CD Price Drop

What can save the music industry? We've asked the question on this website a dozen times in several different ways and your responses are pretty much always the same: lower CD prices—closely followed by better music.

One down and one to go: Universal Music Group (UMG) announced last week that it is lowering the wholesale pricing on "virtually all top line" CDs and instituting a $12.98 Manufacturer Suggested Retail Price (MSRP) in the US. The current wholesale pricing to record stores is reported to be around $12.00, but the new price would put it at around $9.09. UMG says there are "no immediate" plans to reduce CD prices in the rest of the world, "We constantly review and change our prices country by country. As a result, our international pricing is already close to the new US pricing level."

The company says it is introducing the new pricing policy, which should become obvious on store shelves around October 1, with the aim of "bringing music fans back into retail stores and driving music sales." The program is expected to eliminate $16.98, $17.98, and $18.98 MSRP discs on both major artist and back-catalog releases. Universal says that, while there is no guarantee that retailers will pass the savings on to consumers, it expects to see many stores further discount the discs to around $10 each.

Lowering prices as much as $6 a disc is a significant gamble for Universal, which distributes almost a third of all recordings sold in the US. Any pricing strategy lives or dies by predicting the sweet spot where the decrease in profit margins per unit sold are more than made up for by an increase in sales volume. Referred to as "price elasticity" by economists, the trick is to find the point along the price vs demand curve that reaps the greatest amount of profit.

Record labels have been nearly unanimous in blaming online file trading for their woes, but Universal's announcement brings the pricing issue to the fore. Universal Music Canada's Randy Lennox admits that the Internet is not really the issue: "The real issue is the distribution of consumers' entertainment dollars. We have tons of evidence from surveys and market tests that has convinced us people believe CDs are too expensive. If we reduce the retail price by 25–30%, we expect to see a corresponding increase in music consumption. That means more music in people's hands, and larger audiences for working musicians."

Industry observers expect the other major labels to follow Universal's lead. But while the other labels are still hanging back to see what happens, Universal says it plans to significantly increase its direct-to-consumer advertising to raise music fans' awareness of the artists and their music.

The effect of cutting back pricing may be a mixed blessing for retailers, however. Along with the price reductions to stores, Universal says it will also eliminate the common industry practice of giving "co-op" discounts to retailers who spend their own funds to advertise or prominently display its CDs. Store owner Rand Foster comments, "I like the idea of CDs coming down in price. It's a fundamental thing that has to happen in the industry. Unfortunately, we're at the stage where there are way more questions than there are answers."

According to industry analyst Phil Leigh, "The labels had an interest in protecting music stores because they had large receivables from them and it was their standard distribution channel. Now the Internet comes along and over time it begins to erode the foundation of the incumbent distribution channel. It's no longer worth it to protect your incumbents."

Universal Music Group consists of record labels Decca Record Company, Deutsche Grammophon, Interscope, Geffen, A&M Records, Island Def Jam Music Group, Lost Highway Records, MCA Nashville, Mercury Records, Mercury Nashville, Philips, Polydor, Universal Music Latino, Universal Motown Records Group, and Verve Music Group, as well as a multitude of record labels owned or distributed by its record company subsidiaries around the world. According to a company spokesman, classical music titles will largely be unaffected by the price cuts.

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