You may have seen by now that Nine Inch Nails' Ghosts I-IV was the top-selling album of 2008 at Amazon.com's MP3 store. What makes this such an interesting story is that Nine Inch Nails frontman Trent Reznor offered the album download for free at the band's website. The success at Amazon.com shows how people will buy music at their preferred venues -- especially if they weren't even aware of the free giveaway.

The other story is the success of an album download that has a permanent price of $5. That's considerably less than Amazon.com's usual album download prices ($7.99 or $8.99) and equal to the sale price of weekly specials. Proponents of lower album prices may see this as proof customers react positively to a lower price. That could be the case.

There are, however, some things to keep in mind. Ghosts I-IV had four key things going for it:

1. Awareness. Reznor's free release scheme raised the album's profile to a very high level. Both the online and print media celebrated the strategy and gave it as many words as any other release of the year.
2. Timing. The album was released on March 2nd. Coldplay's Viva la Vida, the #2 best seller, was released in June. Death Cab For Cutie's Narrow Stairs, the #3 title, was released in May.
3. Price. At $5, the album had a lower price than other popular acts.
4. Promotion. Amazon.com gave a good deal of front-page placement to Ghosts I-IV. It was often part of the site's weekly $5 specials. Granted, the album's permanent price is $5, but the placement is very valuable and has a positive impact on sales.

For a $5 price to work for all albums, one cannot look to the success of Ghosts I-IV as an indicator. Any other album can be priced at $5, but few albums can generate as much awareness or receive such favorable treatment by an online retailer.

Even if all prices were lowered to $5, the other factors would remain unchanged. There would be no more promotion. There would be no more awareness. Any spike in attention generated by a lower price point would drop and level off as consumers adjusted to the permanent price change. There will be individual cases that get increased promotion and awareness -- it happens all the time -- but on a macro level none of this will change.

So the only thing to generate the expected increase in sales would be the price. How much would unit sales need to increase in order for revenue to remain unchanged? I'll run through some simple examples that have a few assumptions: full statutory rates paid to songwriters ($0.91 per album), a wholesale price of 70% of retail, and a 15% distribution fee. What is left over is the per-unit contribution that will go to pay the labels' fixed (salaries, office expenses, etc) and variable costs (royalties, promotion, advertising, etc.).

A $10 album has a wholesale cost of $7 and a contribution of $4.59. A $5 album has a wholesale cost of $3.50 and a contribution of $1.84. Even though $10 is 100% greater than $5, a 149% increase in sales would be needed to sustain contribution to profit if the album price drops to $5 from $10. And because advertising and marketing costs will not change much -- if at all -- the sales increase will need to be more than 149% in order to break even.

In that light, dropping album prices to $5 looks like a risky maneuver. Unit sales may increase, but consumers would have to purchase much, much more music to prevent a serious drag on revenues. An increase in sales may be possible, but there would need to be advancements in how music is sold, how consumers are reached and the relationship between buyer and seller.