Too little, too late.
The music industry's last-ditch effort to revive compact-disc sales with a massive price cut might have seemed downright visionary a few years ago, but now it smacks of desperation.
After years of management blunders that have alienated consumers and contributed to steep sales declines, the music industry tried to make amends last week. The world's largest music company, Universal Music Group, announced that it would cut compact-disc prices 30 percent. The new prices go into effect Oct. 1, which could lead to new discs by major artists retailing for under $12 and possibly even $10.
"It's shocking," says Mike Dreese, CEO of Newbury Comics, a New England music-store chain. "It's such a fundamental deep-sixing across the board for hard-fought price points. It's like General Motors dropping the price of each of its cars $5,000."
It's a historic move - the first time prices have been trimmed across the board by a major label in the 20-year history of the CD - but it comes at a time when the music industry as we know it is fast becoming history.
Last week, a Forrester Research survey forecast that in five years, about one-third of music sales will come from Internet downloads, and CD sales will drop 30 percent from their 1999 peak. The survey found that 20 percent of all Americans already download music, and that half of the downloaders say they're buying fewer CDs. Forrester analysts say this means that physical media such as CDs and DVDs will soon become obsolete as consumers connect to entertainment through their computers, cell phones and other portable devices.
Industry insiders and consumers questioned why a CD price cut wasn't set in motion years ago, when the pipeline for distributing music first showed signs of springing an Internet leak. That leak has since now become a flood, and there aren't enough Little Dutch Boy fingers left to reverse the tide.
"Is this going to make the 18-year-old kid who gets his music off the Net or punches up his music on a cellular phone return to the CD market? I don't think so," said Dave Frey, a longtime artist manager who has worked with Blues Traveler and Cheap Trick, among others.
"We've been telling the major labels for years that they're priced too high, and we were told to stop whining," said Anne Garbus, owner of Desirable Discs, a small chain of Dearborn, Mich., music stores that will close the next month because of declining sales. "I applaud them for finally listening to consumers. But it's too late for the 600 record stores that closed last year, it's too late for places like Tower Records, and it's too late for me."
In a year in which CD sales have already declined 15.8 percent (following a 9 percent plunge in 2002) and hundreds more music stores have closed, a bold move to restore consumer interest in the discs was long overdue. Consumers have consistently complained that CD prices are too high, and the industry's failure to address their concerns is often cited as the main reason they have turned to the Internet in search of music. Through file-swapping services such as KaZaa, Morpheus, Grokster and Soulseek, consumers download free music off the Net at a rate of 2 billion songs a month.
Instead of pouring its considerable resources into building a better, more efficient digital distribution model, the $12 billion-a-year industry has tried to sue the file-sharing services and file-sharing consumers into submission.
So the announcement that Universal Music Group would cut the retail price of its CDs to $12.98 from $18.98 was a refreshing change. The move will also cut the wholesale cost to retailers from $12.02 to $9.09, which will enable some retailers to sell new CDs at under $10. The conglomerate, with an artist roster that includes Shania Twain, U2, Eminem, 50 Cent, Elton John and Diana Krall, accounts for nearly one-third of all music sales worldwide. Because of Universal's size, its decision is likely to trigger more change throughout the industry:
- The four remaining major labels - Warner Music Group, EMI Group, BMG Entertainment, Sony Music Entertainment - will likely be compelled to also lower CD costs to compete with Universal at the height of Christmas buying season, when the industry traditionally brings in 40 percent of its annual revenue.
- Retail stores are expected to lose millions in so-called "co-op" advertising dollars as the major labels cut back to compensate for the lower-cost CDs.
- The strategy of selling CDs at lower prices to introduce new or unknown artists will have to be sacrificed. "In doing away with all discounts, where does that leave developing artists? How do the labels bring a focus on them?" asks Bruce Iglauer, president of Chicago blues indie Alligator Records.
- Artists who receive royalty payments from the major labels face an immediate 30 percent pay cut.
- Pressure will increase on labels and retailers to move more CDs to compensate for the revenue lost from the price cut. This could mean that the major labels and retail outlets will become even pickier about which artists they choose to support and focus only on those acts with the best chance of achieving mainstream success.
"What you're going to see is fewer nationally distributed records for fewer slots at retail, which means that a smaller variety of music will be recorded," Iglauer says.
Independent record stores, which are already working on a tighter profit margin than the big retail chains, will be squeezed even more. But they may gain ground on large department stores such as Best Buy and Target, who which for years have been using CDs as so-called "loss" leaders. The big stores sell CDs at deep discounts to lure consumers in the hope they'll also purchase other products. Indie stores don't have the same cushion.
"The $9.99 price point resonates with consumers," Dreese says. "You'll see a lot of new CDs by major artists on Universal at that price starting in October, which means we're all going to lose money on the hits. But at least the playing field will be a little more level for the little guys, who have been getting blown out of the water by the Best Buys of the world."
Dreese and other retailers remain convinced, however, that the days of the CD as a growth industry are done. "As technologies emerge ... like iPods or cell-phone streaming that allow consumers to run their lives better, faster, smarter, there is no doubt that the utter digitization of it all will lead to a place where in seven, eight years we will still have a huge music industry, but not too much of a CD industry. Cutting prices like Universal did will slow the decline, but it won't stop it."
©2003, Chicago Tribune.
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