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CD prices: Leaving the little guys behind

Universal Music Group's (UMG) plan to cut CD prices to improve sales has gotten a good deal of coverage. But an interesting Wall Street Journal article (“CD Price Cuts to Squeeze Retailers”, September 18, 2003) presents a postscript to that story. UMG is the largest record company of the Big Five, and it represents a wide variety of artists from Eminem to the Rolling Stones.

Hidden behind the story is a big bonus for the big retailers at the expense of the smaller stores. The big general retail companies now control 33% of all CD sales, up from 27% a few years ago. That's in part because companies like Wal-Mart and Best Buy use CDs as a break-even or loss leader lure to bring customers into their stores.

As the article points out, Universal is dropping its wholesale price by around $3, from $12.12 to $9.09. But retail prices are being reduced by $6, from $18.98 to $12.98. That means that the retailers are been maneuvered into giving up $3 of their potential profits too. The new actual prices are estimated to end up between $11 and $12, with mass market stores selling CDs for under $10. Independents and even many music chains will see their margins cut to the bone.

Second, the UMG price cut will only go to stores who make certain shelf space quotas. According to the Journal piece:

Originally, certain conditions were set in order for retailers to receive the new wholesale prices. Among them: stores would be obliged to give 25% of bin space and 33% of 'prime' space — kiosks, displays, and the like — to Universal products. Those numbers were roughly in line with Universal's 30% market share, and they made sense for mass stores like Best Buy, whose sales typically reflect those of the market overall. But independent stores…were outraged at the notion. Universal responded to their complaints by lowering its prime-positioning requirement to 27% of total space, or 33% of the space used to promote the major labels' releases. Universal will retain the right to determine which of its CDs are promoted.

In other words, despite a small retreat, Universal will only give the discounts to the stores that are willing to give the CDs they want to push top billing.

According to another article in the Louisville Courier-Journal, “from a practical standpoint, it would be impossible to satisfy the major labels were they all to make the same kind of request. 'There are five major record companies,' [an independent music storeowner] said. 'If Universal wants 25 percent, what does that leave for the rest? They all can't have 25 percent.”

Possibly without deliberate intent, all of this favors big general merchandisers and hurts already ailing independent stores and small music chains. The article also theorizes that lower new CD prices will also lower used CD prices, a staple of small record stores, cutting their profits even more.

This is all rather predictable. The big record companies are mostly interested in the big retailers. It's a lot less work to use them to push up sales, as they take less hand-holding and have better marketing information and display savvy. They also have customers that tend to buy the big blockbusters, the CDs that have the biggest return for the record companies. Smaller, independent shops involve lots of overhead for them, and they have customers with less trend-driven tastes. They also sell the popular CDs, but they do so in smaller numbers. The record shops may sell more at the lower retail price. But more will certainly close their doors because of the price changes started by UMG.

These are all elements of the oligopoly wars: the grab for shelf space, the big companies talking to other big companies, the small guys threatened by being left out. In the music world, UMG's have knocked current trends up a notch. The consumer may benefit in short run, but in the long run, there will be less choice. If the people selling music really don't care about it, only the least common denominator will remain on the shelves.  [Oligopoly Watch]

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