“Variable pricing”—to use the current vogue euphemism of the music industry—for digital downloads is the labels’ latest idea for an industry cure-all.

Now, you or I would call it simply “raising prices.” But the industry can’t do that right now. Since the iTunes Store is the de facto gatekeeper on pricing, as long as Steve Jobs likes the clarity of the site’s simple 99-cents per track, that’s where things will stay.

But a record label can dream, can’t it?

The new Billboard has a story on this, by Anthony Bruno, but since the Billboard web site sucks so much I can’t find it to link to. (Is billboard.com the worst publication web site ever? I honestly think the search engine is mentally retarded.) So here’s a Yahoo version of it.

The story is kind of funny. Basically, the labels are saying, “OK, let’s pretend Steve Jobs doesn’t exist. If we could raise prices on digital tracks, what could we get away with?” This is worth parsing:

The idea behind variable pricing is to make more money from those 33% who downloaded up to 50 songs in six months by slightly raising the price on certain tracks, while at the same time convincing those who only downloaded 10 or fewer to buy more by slightly lowering the price of others.

How that’s done is where the real science kicks in, which is why even those labels pushing for variable pricing most aggressively are still only in the test phase. The latest is Warner Music Group (WMG), which last month began a trial of a dynamic pricing system from Digonex.

The company’s system recommends raising or lowering the price of a track and/or album based on a variety of factors. In some cases, new releases selling very well may get priced higher, but so might catalog items appealing only to the die-hard fan willing to pay more. In other cases, the system recommends lowering the price of even new releases to spur more sales.

Now, the real reason that this won’t work I’ll get to in a minute, but it’s kind of fun to examine how it doesn’t work on its own terms, either. As I read the part about Digonex’s “real science,” it seems that you can raise the prices on stuff a lot of people want … but also on the stuff that only a few people want.

Since this encompasses just about everything, this finding is very convenient and was probably greeted with no little praise for the keenness of its analysis by the label.

But Digonex also noted that the labels can also lower prices. Despite the prospect of increased sales, this finding was probably greeted with less enthusiasm. The trouble with selling product at lower prices is that some of the people who buy it at the lower price might have bought it at a higher one. That might not bother you, but it is the sort of thing that keeps the record industry, collectively, up at night.

All Digonex has to do is take all of this into account, and create an algorithm for Warner Brothers that will sell each of its songs for the highest possible price to all of its customers.

The search for this particular holy grail has some theoretical interest, because it is possible. Imagine if there was only one music service, and it could track each customer’s buying habits and craft a custom pricing structure for him or her based on prior purchases.

Once the service learns that young Trevor is the kind of rap fan who’s on the east coast tip but isn’t down with the west coast, it could start dynamically shifting its pricing structure for him only, perhaps making the latest Snoop Dogg album cheaper. (Think of the deals he’d be offered for a Bocelli CD.)

There’s a certain demonic logic to such a system, foiled only by reality in about nine different ways. There isn’t only one system. Customers aren’t that stupid. Human behavior and the business plans of myriad other media corporations will not change to help the record industry turn back the clock to the time where it could raise prices whenever it wanted to.

But, again, that’s just why variable pricing won’t work on its own terms. In the real world, it won’t work either, not just because of iTunes, but because music fans have so many other outlets to get the music they want, from mp3 blogs to the file-sharing networks to the good old fashioned sneaker net. If a Madonna song is 99 cents one day and then suddenly jacked up to $1.99, no one in the world is going to feel guilty for taking the thing off an mp3 blog—and sending it around by email (or on a mp3 disc, with 150 other songs, or on a flash drive, with 500 other songs) to her friends, as well.

Now, the iTunes Store doesn’t have Digonex’s science behind it. (And where do these companies get those names?) But one thing it accomplished, which isn’t often noted, is that Apple has people content to pay the 99 cents for music its customers could get free, even though the product is inferior—in the sense that the songs are bundled in restrictive software that doesn’t let you send the songs around to friends, at least without some aditional hassle.

You almost want to see this experiment play itself out. Let the major labels have their ideal variably priced music service in all its algorhithmic glory. They might find out Apple’s dumb system was smarter than it looked.

The Radiohead catalog has never been on iTunes because of one of those impasses that occur when the implacable prejudices of two artistes collide. Radiohead wanted it albums to be available in full—only. Apple wanted the individual songs available for download as well.

Neither position made any sense. (I would explain why, but who, really, frickin’ cares?) At any rate, Wired reports that the band finally backed down, and the band’s presence, as I write, is heralded on the front page of the iTunes store.

As I’ve mentioned before, the only interesting aspect of such stories is how much money the band has lost by forgoing official (i.e., remunerative) digital distribution of its work earlier. The Beatles are the poster child here. Back at the dawn of the CD era, making the band’s work available on disc was a big, hullabalooed deal, and paid off handsomely.

But fans of the Beatles have now been merrily digitizing the music from their own CDs or those of friends for a decade.  When the Beatles’ work comes to iTunes, there will be hullabaloo, all right, but it will also represent not a big financial payoff but the long-delayed staunching of a financial wound.

… by allowing HBO to charge $2.99 an episode for those of its shows that just joined the iTunes Store lineup, the Hollywood Reporter says:

NBC took The Office, Heroes and all the rest of its shows out of the iTunes Store last year, mostly because Steve Jobs wouldn’t let the company charge more than $1.99 for an episode. Or so it seemed at the time. The HR story has a lot of new information on the dispute:

[…S]ources also suggest that it wasn’t Apple but NBC Uni that was being stubborn in their previous negotiation stalemate. Not only was NBC Uni pushing to test a $4.99 price point—suddenly, “Sopranos” doesn’t seem that expensive—but it also wanted to institute dynamic pricing, an experimental new technology that recalibrates price based on consumer demand. NBC Uni declined comment on dynamic pricing, which is being tested by Warner Music Group.

The story also details more of the complex dynamics behind the scenes as companies try to balance competing revenue streams—and the implacable Jobs:

Even if a program’s popularity was key to setting its price, “Sopranos” hasn’t proved particularly popular in its first few weeks on iTunes — perhaps because of the elevated price point. It is ranked 24th among season packages on iTunes; among individual episodes, “Sopranos” didn’t even crack the top 100.

No doubt Showtime might want to test the $2.99 waters not only because it shares HBO’s premium status but also because its series “Dexter” is currently the most popular full-season order on iTunes.

If sales ends up driving pricing, shows that aren’t necessarily big on-air hits but are iTunes darlings could command higher prices, including the CW’s “Gossip Girl.”

However, one conglomerate exec believes that Apple might have its own opinions on programming value. “When you get into that conversation, it’s a slippery slope,” the exec says. “Because we’ll differ with them on what content is worth what.”

If anything is indicative of a show’s iTunes price, look at the digits appearing on its DVD price tag. HBO in particular has a massive DVD business, and with that comes the need to maintain a higher price in order to afford some protection from cannibalizing DVD sales.

But variable pricing is only part of what content companies want from iTunes. What one might call variable packaging is high on the wish list as well, which means the ability to bundle multiple titles in creative ways—for instance, selling a film and its soundtrack together for one discounted price.

Another question altogether is whether Apple also will adjust revenue splits—known to be in the neighborhood of 70-30 with the content companies—once pricing changes. Not likely, most say, and beside the point for Apple. Content isn’t seen as much as a revenue driver in and of itself as it a catalyst for more significant dollars that come from sales of iPods and AppleTV devices.

The Motley Fool calls on Microsoft to kill the Zune:

I get why Microsoft wants to bury the iPod. The player’s success created a halo effect, winning over Mac converts. They’re using Mac’s operating system over Windows, surfing on Safari instead of Explorer, and not necessarily relying on Microsoft Office, even though it’s popular and available for the Mac.
[…]
Unfortunately, there comes a point when persistence becomes embarrassment. No one laughs at SanDisk or Creative for taking up slings and stones against the Apple Goliath, but Microsoft is too big to settle for being a niche player. The whole social sharing distinction of the Zune becomes a joke when there are too few Zune owners around to share tunes with.

A couple of things I didn’t know:

Critics can point out that Apple commanded a whopping 76% of the market two years ago. [As opposed to the company’s 70 % share today.] However, what about the brisk-selling Apple iPhones, which also double as iPods? Apple is looking to move five times as many of its pricey iPhones this year than all the Zunes Microsoft has sold to date. Even [RIM’s] new BlackBerry Bold smartphone syncs up to Apple’s iTunes, further entrenching Apple as the digital-delivery standard.

Isn’t that Blackberry news (emphasis added) odd? It would seem that if Apple licenses iTunes for every Tom, Dick and Harry of a cell phone, demand would go down to iPods. Apple doesn’t care about being “the digital-delivery standard” except to the extent it builds up iPod sales.

The Blackberry item is particularly strange in that the Apple iPhone is aimed squarely at the Blackberry market. Why is Steve Jobs allowing Blackberry users a iTunes workaround?

Also:

There’s little reason to get excited about the Zune, especially since the second million units have sold slower than the first million, despite their generational enhancements and Microsoft’s costly marketing campaigns.

Not a good week for Microsoft.

First, Yahoo and Google are being cliquish and won’t let the Borg play with them on the internets.

And now there’s more bad news from the Zune division. (Team colors: Poopy brown.) The WSJ ($) reports:

Videogame retailer GameStop Corp. plans to stop selling Microsoft Corp.’s Zune media player due to insufficient demand.

GameStop’s already pulled its stock of Zunes from its stores. The media players will be available via GameStop’s Web site until supplies are exhausted. The Zune “didn’t have the appeal” that GameStop expected, a spokesman said.

Adam Sohn, Microsoft’s Zune marketing manager, said in response that Zune sales “have seen good momentum” during the last few months, and that there’s been a “great response to our spring release.”

This didn’t look like that big of a deal until I noticed that GameStop had 4500 retail outlets. Who knew? (EB Games stores are part of the same company, it turns out.) Microsoft has allegedly sold two million Zunes since its debut a year and a half ago. If GameStop had fifteen percent of the Zune market (I’m pulling that figure out of a hat) it would mean the company averaged about one sale per store per week. (Apple, by contrast, is selling iPods at the rate of nearly a million per week.)

Meanwhile, tucked away in the Times today was a story about how Microsoft has quietly stopped scanning books for its Live Search service. In the modern world of search, book scanning is one of the brave new frontiers, and Google, of course, has encountered all sorts of heat for its attempts to scan everything it can get its hands on. The Times:

Digitizing books and archiving academic journals no longer fits with the company’s plan for its search operation, wrote Satya Nadella, senior vice president of Microsoft’s search and advertising group, in a blog post Friday.

Microsoft will take down two separate sites for searching the contents of books and academic journals next week, and Live Search will direct Web surfers looking for books to non-Microsoft sites, the company said.

Nadella said Microsoft will focus on ”verticals with high commercial intent.”

“Verticals with high commercial intent.” And Microsoft wonders why consumers aren’t connecting with its products.

It seems like only yesterday I was reading all those full-page ads for Microsoft’s big plans for “Live Search.” It was in fact just 18 months ago, or right about the time the company started rolling out the Zune.

If I recall correctly, the ads said, “We’re in this for the long haul, or until we decide instead to focus more on verticals with high commercial intent.”

The company’s interest in those verticals, incidentally, will soon come back to bite hapless Zune owners in the ass. Recently, we saw what happened to customers of Microsoft’s previous music service, the MSN Store, when it was shut down last month. (The MSN Store sold music, like the iTunes Store.) The company could have easily transported its customers there to the new “Zune Marketplace.” Instead, it’s basically disconnecting the service. The songs you bought on it, tied up in digital rights management, will work as long as you keep your current computer. But when you upgrade, you’re screwed, and they disappear.

I don’t think too many people will be re-buying the songs from the Zune Marketplace, but I suppose the company could be a little more aggressive in trying to market their way out of this mess.

(Confidential to B.G.: Try to convince folks that “MSN” had nothing to do with the operation that suddenly repossessed all their music. It was the “Store” part, and the new Zune operation isn’t a “store,” it’s a “marketplace.”)

(By the way, Apple uses DRM, too, and it should be noted that, in theory, the company could pull the same sleazy trick.)

Once the Zune, inevitably, gets 86′ed by the company for its poor verticals, no doubt the company will again forgo allowing their customers to move the songs they paid for to a new computer. For that operation, the customers, far from being verticals, will be horizontals, and not face up, either.

The latest news from the NBC-Zune-Microsoft front is fascinating.

The story thus far is that NBC, which had a very popular slate of shows available at the iTunes Store, wanted to raise prices. Apple said no.

NBC, a media conglomerate that kicks it old style when it comes to feeling like it should be able to squeeze as much money as possible out of its customers, whined for a while and then finally picked up its Offices and Heroeses and went homeses.

Now it’s playing with the bully down the block. (Microsoft, if you follow my point.) Here’s where it gets interesting. In the old world, that would be the end of the story.

Twenty years ago, if an indie retailer had protested a jump in, say, CD prices, the big corporation would have pulled its product and gone over to Sam Goody’s or whatever, and the small retailer would be screwed.

That’s the media landscape Big Content knew and loved. The sitch today is different. Microsoft’s competition for the iPod is the Zune, which despite the company’s best efforts has a puny market share.

So—getting NBC, with its very hep and sophisticated lineup of shows, is a coup right? What does Microsoft care if the company wants to try to jack up the price on this or that?

Because apparently that wasn’t the whole deal. According to a story on the NYT’s Bits blog, Microsoft made a couple of arrangements with NBC:

Microsoft […] will accept NBC’s pricing scheme and will work with it to try to develop a copyright “cop” to be installed on its devices.

[…]

[…T]he copyright filtering system is still in development and its exact form has not been set.

Mr. Perrette said the plan is to create “filtering technology that allows for playback of legitimately purchased content versus non-legitimately purchased content.”

That’s corporatespeak for “Your Zune won’t be able to play pirated material. ” They are talking about a system that has become a Holy Grail for Big Content: Filters that would allow only legitimate—i.e., corporate approved—media to work on the players.

This is a sort of reverse DRM. A song with digital rights management attached will only play on certain players. This is a system where the player excludes everything but approved content.

It’s a fiendish plan, if it weren’t for the fact that no one in their right mind would buy a product like that.

(I’m a little surprised the companies only went half way. What they really need is a Zune that, when you try to play pirated material, automatically sends your personal information, complete with GPS coordinates, to the RIAA for automated legal action.)

After the item was posted, Microsoft began to spin the issue wildly. The writer never said the copyright cop had been incorporated into the Zune, just that that had been part of the deal with NBC, and quoted Microsoft thusly:

Adam Sohn, a spokesman for Microsoft, declined to discuss details of this effort other than to say that the software company is exploring anti-piracy measures with NBC. He said Microsoft, which suffers from its own piracy problems, is sympathetic to Hollywood’s concerns.

But after the piece was posted, the company complained, and the writer posted this update:

In the Zune Insider Blog, Cesar Menendez, a member of Microsoft’s Zune team, refers to this post, and the blog discussion it prompted. He writes:

We have no plans or commitments to implement any new type of content filtering in the Zune devices as part of our content distribution deal with NBC.

It’s worth noting that [NBC’s] Mr. Perrette told me that Microsoft committed to explore filtering; he didn’t say it committed to implementing those filters.

Here is what Mr. Sohn, the Microsoft spokesman, told me yesterday when I asked him about what Mr. Perrette said: “I don’t think they are wrong, but we are not going to characterize those discussions.” Later he added, “We have agreed to work with NBC across a range of topics, and protection of copyrighted material is certainly one of them.”

In other words, the original story was entirely correct.

It must be said that one explanation for all of this is that the unsophisticated folks from NBC came to the table with this proposal and Microsoft led them on (”Of course we can do that! Why, we’ve got a big ol’ team of people up in Redmond that are just wizards at this sort of thing!”), with no intention of actually doing it.

But it’s still a good example of how the transformative power of the digital convergence has made the old world of doing business more difficult; if nothing else, word of such comical dealings gets out. The irony is that NBC shows are going to be watched on computers and the internet no matter what the company does.

Moving from the iTunes Store to the Zune just means it will make less money. Sooner or later, presumably, one of the Six Sigma GE folks overseeing NBC Universal are going to notice the declining digital income figures and knock some heads together.

Microsoft, however, needs a lot more exclusives than The Office to compete with Apple, and the next company to come along dangling a deal won’t be as dumb as NBC.

London’s Financial Times is reporting that Apple and the record companies have something new to fight about: How much Apple would have to pay per iPod or iPhone to give users unlimited access to virtually the entire iTunes store music library.

This is a variation on the “subscription model,” like Rhapsody and other services, where folks can listen to as much music as they want—as long as they keep paying a monthly fee. When the fees stop, so does the music.

In the Apple version, the FT says, that cost would be incorporated into the cost of the device, and would last as long as the device did. The hitch: Nokia, the Finnish phone company, is trying to cut a similar deal with the music industry, and offering $80 per unit.

Steve Jobs is holding the line at $20, the FT says, citing as sources two executives.

Without citing sources, a recent story from Think Secret published on the PC Magazine site had this to say:

Another near-lock for the September 5 event is the availability of the Beatles’ catalog on iTunes. Following years of litigation that ended in Apple’s favor between Apple and the Beatles’ record label, Apple Corps, concerning trademark infringement, the Beatles catalog—the most coveted catalog not yet available in digital form—is expected to at last be made available. Some have gone so far as to speculate Apple will mark the momentous event with the release of a special Beatle-themed iPod, although evidence of this has yet to manifest itself.

PC Magazine says that Apple will announce that Beatles songs will be available on the iTunes store.

I’d like to predict that this will get press coverage far out of keeping with its import, but whatever. The interesting question: Was Beatles Inc.’s slow movement on digital sales was a smart idea or not? It’s a difficult calculation.

A good part of the decline in pop-music sales the last five or six years is the tapping-out of the oldies CD market. The guys who had bought the Eagles’ One of These Nights on LP, 8-track and cassette over the years had their chance to slip the record biz en masse (WEA, Don Henley & Co., and Sam Goody) another fast $15 when the album came out on CD. This process was duplicated many many times (millions of times, perhaps billions of times) over the 1990s as music-loving teens grew up, got a little disposable income and felt the need to relive a few high-school memories on the digital tip.

(I’m not being condescending, here: I’d be very embarrassed to share the names of some of the albums I re-bought on CD on just these grounds. I’ll see your Fragile and raise you a Captain Fantastic.)

But by the end of the 90s this income stream had tapped out, and none of the industry’s other attempts at a new format (DAT, minidisk etc. etc.) caught on.

Then comes iTunes, and I’d bet that a lot of the downloading comes from people who already had the CDs of the songs in question. This is free money for the Eagles and the record companies, without the need to make the damn record, store it, ship it somewhere, or pay the dullish kid behind the register to sell it to you.

The issue: when was the best time is for the Beatles to strike in this market? The argument that the time is long past is that millions of its original albums are being digitized and passed around amongst friends. I don’t even listen to the Beatles anymore, just on the grounds of overfamiliarity. Still, I just took a quick look on my iPod and discovered … nearly 100 Beatles songs on it. I would bet a lot of people are like me, digitizing their own albums (in my case, almost absent-mindedly) or getting them from friends, and absorbing the Beatles into their digital library almost by osmosis. Isn’t the band losing an enormous, unrecoverable, income stream?

You’d think that the Beatles’ organization making a calculated decision on this. Perhaps, in old-school negotiation style, they were trying to drive a harder bargain, or build up demand, but that would seem to be senseless when on every passing day people are digitizing their own CDs and adding them to their iPod collections—and then passing the discs on to friends, who have no other way to get the music onto their iPods.

The band’s sales veer widely—the 1 collection sold 10 million in 2000 and 2001, but in a typical year the group has a sales base of 1M or 2M. Two years ago, the group sold 2.4 million, according to SoundScan, and last year 1.6, and are on track for about that this year.

Assume the band makes three bucks from each record sold, and so might gross $6M a year just from album sales royalties. Assume the band and the label split the 65 cents they would presumably get from each iTunes sale, and that would translate to a little more than $3—or about the same as for the hard copy—for each album equivalent sold over the web.

In the face of such numbers the main argument I can see mitigating against iTunes sales is that they might in the long run hamper the group’s ability to finagle new generations of repackaging. The success of 1 is a very strong argument for this. There are for some reason millions of people who will buy a Beatles greatest hits set, like 1, even though it has nothing but the same songs they’ve bought again and again, notably in the massive-selling blue and red double CD sets. By contrast, online, once you’ve bought the digital version of “Hello Goodbye,” why would you ever pay for it again, absent some added value?

In the end, though, whatever sales records are bruited about by Apple after the inevitable event occurs, I think in the end the band will have lost untold millions over the last five years by not having benefited from being in the first wave of digitization by allowing, in effect, their fans to do the digitizing for themselves.