Music CDs Still Priced at Levels That Make Consumers Cynical toward Retailers

By Carolyn Shapiro, The Virginian-Pilot, Norfolk, Va.
02.16.2004

Feb. 15--Last fall, the world's largest record company spun out a plan that made many music consumers rejoice.

Universal Music Group announced it would drop the cost of its compact discs by about 25 percent and encouraged retailers to lower their prices as well. The company suggested that consumers should pay around $13 for those CDs, not the $15 to $19 charged for most new discs.

That sounded good to album buyers who had long lamented steep costs. But more than four months later, many price tags still top $18 – even for Universal's own artists, such as rapper Eminem – and show no signs of falling.

Consumers, meanwhile, have grown more sensitive to CD prices, especially since the music industry's younger target audience has turned to the Internet and file-sharing sites to collect songs and burn albums for free.

"The most I'll pay for a CD is $14," said Aaron Yorty, a 24-year-old from Virginia Beach, who said he downloads music on the Internet when he can. "I won't pay $20 for CDs."

Music buyers have reason to look at CD prices with cynicism.

In September 2002, the five major record companies and several large music retailers settled a multistate lawsuit that charged them with fixing prices between 1995 and 2000. Consumers who bought CDs during this time had a chance to sign up for possible compensation, which is yet to be disbursed, with an appeal pending in the case.

The Recording Industry Association of America's increasingly volatile battle against Internet piracy by users of file-sharing Web sites also has put a spotlight on methods of music distribution and pricing. The RIAA, which represents the five major record companies and their various music labels, has gone after the operators of sites such as Napster, which has been converted from a free site to one that charges for its music, and its successors, as well as the individuals downloading from them, claiming they are stealing copyrighted intellectual property.

Universal's move refocused consumers' eyes on price tags. The record company, as it turned out, discounted only some of its titles – and not necessarily releases by its most popular artists.

Universal did cut the wholesale price of many CDs from about $12 to around $9 to $10. But the manufacturer's requested retail price dropped by $4 or $5 in some cases, which would have decreased the retailers' profit margins.

This led some stores to bump up their prices a dollar or two above the suggested $12.98.

"It makes people like us look like we're charging an arm and a leg when we're just making, like, $3 a disc," said Ronnie Maiorana, manager of the Volume CD Exchange in Virginia Beach, part of a small local music store chain. "Basically, we're just trying to keep the margin the same."

Universal also reduced its contributions to retailers for marketing and promotions such as in-store displays, diminishing the savings from the wholesale discount. The losses offset some of the benefits that the retailer would have passed on to the customer, said John Sullivan, chief financial officer for Trans World Entertainment Corp., the nation's largest music retail chain with stores such as Planet Music, fye and Wherehouse Music.

"They weren't dropping it significantly enough to drop the" retail price, he said. "Manufacturers cannot dictate retail. The market dictates retail."

Mass merchandisers, particularly Wal-Mart Stores Inc., drove the Universal price cut, said Don Cusic, professor of music business for the Curb College of Entertainment and Music Business at Belmont University in Nashville, Tenn.

Bearing down its hefty retail weight on the record company, Wal-Mart pushed for wholesale rates to keep CDs in its stores at a customer-friendly $10, Cusic said.

Wal-Mart and other major discounters, such as Circuit City and Best Buy, are known for selling CDs below cost as a "loss leader" to lure shoppers into the store with hopes they will buy computers, television sets and other big-ticket items. The discounters also could more easily take advantage of the Universal price cut because they can afford lower margins, given their greater sales volumes.

In most music stores in Hampton Roads – from mass merchandisers to local independents – new CD prices range from $8.99 on sale for some upstarts or obscure artists to $18.99 for hot stars such as rapper Missy Elliott and classics such as The Beatles. Last week, the album "Some Devil" by Dave Matthews cost $13.99 at Best Buy in Chesapeake, $15.99 on sale at the Wherehouse Music chain store in Norfolk and $16.98 at local dealer Volume CD Exchange in Chesapeake.

As pressure increases on the manufacturer to cut prices, the cost to produce a CD continues to rise, Cusic said. The bulk of the expense comes from marketing and promotions, including music video production, concert tours, store displays, radio play and advertising.

"While the RIAA does not collect information on the specific costs that make up the price of a CD, there are many factors that go into the overall cost of a CD – and the plastic it's pressed on is among the least significant," the industry association wrote in an explanation of CD costs on its Web site. "CD manufacturing costs may be lower, but it takes more money than ever before to put out a new recording."

The labels pay the smallest amount, about $50,000 to $300,000, to record and manufacture the CDs, Cusic said. But it costs them $500,000 to $1 million to garner radio exposure and space in stores for a new release. A music video costs anywhere from $50,000 to $1 million to produce. Wal-Mart charges $50,000 to provide a prominent display for a new CD and a mention in its weekend newspaper flyer, he said.

The record label's wholesale price must cover all these costs. Artists receive royalties, typically 15 to 20 percent of the wholesale price, Cusic said. Often, that actually comes from 80 percent of the wholesale price, with 10 to 20 percent pulled out to cover packaging and "free goods" given as promotions. Songwriters, if not the artists themselves, and publishers also get a cut of the wholesale cost.

The record companies take on considerable risk. Most musicians will never sell enough albums to cover the record company's investment. The big five companies – Universal, Warner Music Group, The EMI Group, BMG Entertainment and Sony Music Entertainment, the last two of which plan to merge – carry huge overhead costs for multiple labels, each of which have their own staffs.

"Labels are losing money hand over fist now," Cusic said. "They can't really afford to operate as they are operating today."

That's why certain CDs with guaranteed demand – classical music, ever-popular rock acts or superstars – carry the highest prices. They help cover the losses from the rest.

"The industry has no choice but to charge more," said Henry Hutton, music director for Lulu a company that helps independent artists distribute their music on the Internet.

But Hutton argued that the Internet has diminished, if not erased, the need for so much marketing muscle to propel an artist. Musicians now can reach their audiences online with little expense.

The industry's target market, mostly male music fans ages 20 to 40, prefers the ease and selectivity of the Internet.

They're more price savvy, shopping at Amazon.com and other online sites for better deals. Those not downloading free music are using pay sites such as Apple's iTunes, which charges 99 cents per song and shares the cost with the record labels. These shoppers don't want to spend the money on albums of 10 to 20 songs with just a couple of hit singles.

The old recording industry and its retail structure now depends on a generation of buyers older than 40, Hutton said. These consumers are wary of or less adept on the Internet and go to stores to buy music.

They have more disposable income and are less sensitive to the prices. But, with most of their collections complete, they also buy fewer CDs than their children do.

Music retailers have subsequently suffered. Sales have slipped the past few years, falling again in 2003 to 656 million units, down 3.6 percent from 2002.

The Tower Records chain is one of the latest casualties, filing for bankruptcy last week and selling stores to stay afloat.

Surviving retailers have had to adjust. Trans World Entertainment, based in Albany, N.Y., has been working on technology for its stores that would allow customers to download the music they want, even singles from different albums, onto self-made CDs. They also could download songs onto MP3 players or send files home to their computers.

"Digital downloading is something we embrace," Sullivan said. "We think it's the next configuration."

Retailers large and small also have put more emphasis on selling used CDs, hoping to reach younger customers who balk at the higher prices. Wherehouse Music has long mixed used and new CDs in its bins, and its sister chain, Planet Music, now offers a secondhand section as well.

Volume CD Exchange and other independent stores in Hampton Roads devote at least two-thirds of their store space to used products. "It's just easier to take a chance on spending $2 on a used disc," Maiorana said.

But the recording industry will take a few more years to change its approach and to adjust its pricing and its distribution in response to modern technology, Cusic said. It's "like taking this huge, giant ocean liner and trying to turn it," he said.

News researcher Jakon T. Hays contributed to this report.

PRICING DISPARITY

Last fall Universal Music Group announced it would drop the cost of its compact discs by about 25 percent. However, many price tags still top $18 – even for Universal's own artists, such as rapper Eminem.

Around Hampton Roads, new CDs range from $8.99 on sale for some upstart or obscure artists to $18.99 for hot stars such as rapper Missy Elliott. Last week, the album "Some Devil" by Dave Matthews cost $13.99 at the Best Buy in Chesapeake, $15.99 on sale at the Wherehouse Music chain store in Norfolk, and $16.98 at local dealer Volume CD Exchange in Chesapeake.

http://www.bcentral.com/articles/isyn/default.asp?newsid=200421715&cobrand=msn&LID=3800

Welcome to change.

So you have to file bankruptcy, boo hoo. Now that you don't have the money to pay your own prices, I for one don't feel sorry for you, this is needed in order to give the comsumer what they deserve. We deserve the right NOT to be ripped off, with the boom of the internet, we the consumer have created our own ways of fighting back against the Nazi industry.

Welcome to the revolution.

I'm proud of the side I'm on.

Best Buy & Circuit City lowered their CD prices? Hmm, must only be on the sale items because I haven't seen these miraculous low prices yet for the entire inventory of CDs.

And what about the effect of the pricefixing lawsuit? When it was settled, some mouthpiece said consumers should see an average $5 reduction in the retail price of disks. Still waiting for THAT to happen.

I'm waiting for a dramatic drop in CD prices, just like the recent 20 dollar drop in video game prices.

By the way, that settlement is $12.68, and one guy in prison in Washington for something serious is holding it all up, saying that he wants millions instead...

Gee, prices should drop by $5 per disc because of price fixing? Holy CRAP!!! That means that the music industry (those labels represented by the RIAA) ILLEGALLY made $22.5 BILLION in that four year span of 1996 through 2000. They sold 4.5 Billion units during that time (according to their website) at $5 per pop.

What was their penalty for this ILLEGAL price-fixing action? Didn't the settlement cost the labels about $147million? WHAT A JOKE!! No wonder price fixing is still happening today.

Let's see, if I bought about 300 CD's during that 4-year time, at $5 per pop, I was ripped off for $1,500. And they want to settle for $12.68? No wonder someone wants to hold this all up. IT SUCKS!!!

Clearly this article is more RIAA propaganda, because the only one that doesn't make money on CD sales is the recording artists, since RIAA contracts require them to pay for most (if not all) costs involved in making their CD. Don't believe a word of it.

Best Buy's pricing on CDs varies widely every week. New release CDs (every Tuesday) are usually $9.99. Within a week or two they go to $11.99 - $13.99 depending on how the title is selling and the current promotion. (And if the corporate office has had their Wheaties that week). After a month, the price gets set usually to $15.99 for slow sellers, and usually settles on $13.99 for titles that still do well.

Movies are a much better bargain at those prices.

Now, the most I want to pay for a CD is $4.99 . I'm not really particular about how I get the CD either, if the artist wants to sell it as a high quality non DRM digital file that I can burn onto CD myself, I'm cool with that. If I have to get it used, I'm ok with that too, even if it means the artist gets zip.

Yes, I'm aware that that is a rediculously low price to want to pay, but I have good reasons. First, I live in what you would call a low income household. Not a lot of disposable income floating around to spend on non-essential goods.

Second, I'm not going to be sympathetic to the starving artist, you as an artist provide entertainment. If you aren't making enough doing that, there's always time to go back to night school and get a real job. Come jockey a register making $28 a week while accruing $300 a month in medical bills and then you can cry to me about being broke.

Third, I like to know where my money is going. If I'm going to shell out more than $10, I want to know that everyone who gets a cent of it is doing something responsible with it. I have charities to support, and church fundraisers, and a whole lot more deserving people than some corporate slut in a $1000 suit.

Last, if I pay more than $10 for my entertainment, I expect to get every penny's worth of my money. That CD better be sheer artistic genius on 70% of the tracks. And lets see, that rules out...everyone's stuff.

Wow, I like this boycotting thing, look at how much I save by not buying crap.

Theres a lot of high-quality DVDs u can get for 10 bucks or 15 bucks. For instance, the other day I bought Titanic for my mother for 10 bucks.

Now lets see....HOW MUCH MONEY WENT into producing Titanic? And I can buy it for 10 bucks. What a deal.

Now explain to me why the Titanic SOUNDTRACK...should be 15 dollars?

nyer
Now explain to me why the Titanic SOUNDTRACK...should be 15 dollars?

because they saw in a New York minute that some sucker will buy it.

What was their penalty for this ILLEGAL price-fixing action? Didn't the settlement cost the labels about $147 million?
from profit 22.5 billion that sum should have been given back to the consumers. not 147 million

CD's are relativly inexpensive to manufacture. The record labels should slash wholesale price's. My friend owns a record store, where most cd's are guarenteed at 12.99$ or less. However there is a Black Flag cd, an EP meaning it has 5 or 6 songs, there for sale for 15.99$. Why did he price it so high you may wonder? The wholesale cost of the cd was 12.99$ for him. 2 dollars a track at wholesale? Something wrong there...

I'm still waiting for my share of the '02 settlement (although I' not holding my breath), and also for BMG to give me my vouchers for over-charging me the three years I was a member (which, btw, they conveniently lost my member info).

I've got over 2000 music files (I AM careful about the nearly 700 files I share, too). I plan to DL even more. The way I see it, if the industry refuses to reimburse me for what is rightfully owed to me, I have no choice but to re-coup my loses any way I see fit. I've been buying music for almost 40 years, from 45's, LP's, and 8-tracks to hundreds of CDs. No one threw a hissy-fit when I recorded off the radio or made compilations onto cassette tapes, so why should DLing be any different?

And to those who think I'm ripping off the artist...well, I have 2 front row seats for Johnny Rivers this weekend. Well worth the 35 bucks a seat I paid. Hopefully, Johnny will get the lion's share of the gate. I support the ARTIST, not the industry.

Some very good points are raised in this article:

"The labels pay the smallest amount, about $50,000 to $300,000, to record and manufacture the CDs, Cusic said. But it costs them $500,000 to $1 million to garner radio exposure ........ The record companies take on considerable risk. Most musicians will never sell enough albums to cover the record company's investment."

One can quibble with the numbers, but these statements raise an interesting question. What would happen if the RIAA affiliates invested heavily in a satellite radio company, to the point where they would have control of the radio company's board of directors? Wouldn't this allow the big labels to broadcast their own songs without having to pay such huge amounts of money to radio promoters? And, if so, then could they not lower CD prices significantly to increase demand for commercial music?

As long as a CD costs more than a cassette the price is unfair. Very simple. Another thing I don't think the RIAA gets is the fact that they don't have as many repeat buyers. By that, I mean people who bought the Beatles music on 45s, then again on 8 tracks, then again on cassette, and one more time on CDs. Recently for two reasons these sales have dropped. 1)I'm sorry, but if I bought something on cassette I should be able to download it as fair use due to the prior purchase of the same media. I should also be able to upload it to someone with the same "fair use" needs. 2) There has been no new media type created anytime recently to keep the sales of repeat (new media)buyers. That alone would be reason for decrease in sales. Now about the CD and Cassette prices again. I should be able to buy the cassette (for less) and go home to download it from anyone I please as "fair use". Same for uploading my CDs to a previous cassette buyer. The RIAA should have the burden to prove otherwise. They are the ones sueing, they carry the burden of proof.

Nyer82 has got a great point! If you can buy a DVD movie for $10 that cost $100 Million to make, there's no way in hell the soundtrack, or CDs should be higher. CDs should be LESS than $10, probably $5-$8.