies/artists a penny, charges 3 cent per MB. For a typical four minute song, this is $0.24 per song at 256KBit. For a 60 minute record, it is $3.60. Since Apple pays $0.70 per song with DRM and an unknown amount without DRM, I think that Apple is actually cheaper once you remove payment for the artists from the equation.

What's your point? Are you saying those are the bandwidth and storage costs?

 

[Avatar74]

Two things:

1. Apple is one of the few companies that actually almost does not do any market research.

I'll be sure and tell that to my colleague who was a product engineer at Apple who, even as a technical person, was involved in Apple's market research. The very first thing Steve Jobs did when he returned was he killed many of the dead projects that weren't marketable and re-instituted a model of product development that involved introducing feeler products to gain feedback from consumers, analysts, vendors, developers, retailers, etc. as to what they like/dislike and then set in motion 2-year product cycles that ramped feature sets in from the feedback gathered from this heavy market research.

If anyone goes to tremendous lengths to understand what consumers actually want and then shapes their products and features around that demand, Apple is a leader at this.

I think the misconception arises in wanting to believe that Apple just designs cool stuff with nobody's direction but Steve's, and that somehow this is more implicitly noble/ethical than "evil" marketing guys just trying to figure out how to reposition Jello. Apple DOES marketing research, and they do loads of it... the difference is that they're not just trying to figure out how to re-brand refrigerators in Alaska... they're actually sending out engineers to understand how products are used in the real world, and what people like or dislike about them, and what other features they might want to see... and they do also take their consumer feedback through online and retail channels pretty seriously.

Hell, they even have one or more people at Apple retail stores monitoring user activity on their floor models from behind the scenes so they can understand how the average consumer interacts with their products and features.

Apple has some of the most impressive product development roadmaps guided by market research so robust... That, and not simply Steve Jobs' good looks and charm, is a huge component of why they manage to stay ahead of the curve... why they introduce products at the right time (AppleTV product development coincided with a projected surge in HDTV sales)... and why when the public was scrutinizing iPhone which isn't even out yet, Apple is already focused intently on products that aren't due for another 1-2 years but are driven heavily by current market research that shows a big uptick in mobile internet access usage.

2. Apple has had almost no raise in cost per song by the bitrate change. I would say $.01 if I were to exaggerate, so why again are they charging $.30 more?

This is simply false. Maybe you're confusing the difference between fixed cost and marginal cost, but there is an increase in at least marginal cost. For each EMI tune the storage requirements triple... They store the 128Kbps file, PLUS the 256Kbps file for each song. Some of the fixed costs included updating databases and front-end UI to incorporate the new content on Artist/Album pages dynamically. Then there's additional marketing costs, yes they will actually spend some money advertising the new content and the money to do so doesn't magically fall from trees... they have to budget it.

Transcoding the 256Kbps files from digital high resolution masters also eats up processor time... That's a measurable per unit cost as well. And don't assume their finance people are sitting around watching YouTube instead of calculating these things.

Apple is still very much a business... they're a radically innovative business but they're also a smart business. Steve Jobs positions them as this outfit that oozes magic but the reality is that his statements are backed by keeping his finger on the pulse which means doing calculated market research and not just making vague Nostradamian shots in the dark.

 

[manu chao]

Stupid question: Is there a version of Apple Lossless that preserves the extra info in SACDs?

Sure, lossless is better than 256 bit/s AAC. But SACD is also definitely better than lossless/CD. I want iTunes to be able to handle SACD content.

 

[gnasher729]

Lets say a bigger pecentage of people buy non DRM EMI music than DRM EMI music, making EMI/Apple more money per sale. Clearly, the other record labels are losing out here and their insistance on DRM is proved wrong.

If the only change was that ten percent of customers who would have bought EMI songs anyway switch to EMI DRM-less, then this would be a three percent increase in revenue at no cost for EMI at all. There is just no way they can lose. I'd more think it will be around 30 percent doing that, which would mean nine percent increase.

On top of that EMI gets: 1. Money from all upgraders. 2. Money from people who wouldn't buy music with DRM on principle. 3. More money from album buyers because the new pricing structure makes album purchases more attractive.

And I think there will be money made from friends who share purchases. If two people want a record, obviously EMI wants them both to pay. With DRM, there is a good chance they don't buy at all. Without DRM, there is a good chance that one buys and makes a copy for his friend. Which is not legal, but still more money in EMI's pockets.

 

[Avatar74]

Well, you're logic is flawed. The "crowds" don't exactly have all nice stereos nor a possibilty to play these discs as they need special players.
Lossless doesn't need another player. It plays on the same stuff you have right now. And besides, although I admit that there are more people not caring about quality than people caring, there are still a lot of people that simply won't buy lossy music and Apple is losing out at that end of the market.

Were you paying attention to a single thing I said? First, SACD is playable on most Sony DVD players purchased in the last five years or so. DVD Audio is playable on most non-Sony DVD players purchased in the last five years or so.

Additionally, while there may be "a lot" (how many is "a lot", exactly?) there are many times more people for whom convenience is a bigger issue... iTunes sales of 128Kbps AAC files should be a huge indicator of this. It hasn't stopped iTunes Music Store from rapid, exponential growth in an entirely new distribution paradigm... It also hasn't stopped iPod from replacing the Sony Walkman/Discman as the ubiquitous portable player of the times.

Whatever Apple is losing to the tiny margin of people who want Apple Lossless, it's not much... Specific bitrate aside, the very usage of a variable bitrate format radically increases costs because predictable, compartmentalizable products have the least marginal cost factor. VBR amounts to custom sizes for every product on the shelf, and this increases cost in many ways... not the least of which is less than predictable data warehousing requirements on Apple's end.

How much do you actually think would be the marginal cost? Apple didn't say "Hey, let's screw the five out of 120 who want Apple Lossless"... they probably researched this and determined that the money they'd get from the few who'd buy at the price they'd be willing to pay wouldn't be enough to cover the additional expenditure nor would it be a significant enough market to generate enough iPod sales to justify taking such a loss.

Or do you think Apple just looks in a crystal ball to figure out pricing and product offers?

 

[snowmoon]

1. Apple is one of the few companies that actually almost does not do any market research.

Apple market tested it's stores! They went through a dozen or more iterations in a warehouse before they rolled out the first retail store.

 

[gnasher729]

What about indie labels? Will they charge more too? Probably some would and some would not, and when those labels sign up, as Apple intends them to do, we'll see what the cost is.

It will be $0.99 with DRM and $1.29 without DRM. In Apple's press release they said they are offering _exactly_ the same deal to all record companies. Just as they have done before: All independents got _exactly_ the same deal as the big record companies.

 

[Avatar74]

Stupid question: Is there a version of Apple Lossless that preserves the extra info in SACDs?

Sure, lossless is better than 256 bit/s AAC. But SACD is also definitely better than lossless/CD. I want iTunes to be able to handle SACD content.

No... iTunes can't handle SACD content. Different methodology all together.

iTunes CAN however handle 24-bit Linear PCM format in an AIFF container. This fidelity is arguably superior to SACD.. one of the limitations of SACD being its methodology of deriving amplitude values from only a 1-bit word length per sample versus a 24-bit per sample word length.

 

[whooleytoo]

iTunes already has the ability and adding a "You have downloaded a high quality album, would you like me to create smaller files for iPod?" ( Yes/No ) would take almost 0 effort.

There are soo many benefits to Apple as well.

1) Backdoor price increase as more studios go "premium"

2) Most users will just notice that their iPod's/Mac's are filling up and get new, bigger iPods/Mac's.

3) Fends off criticism in the EU about anti-trust violations.

4) They probably watermark/tag the AAC and that would be difficult with Apple lossless

5) Now only a small fraction of a percent of potential users can complain about quality.

Studios win because

1) They make more on singles

2) One more nail in the coffin of the CD format

The programming effort required for auto-downconverting to 128Kbps for iPod use would be inconsequential, however it would mean you'd have two copies of each song in your library which would be confusing - especially if you already have duplicates! (Apple could implement the downconverting transparently when syncing though).

It could well be the labels are nervous at the thought of online distribution of 'perfect' reproductions of their music. Obviously CDs are already out there, but they tried to limit their usage with copy-protection and failed. But there's no going back from lossless copies without DRM, if it lead to widespread piracy you can't revoke them, and you can't ship a higher quality sound file with DRM since it's already perfect (more or less).

Ultimately though, I just don't think the widespread demand for lossless music exists. Not enough people can appreciate the difference, and only a minority of those who can would pay extra for it. IMO.

 

[shawnce]

1. Apple is one of the few companies that actually almost does not do any market research.

Wow that is simply false.