CD pricing retreat
Universal Music Group (UMG), the biggest of the struggling Big Five recording firms, caused a minor sensation in October by offering to drop the wholesale and retail prices of its CDs. The idea was that cutting prices by 30% would revive flagging CD sales and help discourage piracy, in major part exacerbated by the high price of compact discs.
Nine months later, Universal is retreating from that initiative, which went under the code name of JumpStart. JumpStart has not worked, and Universal is backpedaling. Part of the story is a struggle between the music company and key retail distributors; the other half is the continued prevalence of illegal downloading and file sharing, which has been resistant to lawsuits, threats, encoding, and now re-pricing.
According to an article in the Wall Street Journal ("Why a Grand Plan To Cut CD Prices Went Off the Track," 6/4/2004
Many music buyers never even saw the lower prices. A wide swath of music retailers, from Virgin Entertainment Group Inc.'s Virgin Megastores to Trans World Entertainment Corp.'s FYE, either never adopted the cuts or were slow to implement them -- and pocketed the extra cash. Retail prices on Universal CDs declined just 5% between the first quarter of 2003 and the first quarter of 2004, according to research firm NPD Group Inc. -- instead of the planned 30%.
The music retailer, most of them in dire financial straits because of music piracy, rebelled, especially since the discounts would be a big bon to superstore retailers like Wal-Mart, Target, and BestBuy that could afford to sell a select number of CDs at cost or even below, as a loss leader. In addition, Universal stopped paying promotional fees, which helped prop up the teetering chains.
Record retailers felt they were the victim of "strong-arm tactics" designed to force them to accept untenably low retail prices that squeezed their profit margins, says Don VanCleave, president of the Coalition of Independent Music Stores, which represents 70 retailers in 24 states.
If anything, JumpStart has made for even more problems for the industry. As specialized music retailers go bankrupt (Tower Records and Wherehouse, for example), the recording companies are depending more an more on the megastores, which have small music departments and are interested only in big hits and are not very interested in backlist. The backlist is critical to the recording companies, because they can be steady sellers and require no new promotion, unlike the dice-roll on marketing any new CD.
The music industry is in the same situation as the book industry, where mass-market sales of best sellers at stores like Wal-Mart are changing the industry and making life difficult for the publishing houses. Even Borders and Barnes & Noble are culling their lists and beefing up coffee and gift sales. Every attempt to feed those big venues sucks life away form the smaller stores that carry the non-mainstream and the backlist.
Another factor, the article argues, is that UMG's rivals refuse to follow suit, indeed used the change to get some share at universal's expense:
In fact, Universal's move toward standardized pricing encouraged its rivals to step up their use of co-op advertising -- which curried favor with retailers just as Universal was alienating them.
None of this has made the overall industry any stronger. As we've pointed out before, the music industry is in the midst of a major disruption. Maddeningly for companies like UMG, even an attempt to maneuver around the problem can backfire. Power over pricing is severely limited in a layered market where producers and retailers are both concentrated and where both of them see no way to radically change the way they do business. The only tricks left for the big music companies are further mergers (BMG, Sony is pending) and paid downloads (so far pretty successful but the jury is still out).
