Cost In Translation

By: Greg Milner

Last summer, Universal Music Group -- the largest of the five corporations that produce most of the music we hear -- made headlines by cutting the list price of its labels’ CDs by about 30 percent. Universal CDs now retail for between $10 and $13, which should pressure other labels to follow suit. Universal officials said the decision was in part an attempt to stem the tide of illegal downloading. But is slashing the price of an album enough to entice a typical downloader away from Kazaa? “There’s no question that a third to half of the decline in album sales is directly attributable to downloading,” says Russ Crupnick, vice president of the NPD Group, a marketing-information firm. “When we ask consumers why they’re buying less music, price is at the top of the list every single time.”

To pay for the price cut, Universal will slash certain promotions, in particular eliminating cooperative ad campaigns with retail chains. To buy CDs at the reduced wholesale rate, retailers must agree to specific conditions, including devoting around 30 percent of their display racks to Universal acts. The price cut may help large chains like Tower and Sam Goody compete with electronics stores such as Best Buy, which already sells CDs at reduced prices to attract customers.

For smaller independent record stores, already struggling to compete, the price cut isn't so welcome, since Universal is lowering retail prices far more than wholesale prices. That's a problem because major labels service large chains directly, at wholesale prices, while indies usually purchase product from large distributors called one-stops, which impose a middleman fee. Thus, chains can still afford to meet or beat Universal's suggested prices. But indies have to choose between shrinking their already slim profit margin (to as little as $1 per disc) or being outpriced by major retailers. "Already, we have customers asking us why Universal CDs aren't cheaper," says Josh Madell, co-owner of Manhattan's Other Music.

But even if Universal's new policy gives a leg up to major chains, it may not succeed in wooing file sharers out of the underground. "They've gotten used to the idea that they can get anything they want online," says Josh Bernoff, an analyst for Forrester Research. "CD prices won't solve that problem, whether they're $20 or $12."