Is all fair in Apple's iTunes $1.29 variable pricing?

Today, Apple released the variable rate pricing that was announced at Macworld 2009 in January.  Surprisingly, a lot of people were upset by this.

On the surface, it seems like it should make sense in a rationalist capitalist economy.  All songs are not equal in effort so why should we be forced to pay the same for each one of them? 

If you don't like the price of a song don't buy it.  Surely the record companies know that above a certain price, people won't buy a song (they steal, walk away, etc.)  Below a certain price, people buy it legitimately.  The percentage of those people who fall into each category differs by song, price and even geographic region.  These guys aren't just guessing.

But are the record companies actually playing fair with Apple vs. Amazon?

As someone who has been buying music almost exclusively from Amazon for years, the variable rate pricing didn't seem like a big deal to me.  I usually end up picking up a deal and spending slightly less on Amazon tracks than they'd cost on iTunes and still get the high quality DRM-less music that we now should expect from music distributors.  I originally thought this was due to Amazon's efficient operations and razor thin margins.

But Apple sells so much more music than Amazon that that no matter how much it costs to run the store, the prices shouldn't be that different.  Plus, Apple's official line is that it is operating the music store at break-even just so it can sell more iPods. Amazon needs to make a profit.

The news came later today that Amazon's prices would also start hitting $1.29  If you look at Amazon's top 100 Music sales, you'll see some prices at $.79 and some as high as $1.29.  (Taken at 11:30 PM EST on April 8th).

But these $1.29 songs are few and far between, while most of Apple's top 100 are $1.29.

The number one song in both stores shows significantly different prices: the Amazon Store has the Black Eyed Peas' Boom Boom Pow for $.99, while iTunes charges $1.29.

Amazon's price above, vs. iTunes price below.

The #2 song on each chart, Poker Face, by Lady GaGa produced an even bigger discrepancy.  Amazon has it for only $.79 while iTunes charges $1.29.

How can this make sense?  These are the two biggest songs going right now are going for entirely different prices?  Why would Apple be charging $.50 more for the same product?

Sources at Apple tell me that Apple is getting different prices than Amazon from the recording idustry.   The record companies are, and have been for awhile, favoring Amazon.  In fact, Amazon is selling songs for less than the price that Apple pays for them in some cases. 

The price for the Lady GaGa song above would be an example of this.  Assuming Apple has a 30% margin on this song, it likely get it for around $.90.  Amazon is selling it to the public for $.79. 

Apple might as well be buying its music from Amazon too!

The reason?  The recording industry fears Apple's dominance and has picked Amazon as the counterbalance to Apple's growing monopoly.

Except that isn't going well either.  Amazon has been selling DRM-free music for over a year at prices well below Apple's until now, DRM-laden music.  iTunes hasn't been losing any marketshare. 

The record companies have been blaming Amazon's lack of marketing but realistically, and this comes from my friends who swear by iTunes, it is the iTunes store experience that has them staying with Apple and even higher prices won't drive them away.

Now that Apple and Amazon both have variable pricing let's see if the prices start to even out or if Amazon gets a better deal. Remember, Apple is only trying to sell iPods.

Update: Amazon has raised the price of Pokerface to $.99