Welcome to the Lady Gaga Wars

By Ethan Smith, Yukari Iwatani Kane and Stu Woo
http://online.wsj.com/article/SB1000142 ... 37470.html

Amazon.com Inc. wants a piece of Apple Inc.'s commanding position in digital music. It's using Lady Gaga's new hit album, "Born This Way," to wage its war.

How both companies approach "Born This Way" says a lot about how the two companies are positioning themselves for the fast-changing media business.

Market-trailing Amazon is using aggressive discounts: A 99-cent one-day sale followed by a $6.99 everyday price, which is still below the album's wholesale cost of around $9.

Apple, meanwhile, is milking the advantage it has in being the dominant player, with customers who are steeped in a music-buying process where one part of the business feeds off the other. Its sleek music players, starting with the first iPod, led people to its iTunes Store, where people became accustomed to buying music. The gadget-software-store model means many users treat iTunes as their default music retailer, while also reinforcing sales of the company's gadgets.

Digital-distribution executives at record companies say Amazon has never put much of a dent in iTunes' market share, which is estimated to hover around 90%. And on Monday, the Lady Gaga album was selling briskly on the Apple site at full price, even as Amazon was offering it for 99 cents. Yet some say the Gaga promotion could bolster Amazon, at least temporarily.

Amazon's discounts appear to have succeeded in attracting some price-sensitive consumers. Like Apple, Amazon offers an expanded edition of the album, with 22 songs instead of the usual 14. Apple sells that version for $15.99; Amazon sells it for $12.99. The higher-priced edition has been Apple's top seller for two days. It is No. 4 on Amazon's sales chart, which is led by the cheaper version.

Amazon and Apple declined to comment.

Amazon typically offers a daily album deal for $3 to $5. Monday's 99-cent special generated extensive attention after the company's computer servers slowed down, apparently unable to keep up with demand for the low-priced album.

The Lady Gaga album, released by Interscope records, part of Vivendi SA's Universal Music Group, is expected to be among the year's best sellers. The two online stores combined sold about 250,000 to 350,000 copies of the album in its first 24 hours, according to early estimates from a person in the music industry. Only a handful of albums this year have sold more than that in an entire week.

Initial estimates of CD sales are likely to become available Wednesday morning. Nielsen SoundScan won't deliver a full first-week tally for another week.

Amazon often forgoes profits as it seeks to acquire customers in many product categories. The retailer has recently emphasized expansion and revenue growth in its conventional retail business. Its first-quarter profits dropped 33% as it spent to build more fulfillment centers, among other things, and the company has predicted lower earnings for the second quarter.

With the Gaga promotion, it aims to attract users of its new Cloud Drive and Cloud Player—services that let users store music on Amazon's computer servers and listen to it from Android smart phones or Internet-connected PCs.

The service launched without agreements in place with major record labels that would have let Amazon offer certain features that might have made it easier to use. Among those features is one known as "scan and match," which lets users avoid the time-consuming process of uploading their music libraries.

Apple, meanwhile, has built a cloud music service of its own and is in the late stages of negotiations with all four major labels that would let it offer such features, according to people familiar with the matter.

Such an offering from Apple, which could be unveiled as early as next month, would be in keeping with its approach so far. That approach has focused on improving the overall quality of the iTunes Store experience: allowing users to share purchased songs across multiple computers, providing a sophisticated recommendation feature based on an analysis of users' current library of music and offering exclusive additional content.

"Apple tries to cultivate a very different experience. In the end, they're taking a more high brow, refined view," said Mike McGuire, an industry analyst for Gartner.

Analysts say that Apple can afford to take the high road and not compete on price because it dominates the music retail industry. While it doesn't break out data about its music sales, Apple reported a 23% increase in sales to $1.63 billion in a category that includes the iTunes Store and third-party iPod accessories in the most recently reported quarter ended March.

"It's their game to lose," said Mr. McGuire.

Amazon launched its digital-music store in 2007. Unlike the iTunes Store at the time, it offered music files without copy protection software known as digital-rights-management, or DRM. That let people put the files on any computer or music device without restrictions. Analysts say this nudged Apple—whose iTunes was launched in 2003—toward dropping DRM protection on its own songs in 2009.

This week's Lady Gaga promotion probably gave Amazon a short-term boost, according to people in the music industry. But the downloading delays frustrated the users that Amazon was trying to woo, prompting hundreds of them to complain.

The online retailer also can't afford to take losses on every album, leaving the question of how it will entice consumers to come back and download the rest of its catalog at higher prices.

Amazon also faces the challenge of overcoming users' tendency to stay loyal to one service—which so often is iTunes.

"Most people are creatures of habit, and Apple locked that in a long time ago," said Danielle Levitas, an analyst at IDC.

I bought the CD.

Amazon needs to lose the MP3 downloader & speed up their servers. At least for those our age, it should be easy for someone with enough $'s to destroy the crummy i-tunes model.

PROPRIETARY SOFTWARE SUCKS.

How Many Millions Did Amazon Lose on Two Days of 99-Cent Lady Gaga Sales?
Amazon sold about 440,000 downloads of "Born This Way" and nearly all of them were the 99-cent version.

5/27/2011
by Glenn Peoples, Billboard

NASHVILLE -- Christmas came early for Lady Gaga fans this week, as Amazon sold downloads of the singer's brand-new LP, Born This Way, for just 99 cents on Monday and Thursday of this week.

Industry sources told Billboard.biz on Friday that Amazon sold some 440,000 downloads of the album -- nearly all of which were the 99-cent version (a more expensive deluxe version is also available).

So how much is Amazon losing? About $3.2 million over the two days the promotion ran, according to Billboard's estimate.

Here's the math: For every unit it sells at 99 cents, Amazon will lose about $7.40, according to Billboard's calculation. At $7.40 per unit and 430,000 units (10,000 shaved off total digital sales to account for some sales of the deluxe edition), the Gaga-related loss comes to $3.18 million.

The promotion was a boon for Gaga's first-week numbers, which are now projected to be approximately 1.15 million units, Billboard projects.

Amazon will lose money on each 99-cent sale because it is paying Interscope/Universal Music Group the standard rate for each unit sold. The similar title is selling for $11.99 at iTunes. The retailer typically keeps 30% of the sale price, meaning it owes the label and distributor the remaining 70% -- or $8.39.

But is a loss really a loss? The important aspect of this 99-cent promotion is the value of the increased traffic and awareness. It has new products to promote, Cloud Drive and Cloud Player. Google has soft-launched a competing cloud music storage service called Music Beta and Apple appears to be nearing a launch of its cloud music service. Considering all the media attention the promotion has received, it's not difficult to imagine Amazon getting back an equal value of consumer awareness of those new products.

There's other value in 99-cent MP3 albums. Amazon is an e-commerce giant with highly diversified products and a high average revenue per customer.

Amazon also needs to increase its MP3 market share and price is one tool in its toolkit. Even if incremental MP3 sales don't provide a financial windfall, the company has plenty of other products to sell customers who stop by for a cheap album.

The loss-leading promotion posed some questions in terms of how Billboard tabulates its weekly album-sales chart, but Billboard has decided not to revise its policies.

How Lady Gaga's 99-cent 'Born This Way' Sale Hurt Interscope, Distributors
"This was a really bad move," the head of an independent distributor says. "Ninety-nine cents is almost free."

6/11/2011
by Ed Christman, Billboard

NEW YORK -- Let's get one thing straight. The Lady Gaga 99 cent sale for Born This Way was a great thing for the artist, and for Amazon. On a short-term basis, you could even make the case that it was great for the industry.

The 99 cent sale was big mainstream-media news, and that certainly benefited everyone, including other retailers. The album sold 1.1 million units-662,000 digital, 449,000 physical-in its debut week ending May 29, according to Nielsen SoundScan.

The story lasted all week in the press. It worked the same way that Target and Best Buy circulars work: driving traffic to everyone's stores, not just those two big-box chains, or, in this case, Amazon's site. I'd argue that the glitch arising when Amazon's overwhelmed servers couldn't satisfy customer demand was a good thing, too, since it made the sale even bigger news. Given Amazon's impeccable service reputation, that blip won't hurt it long term.

For the cost of $3.3 million-that is, $8.40 wholesale minus 99 cents retail times 443,000 scans during the two-day sale-Amazon put itself on the map as a digital music merchant, in a way that the same amount of money spent on traditional advertising could never have bought.

But whether the sale helps Interscope remains to be seen. First, Interscope and Universal Music Group Distribution (UMGD) shipped 2.1 million album units before street date. If they knew in advance of Amazon's sale, you can bet they would've cut back on the initial CD allotment.

As is, Interscope has an inventory liability, with some merchants saying they need to return product. And if some of that talk comes from a few retail accounts being miffed over the Amazon deal, some is also due to simple math. The CD album sold 449,000 units of the 2.1 million shipped, for a 21.4 percent sell-through. Second-week sales are at 174,000 units (136,000 CDs), or 27.8 percent sell-through.

A decade ago, major-label shipment formulas called for shipping three units for everyone expected to be scanned in the first week. Nowadays, with a more efficient inventory replenishment, the ratio has dipped under 2-to-1. But in Lady Gaga's case, UMGD shipped 4.7 units for each first-week scan. Even another big hit single, which would ensure a sooner sell-through of all 2.1 million units, won't stop merchants now from returning the album to improve their cash position. Interscope is probably looking at a few hundred thousand returns, depending on whether the label comes up with a sweetener to keep inventory in stores.

Competing labels and distributors may be even angrier than merchants about the sale. "This was a really bad move," the head of an independent distributor says. "Ninety-nine cents is almost free."

"If this happened in the 1990s, there would have been a big hue and cry from retail, even bigger than what it was this time," the head of sales at a major label says.

But these are different times. And in the digital world, "there are going to be times when music is the toy in the Happy Meal," a UMG executive says. Another Universal exec adds, "If Amazon tries to turn 99 cent superstar albums into a regular thing, I would be outraged."

Yet, some suggest that a few label marketers themselves may now start pushing such a pricing strategy to break an artist, or get an album into the No. 1 spot. Others say that, in the '90s, that inevitably would've followed-but not in today's market, when profit trumps chart success.

For all the talk about how the industry has evolved, though, former distribution executive Jim Caparro says, "It is shocking how consistent the industry is with the past. Today, it is almost parallel to how traditional music retail acted back then, with big accounts looking to steal market share by pricing."

But one executive familiar with Amazon's thinking says the Gaga pricing won't hurt the industry.

"Of course Born This Way is worth more than 99 cents," the executive says. "That's why it created such retail excitement and buzz, when it was offered for 99 cents ... If it wasn't actually worth more, no one would have cared."

A couple of numbers I found interesting, if the stats in the above article are accurate: 449,000 copies of this album sold on CD (presumably at around $10-$15) vs. 443,000 copies sold as ninety-nine cent Amazon downloads. (I'm assuming these figures are US sales only.) The compact disc is not (yet) dead.

That said, it's hard to not notice how album sales seem to be flat compared to the pre-download era. Pop albums of this ilk used to routinely go platinum during their debut weeks without such retail stunts. Still, as the record industry attempts to continue the crackdown on illegal file-sharing, is there any evidence to suggest that these efforts have resulted in reversing this overall sales decline?

GaGa should be giving Amazon one huge thank you for this. If anyone "won' here, it was her & her fans.

I'll admit to buying the 99 cent dl. No way in hades was i going to buy the album without hearing it first. personally, I hated it, but I'm probably in the minority on that.

At least one person in the industry with good sense and clear vision. Makes a nice contrast to the "outraged" statement made by that other executive quoted in the article (whose name is undoubtedly Mr. Middleman. ).