iTunes has been around five years now. Amazon's mp3 store has been around six months. They'll grow in time, I'm sure...

I find it hard to believe that that digital downloads are less profitable than CDs.

Compared with CDs, digital downloads have no manufacturing, packaging, shipping, or warehousing costs. There are no returns due to overstock or material defects. There are fewer middlemen (distributers) involved to take a cut of profits. A sale is never lost due to a title being sold out or no longer in print. There is no competition from a secondary "used" download market.

If record companies are not making as much profit, it could be be due to the fact that people feel that compressed (and often DRM'd) music is not a good value at buck a track. They may only purchase hit singles rather than entire albums. They may be choosing to spend their discretionary money on other items like DVDs and video-games. Also there is still plenty of illegal file trading going on, and it probably will continue until the record companies lower their prices and restrictions on downloads.

I disagree with the above sentiment, Digital Downloads do create less profit. And here are the reasons why.

1. Digital Downloads free the single song from the "album format" If the only thing available is the CD then those who want to own a few songs off an album will purchase a CD which yields about 7 dollars wholesale to the distributor. With Digital Downloads, the consumer may choose to purchase only 3 songs, which, following the iTunes formula, will net 2.10 to the distributor. By all means, I think this is a positive thing for the consumer as it frees them from having to purchase songs they do not want. But, in the end, it will lead to lower revenue and profit. (Obviously I, like the previous poster and making some assumptions, I know some people who buy the 2.10 cents worth of downloads would not have bought the CD at all, but I do believe that in aggregate you will loose more revenue than you gain)

2. The above poster said;

digital downloads have no manufacturing, packaging, shipping, or warehousing costs.

But these costs are pretty low. At a run over 100K I (and not a major studio) can get a replication facility to press and package a CD for under a dollar a piece. Transportation and warehousing adds at most a dollar. Even with those added costs, a CD still yields 5 dollars of revenue compared to the 2.10 that the consumer would spend if purchasing the product on their own.

3. Finally, the biggest issue, and the one no one on either side talks about, is the role advertising costs plays in the pricing of music. The third largest chunk of a CD's cost - after retail overhead and record company overhead, is advertising. About 2.40 per CD. Now, that number does not change proportionately to what is being advertised. A billboard in Times Square for an Album will cost the same for a single as it will for an album. The banner ad on a website is the same. The cost of the plane ticked to fly the artist to Cleveland or Topeka or New York to do an instore is the same whether or not you are plugging a CD or a single.

And these are all reasons why in the end profits suffer with digital downloads. At least for now.

I hate being a label apologist, but right now they are in a bit of a bind. The future is in Digital Downloads, but right now way to much of the revenue comes from traditional CD's for the labels to abandon them. And as long as they need that revenue stream, they will be forced to promote it. And every time that promotion pays off in someone Downloading 3 songs from iTunes as opposed to buying the CD they will loose money.

Now, of course this is simply a function of a changing market, and eventually the studios will adjust and a new equilibrium will be developed. But in the short term, Downloads most likely do represent a diminished revenue stream.

@speeder

One of the factors impacting record company profits that I mentioned was that people might be buying a only few singles rather than whole albums. But this is not an inherent problem with downloads, only of product offerings.

I suppose record companies could refuse to sell individual songs as downloads, and only offer the complete set of songs from the CD. But I expect that many current online customers would revert to illegal downloading of singles if that were the case.

Another possibility would be to increase the prices on "hit" singles to perhaps $2.50. Apple has resisted variable pricing in the past, claiming that it will only confuse and irritate customers. I suspect they are correct, and that it would also result in an increase in piracy.

Speeder sez:

At a run over 100K I (and not a major studio) can get a replication facility to press and package a CD for under a dollar a piece.

If every CD made was done in runs of 100,000 copies, someone would be taking a huge hit on warehousing costs, because I don't think most CDs sell anywhere near that much-- am I wrong?

First to Obi. I actually agree, it's not a "problem" with downloads. But, it is the end result of offering single downloads. And as I said, I think it is great from a consumer standpoint. I'm simply saying when given the choice between buying a CD and buying only the songs they want, many people will choose to simply buy the songs they want, resulting in lost revenue. Now, I probably should make clear when I say "lost revenue" that I don't mean that the company has lost out on revenue that it somehow "deserves," I simply mean that there will be less revenue under the new model than under the old model. Additionally I think there is at least potential for more revenue based on this model long term, but it will necessitate a real hit on revenue short term, and the problem is that these are publicly traded companies, and the market isn't particularly interested in long term benefits that come at the expense of short term losses.

Second, to the above, you are right, most CD's don't sell, but even at their lower runs, they still come in under a dollar as the major labels get such good rates. My point was that as a complete indy, I could walk in and get an under a buck rate, and I was estimating high because I do not have any replication catalogues handy. The major labels can get a hell of a lot better, even with their limited runs.