Unintended Consequences

One of the reasons there wasn’t open rebellion against the music industry and its price gouging ($15-$20 for a new CD using a process that costs LESS than vinyl to manufacture) until MP3s and P2P came along is that there was always the alternate outlet of used records and CDs for those willing to look a little harder. CDs make a lot more sense at $6-8 than at three times that price, and if you are willing to scrounge through the bargain bins, you can find full-length CDs and vinyl priced from a quarter on up. I can still walk into a good used store with $100 and walk out with 40 or 50 recordings. Of course I’m a freak.

But check out what’s happening to used record stores in Chicago, as reported in the Chicago Reader:

This May, Alderman Gene Schulter proposed the addition of two phrases to the city’s secondhand-dealer ordinance: “digital audio disc” and “digital video disc.” The law, which regulates the resale of certain items, was successfully amended in June, and those six words have had a severe impact on local independent record shops. At least one store has stopped selling used CDs, a clerk at Raffe’s Record Riot was arrested, and Second Hand Tunes’ Hyde Park store was shut down for failure to obtain a license after the four-store chain filed a federal lawsuit against the city. (It has since reopened under appeal.)

Municipal Code 4-264 is intended as a crime prevention tool — it requires stores that buy and sell used merchandise to obtain a special license (currently $500 annually); to qualify, applicants must pass a criminal-background check. Stores must also keep a log that lists used goods purchased and collect personal information to verify the seller’s identity: name, address, phone number, height, weight, date of birth, and social security number. If the seller cannot present a picture ID the store must snap a photo or record the sale on video.

Only those used items considered prone to theft are included in the ordinance, and until June that meant audio-video equipment, cameras, computer hardware, watches, coins, and certain types of jewelry. Schulter introduced his amendment after receiving a letter from Lieutenant Lee Epplen of the 19th Precinct stating that in more than 80 percent of burglaries in the city CDs and DVDs were taken.

….But the new legal demands are more invasive, and, in the age of identity theft, disturbing to patrons. According to Felten, many customers who have come into his shop to trade in or sell used CDs have decided not to when asked for a social security number.

Such concerns are at the heart of the lawsuit Second Hand Tunes has filed against the city in district court. Represented by the firm of Horowitz and Weinstein, the chain is basing its suit on First and Fourth Amendment issues. “If you look at the other used items listed in the statute, none of them are items of speech and expression, as CDs and DVDs are,” says the chain’s attorney, Paul Horowitz. “Regulating items of speech and expression is a violation of First Amendment rights.” As Second Hand Tunes owner Johnny Balmer puts it, “The city of Chicago has no right to document my customers’ listening habits.”

….The existence of many independent CD stores is already precarious — more than three dozen in the Chicago area have gone out of business in the last decade. Unlike large chains, independent stores can’t buy direct from manufacturers and must pay between $1.50 and $3 more per disc to get them from middlemen. They certainly can’t sell new releases as loss leaders at $9.99, as Best Buy does. Balmer says he can price new CDs no higher than $14.99 to $15.99 if he wants to stay competitive with national chain stores, for a profit margin of roughly 20 percent.

Used CDs offer a similar profit per disc (about $3 to $4), but cost considerably less to stock — the average profit margin on a used disc is 50 to 60 percent. Besides, Best Buy and Borders don’t carry them at any price. Many independent shops rely heavily on used CDs to stay in business: Dead Wax in North Center is a 100 percent used operation, Second Hand Tunes does 95 percent of its business in used items, and the Record Emporium sells about half-and-half.

Another case of the law of unintended consequences – I’m sure it was not the intent of the framers of the city ordinance to shut down used CD/record stores, but that may be the result.

Another, unmentioned element in this dynamic is the role that promo copies of CDs play in the income of label, promo/PR, and radio employees, as well as writers, many of whom routinely trade in sealed promo copies for cash. Where do you think those brand new, unopened promos come from?