Bus 277 - Apple Corperations and Itunes

Seth Hanson

Professor Sauve

BUS277.01

April 4 2016

Apple Corporation and ITunes

        Since the year 2003, Apple has formed a powerful monopoly over the market for digitally bought music and audio books through its ITunes store. Apple’s stock alone from 2003 to 2014 rose by a 95 fold price increase. Apples great success can be attributed to allowing for its online music store to be able to interface with all of its products (iPhone, IPad, etc…). Apple’s largest competitor (Microsoft) does not even have half the stock price that Apple possess. By 2005, with Apple market shares of music downloaded in the US controlling over 75%, Apple has the largest influence over the market price for downloaded music. In fact until the year 2009 apple has set the price for digitally bought music at one dollar per song. As the market for digitally sold songs becomes bigger, more and more major music companies are arguing about whether to change the existing price of music purchased online. This has become a major topic of controversy over the last few years as the online music companies try to find the best way to maximize their profits.

        One decision that Apple faces is whether to keep their flat pricing strategy of having all songs cost one price, or to have a more variable pricing policy where different songs would cost different amounts. The best decision for Apple to make would be to apply a variable pricing policy (using price discrimination) to achieve the largest profit. It would benefit Apple the most to price discriminate because different customers have different values for the same products. For example, some customers might be willing to pay more for certain songs then what they are currently paying while other customers are willing to pay less than what the cost of the song is. If there is only one flat price for all songs then some people might not buy the songs while others would be willing to pay more but instead only pay the asking price. By applying the variable pricing strategy, Apply would be able to sell songs for a higher price to people who value it more, and they would be able to sell other songs for a lower cost to people who hold a lower value on the song. This way by price discriminating, more music is sold, more people are satisfied, and the profit is maximized.

        In the year 2009, Apple moved from one to three price points. Some music became more expensive while other music became cheaper. The reason why they probably started selling songs at different prices could be because of the realization that they could maximize profit. Another reason is that they realized that the same year amazon was catching up to them and they needed to push themselves ahead. The    Music that Apple would sell for a cheaper cost would be music that is considered unpopular or music that could be related to groups of people that do not buy much music. For example: the older generation could be considered a group that does not buy much music, and children under the age of 7 could be considered a people group who do not buy much music. Apple would then take the songs that each group would listen to (children’s music or old classical music), and sell the music for a lower cost to give incentives for the children’s parents and the older people to buy the music.

        Besides the variable pricing strategy that Apple uses to increase profit, Apple could also use the price discriminant strategies of coupons and quantity discounts to increase profits as well. The strategy of discount coupons is to charge a higher price for songs but to give out coupons to the public to use. Apple could do this by creating a survey or making another website that customers would have to view first before they could acquire their coupon. When coupons are offered, the richer customers are usually less willing to do the work for the coupons and will pay the higher price while the poorer customers will do the work to get the coupons and pay the lesser price. Another strategy is the quantity strategy. Quantity strategy is when a company sells products to the customers at a rate where the more of a product they buy, the cheaper the product becomes (offering lower prices for purchasing more quantity of the product). This method becomes a successful price discrimination tactic because the customers’ willingness to pay for an additional unit of the product lessens as they buy more units. Both tactics of coupon discriminate and quantity discount will increase the revenue of Apple.