Xmas Blues" Cd Prices Hit Sour Note

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CD prices hit sour note with retailers, buyers

Mon Dec 8, 7:18 AM ET

By Michael McCarthy, USA TODAY

The free-falling music industry is finally playing a song that consumers want to hear during this holiday season: lower CD prices. Retailers have lowered the average price of CDs by 2% this year to $13.42, and cuts will accelerate in this quarter, says market researcher NPD MusicWatch.

Major retailers such as Wal-Mart, Best Buy and Circuit City are selling some new releases for less than $10, a price not seen consistently in a decade.

Universal Music Group, the world's biggest music company with artists such as Eminem (news - web sites), Shania Twain and Jay-Z, has cut wholesale and suggested list prices on most new releases by 24% to 31% for retailers who agree to certain conditions.

But holiday shoppers will need to check around to get the best deals, because prices are still all over the map. Consumers can find a $6 price difference on the same CD. The lowest prices are often limited to promotion periods, before they're jacked up. Many niche, classic or classical CDs are still listed as high as $18.99. The lowest CD prices are found online, before shipping and handling; the highest are often at bookstores.

The online-piracy-ravaged music business needs to woo music fans back into stores - particularly now. The holiday season generated a third of the U.S. music industry's $12.6 billion in sales last year.

Music executives blame rampant piracy and file sharing across "peer-to-peer" networks, such as Kazaa, for a staggering 31% sales drop in the last three years. Piracy now costs artists and record labels $700 million per year, according to Forrester Research, and the industry has started suing individual users who share files.

But lost in the furor about piracy is the fact that many consumers are buying less music because they believe CD prices are too high. Some have shifted their entertainment dollars to competitors, such as DVDs and video games.

"Many consumers perceive CDs as less valuable than they used to be," says Josh Bernoff, music analyst for Forrester Research. "They're livid over having to pay $18 for a CD with only two good tracks."

James Larson, manager of the independent Sounds music store in Manhattan's Greenwich Village neighborhood, thinks a move toward lower prices is overdue. "A lot of customers are coming in and asking about it (Universal's plan)," he says. "There's no reason why CDs should be $20; that's ridiculous. This will deter them from burning" (their own CDs).

Thanks in part to the UMG program, bargain hunters have been able to find Jay-Z's million-seller, The Black Album, for as little as $9.99 on sale at Circuit City. Other releases, such as Bon Jovi's This Left Feels Right, Sheryl Crow's The Very Best of Sheryl Crow and Ludacris' Chicken N' Beer have sold for as little as $9.88 at Wal-Mart and $9.99 at Best Buy and Tower. When they revert to non-promotional, everyday prices, these CDs typically sell for $11.99 to $13.99.

Shoppers have not seen the magic number of $9.99 this often since the price wars of the early 1990s, music experts say. The number of units selling for less than $10 has almost doubled, to nearly 9% in October vs. 5% in the fourth quarter of 2001, according to music tracker Russ Crupnick of NPD MusicWatch

"There's a lot of action in pricing from retail. There's more records on sale for $9.99," notes Alain Levy, chief executive of EMI Music.

The retailers also face increasing competition from legal online downloading. Apple's pace-setting iTunes online store has sold 17 million songs and counting, for 99 cents per tune. Wal-Mart, Microsoft, Sony, Dell and Hewlett-Packard have launched or are planning their own digital stores. Online music will account for 11% of sales in three years, and 33% by 2008, Forrester predicts.

All this activity brought down the average price for full-length CDs. From Jan. 1 to Oct. 31, the latest figures available, the average dropped to $13.42 from $13.73 in 2002, according to Crupnick.

Nearly 1% of the drop came in October, as CDs aimed at the gift season began to roll out. Since the bulk of Universal's lower-priced CDs didn't hit the market until November, Crupnick predicts holiday shoppers will see "some fairly significant price cuts" in the next few weeks. CD prices are dropping across nearly every type of retail outlet (see chart).

By contrast, the average list price for CDs during their introduction in 1983 was $21.50 and as high as $14.02 in 2000, according to the Recording Industry Association of America (news - web sites) (RIAA).

A slight bounce

Meanwhile, the combination of moderating prices and an improving economy - and maybe better albums - is sparking a modest rebound in sales for retailers. Album sales have risen in 10 of the past 12 weeks, with 20.6 million sold in the Thanksgiving week ending Nov. 30, according to Nielsen SoundScan.

But the industry still has a long way to go. Album sales in the USA are 5.0% behind last year: 549.6 million albums have been sold, vs. 578.8 million in the same period in 2002, according to Nielsen. During the first half of 2003, shipments to retailers plummeted 10%, according to the RIAA, which blames "music piracy on peer-to-peer networks and illegal CD copying" for most of the drop.

An end to the bleeding for the $28 billion global music industry might be two years away at the earliest. Informa Media Group, a researcher in London, predicts global sales will fall for the fourth year in a row in 2004, before the industry begins to grow again in 2005.

At least cheaper CD prices might do more for music sales than the RIAA threatening school kids for downloading songs on Kazaa.

But retailers, not record labels, ultimately control pricing. That's why tempers are running so high over Universal's controversial "JumpStart" plan.

Under the program that it kicked off Oct. 1, Universal is cutting suggested retail prices on most CDs as they are released to $12.98 from $16.98-$18.98, and dropping wholesale prices for retailers to $9.09 from $12.02. (CDs from a handful of superstars such Eminem are being wholesaled at $10.10.)

Company research indicated the "sweet spot" for getting consumers to buy CDs again was a price range of $11 to 12. Retailers often sell below suggested list price, so the company hopes actual prices drop to the $10 range or lower.

Universal, which controls a leading 29% share of the U.S. market, started the program slowly in October with only six new titles. But the division of French media giant Vivendi Universal in November released 21 new titles from top artists such as Jay-Z, No Doubt and Enrique Iglesias at the $12.98 list price (see chart).

Universal hopes the plan will jump-start its sales, which dropped 9% in the third quarter.

Wal-Mart, Amazon, Best Buy and Circuit City are among the retailers who signed on - and who are passing the savings to consumers, Universal executives say. Wal-Mart is lowering regular prices by $2 on Universal's JumpStart titles to around $11.88-$12.88.

"We're very encouraged by the support we're getting in the marketplace," says Jim Urie, president of Universal Music and Video. "The consumers are starting to see the benefits of lower prices at retail."

Some unhappy retailers

But the plan has generated some fierce critics in the retail community. Richard Branson's Virgin Megastores, for example, accuses Universal of trying to "dictate" pricing and has refused to participate. It now buys its Universal CDs through a third party. Virgin Megastores, with 23 U.S. locations, has pointedly not included any Universal titles in its own "Under $10" sales.

"We will not be told what we should sell or how we should sell it to our customers, but rather will continue to offer them what they want, at a fair price," said Virgin in a statement.

Some specialty chains and mom-and-pop record stores are also threatening to mutiny, saying Universal's plan will put them out of business. They argue UMG's plan favors big retailers, such as Wal-Mart and Best Buy, which use cheap CDs as a loss leader to sell customers more expensive merchandise.

They're particularly furious that one of the trade-offs to get the lower wholesale prices is that Universal is yanking promotional dollars used for in-store ads and displays. These payouts from labels can often reach more than $1 per CD. Universal is also asking retailers to give their titles 27% of prime display space or 33% of bin space.

For retailers who don't participate, Universal's wholesale prices for top-line CDs are raised to $11.50 and superstar releases to $12.50.

"I told them it's blackmail," says Brook Higdon, general manager of music for Olsson's Books & Records, which operates eight stores in the Washington area. "The public has been hoodwinked that everything will be $11 to $12. And it can't happen that way."

The plan is also confusing some music customers. Some think price cuts apply to all labels. They don't. They don't even apply to all Universal CDs.

Among the exceptions: Latin, classical, singles, music video products, CD box sets and CDs from non-Universal labels still distributed by the company.

Only one in four Universal CDs shipped in the holiday period will be JumpStart titles, estimates Urie. That figure will rise to two-thirds by the first quarter, then remain steady, he says.

"People are coming into stores and wondering why all the CDs aren't cheaper," admits Urie. "It's a big problem for the retailers. They have to explain it's only one (music) company."

Universal flexed its muscles by launching a national ad campaign Nov. 13 inviting consumers to "join" the low-price revolution. "You wanted lower music prices? You got 'em," declare the TV spots, featuring artists such as Limp Bizkit and 50 Cent, and airing on such networks as MTV. The goal of the campaign is to drive music fans to participating retailers - and put the heat on retailers that aren't lowering their prices.

To add insult to injury, Universal is funding the multimillion-dollar ad campaign with the promotional funds it's taking from retailers. It's also slapping prominent stickers declaring "Low Price" on its CDs. The company retreated from its original idea of putting the $12.98 price on the stickers only after retailers howled in protest.

But retailers such as Circuit City warn they'll only change pricing once they sell their old inventory at the old prices. "We will pass along the savings when Universal effectively passes them along to us," says spokesman Bill Cimino.

"Universal is playing hardball. And retailers are playing hardball right back," notes Bernoff.

If music is the first industry "since the industrial revolution to be decimated by criminal behavior," as Universal Music Chief Executive Doug Morris puts it, then lower prices could lure consumers back into stores. But the ultimate success of the price-cutting plan depends on whether others of the "Big Five" music companies - Warner, Sony, EMI and BMG - follow the leader and reduce their prices. So far, not one has.

Music mogul Edgar Bronfman Jr., who led a team of investors that recently bought Warner Music from Time Warner for $2.6 billion, says it's "wildly premature" to speculate about Warner's future pricing strategy. "We'll be watching with interest to see what Universal's experiment brings in the fourth quarter."

Rival companies are tracking "how consumers respond" before making decisions, says Gary Arnold, senior vice president of entertainment at Best Buy.

Lower CD prices would make a difference to 24-year old graduate student Dan Reineke. "If they were cheaper, I would buy more," says this modern-day music pirate who burns most of his new tunes for free. "For $20, I could get dinner and a movie."

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