It looks like the price will still come down. The retailer will just put their own price sticker on it. It doesn't seem like a big deal.

And we can still blame the major labels for not lowering prices years ago. Being overpriced in a bad economy (along with pushing bad music) has far more to do with double digit sales declines than the internet.

For those of you that have actually read the links, you'll learn several important details. One is that Universal is actually still cutting their wholesale prices to $9.09 per disc, which might result in lower prices for us. However, they aren't specifying the new sticker prices on the products themselves, except to say "Revolutionary New Price" or something similar.

Some retailers might sell the discs for $12.98, some lower, and some higher. But we'll know what they're paying: $9.09 or $10.10 (for certain artists).

We'll also know exactly how much of their soul each retail has sold to carry Universal albums. The claim here that even indie stores must devote 30% of floorspace to Universal is actually false (probably due to misunderstanding). The actual requirement is 27% of the whole store or 30% of the space reserved for major labels. Since Universal is responsible for roughly 30$ of all major-label release, they're simply demanding commensurate treatment. If an indie store reserves only one little tiny rack for major-label releases, that's fine so long as they give up one-third of that rack for Universal.

Remember, folks, the wholesale price is $9.09 (or $10.10), so at $12.98 the stores are making $3.89 (or $2.88)per disc, which is ~43% (or ~29%)markup.

As I understand this, the announced wholsale price reduction is still in effect, they jsut agreed to not mandate the retail sale price, leaving sellers a little more flexibility.

Er, the wholesale price will still come down. That may or may not affect you and me. By caving to retail pressure about sticker prices, we can now be charged whatever the retail stores want to charge us. So we were going to save on each and every CD, and now we may not. It's a price hike!

It works in politics, and the music biz is all politics these days anyway, since people rarely delve into the economics. If they did so, they might actually (gasp!) recognize that $5 for an album is unreasonably low in most cases.

Heck, some stores were upset about making "only" $3.89 per disc!

Yeah, I don't see a huge issue here other than that they didn't want to have a pre-mandated price. I think it's likely that one of the two big electronics stores (Circuit City and Best Buy, of course) will offer CDs at the lowest price they possibly can, which will force the other to do the same.

Anyone remember the glory days, right when Best Buy started opening everywhere? All CDs were $9.99 for about the first year they were open in my area. Oh were those the good days . . .

Another angle is that all this transparency about pricing, business operations and like is very good for consumers. They can now say: "we know what you're paying, we know what you're charging, we know what you're making - you suck squid."

Exactly. Now that we know what the margin is, we will have the ability to select who we give profit to based on the margin the retailer chooses. If I think a store's margin is too high, i won't buy. But if the store has other advantages, like a good selection of indie material, i might be willing to shell out the extra buck or whatever to help keep them around. If Best Buy's margin is too high, screw 'em, they can't justify higher prices in my opinion cuz they don't offer anything special.

43% is normally what retail stores make on CDs.

Particleman, it's just the opposite.

Places like Best Buy sell music BELOW cost, because cheap cd's create foot traffic in their stores. The $2 hit they take on selling a disc for $9 that they bought for $11 is more than made up for by the profits on big ticket electronic goods, software, and accessories. That is, recorded music is their loss leader.

This creates a situation where Best Buy, for example, who are among the top five customers of most record labels in terms of units shipped, can dictate terms of pricing, distribution, and exclusivity. The labels are encouraged to play along, because to not do so means Best Buy will not carry as many of their titles, or participate as frequently in co-op ad schemes and end-rack programs.

The effect is that independent record stores, whose ENTIRE profit comes from cd sales, suffer mightily. There was a time about three years ago when a bunch of indie stores were caught going to Best Buy to restock their own shelves, because paying retail at Best Buy was cheaper than going through their distributor!

That "only" $3.89 per disc (as another comment put it) that some stores make isn't that much money, especially if you're a store dedicated to carrying a broad selection. That's a LOT of capital tied up in merchandise that won't necessarily turn over. Whereas Best Buy does NOT stock deep catalog, most indies will go out of their way to keep in stock, say, a copy of Beefheart's "Safe As Milk" or Zappa's "Grand Wazoo", even though they might only sell two a year.

In short, that $3.89 needs to pay for labor, plant/property costs, advertising and marketing, insurance, taxes, etc, and since that's the only revenue stream they got, it's not such a great picture.

And when Universal marches in and offers Joe Indie a lower wholesale price in exchange for becoming, in effect, a Universal store, where's the good in that? Your indies are in it for the music, and they are being asked to choose between going out of business and shilling for UMG.

One thing I learned from my own time in the music industry: It's a shitty business for everyone involved.

Thanks, Johno! This is just the sort of thing for which I'm looking over here. For different reasons, it doesn't seem unreasonable to a music retail "insider" for both big chains and indie stores to collect $3-5 per album, and based on the scenarios, I completely agree.

So buying a typical CD at retail for $5 would leave somewhere near zero for the label and artist to haggle over. Oops!

Johno- thanks for the clarification. I guess i had my x and y axes switched. The music industry is indeed a shitty business. I'm in a band and though we don't play much and aren't signed, i've heard some horror stories.

I don't think $5 is sustainable for new CDs under the current structure - everyone would have to agree to scale down and go for volume over highmargins. Where it IS sustainable is online where many of the costs are reduced or eliminated.

The NYT has an article

CD Price Cuts Could Mean New Artists Will Suffer

...And the plan's lower margins could spur retailers to shift shelf space from CD's to other products. Wal-Mart has already told music companies it may reduce its space devoted to music by 15 percent next year because of slow sales and low profits, music industry executives said. (Representatives for Wal-Mart did not respond to calls seeking comment.)

The retailers main complaint about the plan is that it squeezes their profits. Under the plan, Universal is cutting the standard suggested consumer price for its new CD's by $6, or almost a third, to $12.98 from $18.98. But it is cutting the standard wholesale price much less. That price was about $12, or in effect about $10 after standard discounts and subsidies. Under the new plan, the standard wholesale price will be about $9 for most titles, with no additional subsidies or discounts — essentially lowering the effective wholesale price by a dollar, or about 10 percent. After an initial outcry from retailers, Universal scrapped a plan to post the suggested retail price on each CD, although stickers will still refer to the new lower prices.

Independent stores and music chains complain that the cut in the profit margin hurts them more than it does chains like Wal-Mart, Best Buy or Target. The specialized stores have fewer economies of scale and less chance to make additional money from sales of other products, like refrigerators or apparel.

In recent years, Universal and other labels have also sought to increase sales of promising new artists like The White Stripes, from BMG, or the Yeah Yeah Yeahs, from Universal, by selling their CD's at effective wholesale prices of about $6.50, with additional promotional subsidies. Universal executives say they will still offer a "developing artists" price of about $6, but without additional subsidies. Independent store owners point out that the developing artists will have much less of an advantage next to more establish acts, especially without promotional subsidies....

Steve Berman, who is in charge of marketing and sales at Universal's Interscope Geffen A&M unit, said the company's new investment in consumer advertising would make up for the difference. "I think we will give our artists a much better chance in terms of developing their message," he said.

Instead of paying stores for promotions, he said, Universal will spend part of that money on consumer advertising to help get attention for developing artists. And, he said, in some cases its advertisements will mention an influential local independent music store, since independent stores are the main outlets for developing artists.

Despite what hardship this may cause for indies, lowering prices is still all to he good in the big picture - I am waiting for the others to follow. Indies make most of their money in used records anyway - that won't change.

thanks for the update Steve

Eric (#12), given that on this page I highlight a link which points out that major labels collect an average of $2.20 per CD for manufacturing, packaging, and distribution, I don't buy the $5 online number.

In fact, your statement is exactly the sort of soft-headed thinking I'm talking about. I'll finish this comment over there.

I think the major stupid thing universal is doing here is cutting off co-op advertising.

That is what largely funds the ads (mostly in alt weekly papers) local record stores take out to drive traffic to stores.

General consumer advertising even if indie stores are mentioned sometimes will mostly drive traffic to chain record stores and big box discount retailers.

Lowering prices won't be a good thing if it puts even more indie stores out of biz. While many of them sell more used records, those ads bring people in who buy them too. And new CDs are still important for many.

And if you go to an indie store, there are lots of indie labels who sell CDs for $10 (and too may who sell for $18).

Very true on the co-op dollars, Steve. A big shame. Of course, Universal might point out that it is a little odd that they're paying to advertise the albums of their competitors, and I'll bet some brick-headed exec said just that. Really, this seems to me to be like the rising tide that lifts all ships. Advertise for your competitors if you must to get people in the door. If they're in the store and your albums don't interest them, you've got bigger problems than your ad spending!

:-)