Universal Music to Cut CD Prices to Under $13

[Claude]

Source: Yahoo News

Universal Music to Cut CD Prices to Under $13

By Derek Caney

NEW YORK (Reuters) - Universal Music Group, the world's largest record company, on Wednesday said it will cut list prices on compact discs by as much as 30 percent in an effort to boost sales that have been stymied by free online music-sharing services such as Kazaa.

Starting in October, Universal, the home to such artists as Mary J. Blige, U2 and Elton John, will trim its prices on most of its CDs to $12.98 from its current $16.98-$18.98 range of prices.

"Our research shows that the sweet spot is to sell our records below $12.98,' said Universal Music president Zach Horowitz. "We're confident that when we implement this we will get a dramatic and sustained increase."

Historically, large retailers have sold new CDs at considerably less than the so-called "manufacturer suggested retail price."

"We expect this will invigorate the music market in North America," said Doug Morris, the label's chief executive. "This will allow retailers (to sell) for $10 or less if they so choose."

The price cut comes as the company has endured the enormous popularity of free music sharing services, which the labels blame for music piracy.

Universal, which is owned by Vivendi Universal, sees the price cuts as part of a larger strategy to discourage people from downloading music from the free services.

The record industry has already begun suing individual users of these services for copyright infringement. The labels have also begun offering their music to online music services that charge for each song downloaded, one of the most popular of which is Apple Computer Inc.'s iTunes.

"As people will begin to migrate from illegitimate services, they're going to be exploring a host of options -- some online and some through retail," Horowitz said. "We felt that the most important thing we can do to encourage people to go back into stores is to reduce our prices dramatically."

Wholesale prices for CDs would decline to $9.09 from $12.02. For a handful of bigger name artists, wholesale prices would be $10.10 for a short period of time.

Universal also said it would stop "cooperative" advertising, in which the label subsidized advertising by retailers in local markets and instead advertise directly to consumers. It will also withdraw other discounts to retailers.

"(Our buyers) haven't had a chance to talk with Universal at this point to get details on how it might affect the business," said a spokesman from Circuit City Stores Inc. . A spokeswoman from Best Buy Co. Inc. declined to comment.

Amazon.com Inc., Tower Records and Trans World Entertainment Corp. did not immediately return phone calls requesting comment.

The other major labels -- AOL Time Warner Inc.'s Warner Music, Bertelsmann AG's BMG, EMI Group Plc and Sony Music Group -- declined to comment.

Some music executives questioned how much impact the price cuts will have.

"This doesn't have as much impact as it looks," one record executive said. "The labels were offering some discount programs to the retailers that would now end. So it's not entirely clear how much of a change there is for retailers' margins."

Another executive noted that larger retailers like Wal-Mart Stores Inc, Best Buy and Circuit City already sell CDs at around $13 anyway to get people into the stores to buy bigger ticket items.

"It remains to be seen what this means for the specialized retailer of CDs," he said.

(Additional reporting by Jackie Sindrich)

Edited September 3, 2003 by Claude

[Morganized]

Maybe, just maybe, the record companies are finally getting the message! Forget copy control, lawsuits, online trading, and SCAD/DVD audio, the real problem is the price of CD's. Evidence the last Norah Jones mega hit. When that one first hit the market it was selling for the 9-10 dollar range. People picked it up, liked it, and the rest is history. Word of mouth started selling the thing and allowed Blue Note to actually raise the price in response to market demand. What do you know about that.(sic) .... If they want to get people interested in the music business they have to get people buying the records. Once that happens, buzz starts up, interest comes back, and the music business gets hot again.

Now if they could just find everyone jobs so they can afford to buy them at any price.

[Dmitry]

That certainly looks like a bit of good news. I'm susrprised noone here has commented yet.

UMG owns Motown and Verve/Impulse![among many other, much bigger things] .

I like the sound of $13 and under very much better than $16-$18.

Imagine $10-priced brand new cds any day of the week.

[RDK]

Now we must do our part and buy, buy, buy! (Seriously, we did say that we'd buy more and stop our illegal downloading if prices were lower - I hope that wasn't just lip service.)

Suddenly a lot of those Verves that I was passing up are starting to look pretty good...

[The Mule]

Better hurry up because who knows what'll happen to the price points once G.E./NBC buys the whole magilla...

[Rooster_Ties]

Three words...

'bout fuckin' time!!!!!!!!!!

[BFrank]

This seems amazing to me. What took them so long?? I think they're going to find that THIS is what music buyers are waiting for. Who knows, they might even have to consider going lower on the list price. Maybe it will even spark a price "war". Anyway, it's a start.

I still remember buying records for $2.79 (+tax = $3). We'll never see that again, but this is certainly a step in the right direction.

[Big Al]

Three words...

'bout fuckin' time!!!!!!!!!!

Damn straight!

[Jim R]

I still remember buying records for $2.79 (+tax = $3).

Oh, maaaan, did you HAVE to remind me of that? Now I want to go get a hamburger for 15 cents.

[BFrank]

Sorry, Jim ...

[Jim Alfredson]

Let me guess, the artist's cut is the one that the price drop affects, right... not the record companies cut.

[Big Wheel]

Come on guys, you didn't know that Universal starts their fiscal year on June 3? That would make today the first day of the fourth month...

Edited September 4, 2003 by Big Wheel

[David Ayers]

I hope this comes to Europe. In the UK a full price CD costs £16+ i.e. $24. Even if you can afford it, it still feels like too much, and as a psychological threshold it is set very high. On the other hand a mid price sells for £10+ ($15) and they shift like Prince Charles rubber masks on Bonfire Night. It will be interesting to see if this works - I hope it does, though lower price points may not help independents.

[Adam]

Here's the LA Times article on it:

http://www.latimes.com/business/la-fi-cdpr...a-home-leftrail

Notice the deal about shelf space in the middle of the article.

Top Label Cuts CD Prices to Fight Net Downloads

Universal Music's move to increase sales could benefit consumers but squeeze retailers.

Quote

'We're not blind to the fact that [file-sharing] services have ravaged our industry....We have to take steps to try to deal with it.'

-- Zach Horowitz, Universal Music Group president and chief operating officer

Times' recent coverage.

By Jeff Leeds, Times Staff Writer

In a step that could shake up the economics of the record industry, Universal Music Group said Wednesday that it would slash the wholesale price of its CDs by 25% in a bid to revive an ailing market and discourage piracy.

The move by the world's biggest record label — whose acts account for nearly one-third of new music sales in the United States — upended years of industry orthodoxy. Before Wednesday, music executives had fiercely resisted cutting prices, contending that they were justified by the enormous costs and risks that record companies assume when investing in often-unproven talent.

Consumers may be the biggest beneficiaries of Universal's action, while retailers could be among the biggest losers.

The Vivendi Universal Inc.-owned giant — home to such artists as 50 Cent, Limp Bizkit and Jay-Z — cut the suggested retail price of most new releases, which have gone as high as $18.98, by as much as 32%, to $12.98. Many stores traditionally have sold CDs for even less than the suggested figure.

"This is like a bombshell," said Don Van Cleave, a Birmingham, Ala., music retailer who heads a coalition of about six dozen independent record stores. "People are like 'Oh my God, are you kidding?' "

Although stealing songs off Web sites obviously carries the cheapest price of all, Universal said consumer research has shown that people could be motivated to rush into record stores when the retail price of a CD drops to about $13. One Universal executive called this "the sweet spot."

Doug Morris, Universal Music's chairman, said the price cuts were intended "to reinvigorate the music business in North America." The company said the lower prices, expected to kick in Oct. 1, would be maintained at least through the year-end holidays.

By cutting prices, Universal is offering consumers a carrot, precisely as the Recording Industry Assn. of America is wielding a stick in the form of subpoenas and threatened litigation against those who take songs without paying via the Internet.

Only days ago, the trade association disclosed that U.S. music shipments dropped 15% in the first half of the year, twice the rate of decline of a year earlier. By the end of last year, overall shipments had fallen about 15% from their peak in 2000, triggering an industry-wide crisis that has spawned mergers, layoffs and widespread record-store closings.

Executives from Sony Corp.'s Sony Music Entertainment, AOL Time Warner's Warner Music Group, the Bertelsmann Music Group and EMI Group declined to comment on the Universal move Wednesday. But it appeared that none was immediately ready to follow Universal's move.

Privately, several competitors characterized the price reductions as a short-term solution intended to bolster Universal's holiday numbers at the expense of the industry's waning strength. They predicted that the gambit would be abandoned before long.

Competing executives also suggested that Universal could lose hundreds of millions of dollars in revenue and find itself hard-pressed to impose higher prices if the cuts don't draw customers back into stores in huge numbers.

What's more, if sales don't rise sharply, the plan may trim the paychecks of many Universal recording artists, whose royalties are based on their albums' wholesale price. Nevertheless, several artist managers expressed support for the move.

"As a company concerned mostly with overall artist development, we feel anything that increases consumer appetite for music — as a price decrease should — is good for the artist," said Jeff Kwatinetz, chief executive of management giant the Firm, whose Universal clients include such top sellers as Mary J. Blige and Limp Bizkit.

The new Universal policy would reduce the wholesale price for most albums to $9.09 from $12.02. Albums by its biggest artists, including Eminem and Shania Twain, would be pared slightly less, to $10.10. The new pricing schedule doesn't include Latin or classical recordings.

In a conference call late Wednesday, Universal told several retailers that in exchange for the wholesale price cuts, the record label expected the stores to guarantee that at least 25% of their shelf space would be devoted to the label's acts.

Meanwhile, Universal also jolted retailers by disclosing a plan to halt discounts and "positioning" fees for prominent shelf placement — two long-standing industry customs. Instead, Universal wants to redirect its efforts toward its own radio, TV and print advertising campaigns. Many record store owners have been earning more money from fees than they do from selling CDs.

Van Cleave, of the independent retailer group, questioned how successful an advertising blitz by Universal would be. "I don't think the industry's ever been that great about promoting a record outside of radio and MTV," Van Cleave said. "How are they going to use those funds to motivate the consumer?"

Some industry observers voiced concern that Universal's move would validate arguments that CDs have been overpriced — a common rationale among computer users who download music for free from file sharing networks such as Kazaa.

But Universal executives characterized the price shift as a bold effort to rescue music in the U.S., the world's biggest music market, from devastation.

"Music has always been a great value. It just got better," said Zach Horowitz, Universal Music's president and chief operating officer. "We're not blind to the fact that [file sharing] services have ravaged our industry, which has absolutely nothing to do with the underlying value of the music. We have to take steps to try to deal with it."

Universal Music — which wasn't part of this week's proposed deal to merge parent Vivendi's entertainment assets with NBC, a unit of General Electric Co. — didn't say how much the move might affect its earnings. But analysts were preparing to slash their profit forecasts.

Drew Borst, an analyst at Wall Street firm Sanford C. Bernstein, said he had projected that the music unit's earnings would slip 15% this year to about $900 million, but now he would probably trim his estimate further. "It's going to be pretty painful," Borst said. "It's pretty unrealistic to think that, in the short term, they'll be able to make up the lost revenue with an increase in the number of units sold."

Still, Borst added, he could see the logic in Universal's strategy. "Long term," he said, "I think it's the right move to get this industry in a position where it can have a healthy demand" among consumers again.

[Rooster_Ties]

Another significant quote from the article above...

The new pricing schedule doesn't include Latin or classical recordings.

[Tjazz]

I still remember buying records for $2.79 (+tax = $3). We'll never see that again, but this is certainly a step in the right direction.

You can still get new CDs from BMG Club for around $4.50 (that includes shipping and tax).

So what's the complaint?

[Tjazz]

I hope this comes to Europe. In the UK a full price CD costs £16+ i.e. $24.

I thought Europe has Price Fixing...

Has it ever changed?

The record labels in the USA got sued over Price fixing recently.

[BruceH]

Cheap Verves...cheap Verves...cheap Verves........

Uh, sorry, I kind of zoned out there.

[J Larsen]

Why would Universal exempt Latin?

You can be sure that they forked over at least $100K to some consulting firm that told them their market research indicated dropping Latin music prices would not be fruitful...

[Chuck Nessa]

I thought I posted this somewhere on this board, but here goes again:

While this is great for the consumers, I'm sure lots of indie labels are scrambling to see how they might survive if this price structure becomes the norm. It has been tough selling new recordings when you have to compete with Miles, Monk, Trane and Rollins on cheap OJC and RVGs, but this may be the final nail in the coffin for some operations.

A label like PI could be in deep doo doo. This will probably end the "major label" careers of a number of artists as well.

[Rooster_Ties]

Thanks Chuck, very much appreciate your thoughts on this topic, and any other opinions you have on the topic. Feel free to post more, as I think many of us would be interested in more of your take on all this. Thanks!! -- RT

[JSngry]

Lost in the middle of all this fuss is a question for which I've yet to recieve a satisfactory answer - Where's Mark?

[RDK]

Speaking of Mark, has anybody - anybody? - been over to the Verve site since they did away with their forum oh so long ago? Hasn't even crossed my mind to check in...

[JSngry]

There is no longer a forum. You can write reviews, and they'll post them, but watch out - I wrote a few praising the album in question but also rather strongly urging the reissue of more of the same artist's material, and they got yanked quicker than The Beatles' Butcher Cover. It's a colorful site, kinda neat visually, and lots of sound samples, but it's TOTALLY corporate.

However, A&M records has a forum...

[Shrdlu]

Actually, we didn't really have to cough up $18 for Universal's CDs. There have been many sales and other deals, including those at zweitausendeins. Where there wasn't, I just boycotted them, e.g. the 2 CD Coltrane "Ballads" set.

It's hard to say where a CD price should be set. I'm kinda numb to prices near the $20 mark, after several years of chasing after OOP BNs on eBay (that's all history now, thanks to several reissues) and ordering Japanese CDs (I'm not a millionaire, but I do order some Japanese CDs).

I do remember that, in the 50s and 60s, when it was just vinyl, the LPs were usually quite pricey, and we couldn't get everything that we wanted. Impulses were among the more pricey LPs, as they had those nice gatefold covers. There were several times when we had to settle for an EP. (Definition for you young 'uns: a 7" 45 disc that could accommodate about 7 minutes of music per side; these were usually selected from an LP for poorer customers.)