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Labels bet on flexibility with new iTunes pricing

Apple Inc. and major music labels are betting that the launch of three-tier pricing at the iTunes Music Store will boost music sales with a new mix of song-based packages and give consumers more options.

Apple will announce its new three-tier price points at 69 cents, 99 cents and $1.29, according to several people familiar with its plans. Since opening in 2003, all songs in the iTunes store have been priced at 99 cents.

The previous “one price fits all” strategy has long caused friction between Apple and the music labels, who argued that songs should be priced differently to reflect their perceived value by consumers.

The labels will finally get their wish.

While the majority of songs will still be sold at 99 cents, a certain number of new hit songs will now be raised to $1.29. Many older catalog songs will now go for 69 cents.

Perhaps anticipating a consumer backlash against price increases, Apple executives pointed out that for every one song they raise to $1.29, they will be reducing 10 songs to 69 cents.

But, they said, the biggest advantage of the new pricing would be flexibility to create new digital products beyond the album.

“We’re thinking outside of the disc to reach a new generation of consumers who are able to consume music on any device. It’s not just the track any more,” said one music label executive who was involved with the talks but did not want the label identified ahead of the launch.

For instance, a label could sell a brand new song and its music video for $1.29 or package it with a ringtone. The lower pricing could eventually mean that iTunes can sell albums at more competitive prices, though early indications are that album prices will not change right away.

Major label owners like Vivendi’s Universal Music Group, Sony Music, Warner Music Group and EMI Music say they can make money with more flexible prices and possibly help make music retail a profitable enterprise again.

“If we can gain traction with $1.29 that will be good for greater margin,” said another label executive who was also involved in discussions but did want to identify the record label.

Music sales have plunged as traditional retail outlets for CDs have shuttered and the growth in digital sales have slowed in 2008. Data from Nielsen SoundScan show album sales, once the profit engine of the music business, fell by 14 percent in the U.S.

Industry estimates show that 10 to 15 percent of albums account for 90 percent of all sales, according to Digonex, a dynamic pricing software company which has worked with major music companies including Warner Music.

“This is an opportunity for the labels to get the maximum they can for the music,” said Michael Wanchic, vice president of digital media at Digonex. “The beauty of variable pricing is that if the prices are too high, customers simply won’t buy.”

According to NPD Group, 87 percent of digital music buyers in the U.S. used iTunes to download music in 2008 versus just 16 percent who used Amazon.com’s digital music store.

Apple has already been experimenting with new packages at different prices. In February it partnered with EMI Music to announce the first iTunes Pass with Depeche Mode, offering fans the album, exclusive singles, remixes, video and other content for $18.99.

All parties are also betting that the new lower 69-cent song offering will boost sales of catalog music — described as older songs and albums released about 18 months or more earlier.

According to one of the label sources, 35 to 40 percent of iTunes music sales are of catalog songs and albums, and that share is growing as labels digitize more of their older songs.

“Apple has such a dominant position, frankly another 30 cents won’t make much of a difference to most people,” said Russ Crupnick, analyst at NPD Group. “There may be more gold in the discount on the catalog, Americans love a bargain.”

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