It's the Pricing, Stupid!

Whenever we run a poll asking readers what record companies can do to reduce piracy, one of the most common gripes is that CD prices are too high. Apparently the National Association of Recording Merchandisers (NARM) and major music retailers across the country agree. They also are looking for better-sounding formats to goose sales.

Reporting that mid-year global music sales figures were down by 5% in the first half of the year 2001, the International Association for the Phonographic Industry's Jay Berman said, "Mass-scale CD copying and piracy had a particularly sharp impact on music sales. There is no doubt that multiple CD burning poses a significant threat to the recording industry and to the copyrights of songwriters, artists, producers, and everyone else involved in the music business."

But not so fast, countered NARM President Pamela Horovitz. In a response to Berman's conclusions, Horovitz stated, "We would agree with Jay Berman's assessment that consumers are engaging in CD burning and file sharing on a massive scale. However, we don't choose to characterize our own customers as the problem. We think the problem lies with the record companies. Instead of offering either singles or downloads through legitimate retailers, they offer neither, and simply increase the price on CDs."

John Marmaduke, president and CEO of retailing chain Hastings Entertainment, is also pointing the finger at pricing as a root cause of the record industry's woes. "Hastings is the original multimedia retailer, so we have a unique perspective on evaluating the various entertainment offers we sell," said Marmaduke, who went on to say, "Consumers are buying more entertainment and adopting more new configurations than ever before. But our outlook has been diminished in the last few years by declining music performance, even when frontline CD comparable sales are positive. We believe the problem with prerecorded music isn't the music or the customers but a combination of configurations and misdirected pricing."

Pointing out that both cassettes and singles are dying formats, while the mainstay configuration, the CD, is over 20 years old, Marmaduke says that retailers cannot expect growth from the current scenario.

But he sees a way out, as demonstrated by the video industry. "DVD is the fastest adopted configuration in history, more than doubling CD and VCR adoption rates. Many retailers are seeing increases of 150% or greater in DVD software. DVD is a winner because of its significantly superior viewing, enhanced material, and sound! That's right, superior sound is the number one advantage of DVD to young consumers. The music industry is overdue for a similar product enhancement.

"After 20 years, CD sound is not good enough to command the premium price of $18.95. Unfortunately, each price increase promotes increased duplication by the consumer in subsequent weeks of release, creating a 'doom loop' of increasing price resistance, lower volumes, and less total revenues. The way to command a high price and grow unit volume is with a better product."

To revitalize the CD, Marmaduke insists, "We must reduce wholesale prices immediately as unit volume declines. This lesson will be hard to learn for the European multinationals who think American CD prices are too low and the secret to high profit is a slow ratcheting-up of prices. Look, however, at the disturbingly large front-line CD sales declines in Europe. Their high price philosophy no longer works. High, static prices breed a home industry of burning CDs, file sharing, and even piracy. Since 1998 the rate of week two sales on hit music product has gone from 76% of week one to 66%. And each subsequent week continues that decay. We've lost the equivalent of half of week one's sales to CD burning and it's growing! Technology no longer permits total copyright protection. As Microsoft learned, lowering prices on Windows is the best deterrent to copying, and it hasn't hurt Microsoft's profits either.

"We encourage our vendor-partners to aggressively convert to new, superior audio formats and use dynamic pricing to reinvigorate our CD business. Our industry has committed the classic mistake of the hardware industry—sticking with a configuration too long. Keeping the same pricing formulas in the face of declining sales is no solution. Give us a better quality format for our front-line price and dynamic CD pricing to fight piracy and home-taping. Add to that exciting music releases and retail will do the rest."