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The Big Takeover > essays

SPIN-ing Wrong: Why Lowering the Price on Compact Discs Is a Bad Idea

by John Davidson
8 February 2007

In the heyday of Napster, an oft-heard claim was that people were ‘sharing’ songs because compact discs were too expensive. This canard recently came up in the February 2007 issue of SPIN Magazine. DAVID BROWNE, a well-established music writer, rattles off 10 ways to fix the music business and put this at the top of his list. He thinks this idea is “obvious,” even though it flies in the face of history. Online bloggers at Idolator recently joined the bandwagon of the price conscious.

Pricing is a value proposition to the customer and an income source for the seller. If income is sufficient, then pricing can also be used as a marketing tactic. In other words, if you are covering your manufacturing and distribution costs, then price can be used to establish a competitive advantage in the marketplace. This begs the obvious: if your pricing revenues cannot offset your costs, you will lose money. For almost any industry that has established itself, costs are fairly stable and equitable amongst competitors. In a mature marketplace such as the music business, barring significant innovation, costs are well fixed and do not allow for long-term downward adjustment. When products are essentially reduced to commodity status, as compact discs are, pricing becomes a risky marketing strategy (as opposed to tactic) for growth.

We know this because in the early 2000s, EMI announced a price-reduction to counter the effects of illegal P2P file sharing. Margins were already low, and in order to make up for cutting the margins, significant increases in sales volume must accompany reduction in price. Instead, sales volume decreased and the experiment was ditched; prices simply couldn’t be lowered far enough to spur a significant increase in sales. Of course, when the competition (Napster, etc.) is charging nothing it’s not even the same marketplace anymore.

Let’s remember that compact discs were routinely sold with a list price of $18.99 in 1984. That’s $35.15 in today’s dollars. Mall stores were still charging $18.99 retail in 1996, which comes out to around $24.00 in today’s economy. In 2001, when EMI started an aggressive program of price reduction, they put retail price at $9.99 for a lot of titles…yep, that’s only $10.83 in today’s dollars. So when BestBuy and the other big box retailers—who make up 70% of compact discs sold—are routinely marketing hit music at $7.99 in 2007, it’s pretty obvious that the game has changed significantly. What figure did Browne have in mind? $5 for a CD? Would that increase your purchasing significantly?

As many have noted, it’s hard to accurately break down the costs in getting a CD from a musician to the consumer. But it’s reasonable to assume that $6 of the wholesale price of a CD ($8) is a fixed cost. Even in the enhanced environment of digital distribution, you probably couldn’t get that number to go below the $5 mark due to royalty and production issues. Not to mention that a $5 price point would absolutely prohibit all your indie labels from existing…if you think even major indies such as Matador Records could survive on wholesale prices of $3, you’re nuts.

But for the sake of argument, let’s consider the increase of sales needed for $5 CDs. You’d need to at least double your volume of sales in order to make the exact same profit. Doubling sales in one year, let alone in ten, especially in an industry entering decline, is unheard of. So if you can’t cut your own profits any further (yes, profits are the reason companies exist) and you can’t reduce manufacturing/production by a factor of 50%, then how on earth can you reduce the retail price significantly?

The fact is that compact discs HAVE fallen steeply in price over the past 25 years, which is commensurate with the industry’s life cycle. Further, by making price the key selling point, it reduces the effectiveness of all the other marketing efforts. The only thing obvious about Browne’s argument is that he’s wrong. Some of his observations were better, and we’ll get to those soon.

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Comments

Yes, $5 is too low. But $18.99 is too high, and there are plenty of new releases with that list price. There are points in between those that are low enough to increase volume of sales yet still maintain a good profit margin, and the shining examples that across-the-board budget pricing can work are Naxos, which sells all its single CDs for $8.97 list, and Dischord, which offers the vast majority of its catalog for $10 including shipping.

Working in a record store, I witness the horrible amount of waste by both major labels and indie labels. We get large boxes shipped via UPS that contain a single poster – which we usually throw away because we don’t put up that many posters (maybe about one for every hundred we get, which suggests they’re basically a waste by themselves even before they’re shipped). We get large cartons “filled” with a single LP (why don’t they use the smaller boxes?). We get boxes full of promo CDs of acts any rep looking at our orders could see that we would NEVER stock. And on and on and on. There is plenty of room for prices to be cut if operations were run more efficiently. Not all the way down to $5, granted, but far below what most labels charge. And speaking of Matador, sales of Cat Power’s The Greatest took off when they cut the price to $9.99.


— Steve Holtje    2007-02-09 00:38    #

Why not just cut out the sale of cds altogether and just give people a flat rate service to d/l to their hearts content? I mean with all the issues that cds bring with them like having to pay to make the cds, storage of the item, shipping them, storing them again, shipping again, then storing them and taking up a huge swath of space, it begs the question of why in god’s green earth are we still doing this? Wouldn’t it be cheaper just to have every record company put their entire collection up for sale and let people find stuff they didn’t even know they wanted, let alone a place like Best Buy would carry, and just let people go crazy. In the process would cut out all the physicalities and the expenses that are incurred from doing it that way. Seriously, when are these people going to die/retire and hand it over to someone that can see the future?


— Nick    2007-02-13 05:20    #

interesting points, i’m no economist / marketing guy so i’ll not comment. but i’m listening to new APPLES IN STEREO cd, via a link on rec label. it’s the entire cd, i think, complete songs. how nice of them. how crazy of them.

then i read in nyu student paper of RUCKUS website – students can download music for free. and it mentions similar sites.

isn’t all this throwing monkey wrenches in the marketplace? (or is it like the crazy family in “you can’t take it with you” – they’re an isolated case)


— guided.by.h    2007-02-13 13:57    #

Well, I don’t know about other websites, but I know with Ruckus they don’t let you take the music with you w/o a subscription, but alas no ipods. You are better off just listening to net radio stations then using it, I tried it.

Personally, the only site out there that I have found to be a good service is eMusic. What a novel idea just letting you d/l mp3 files with no DRMs.


— Nick    2007-02-15 06:21    #

I agree that prices are probably too high—let’s remember that pricing is almost always PRIMARILY a marketing decision. It’s counter-intuitive to think of it that way given that you’d think the best way to bring a product to market would be to simply look at the actual cost and then add a profit margin. The problem with that is what I note in the article: a purchase is an emotional decision based on value and price is merely one component.

What we’re seeing, as Steve notes, is that the value of recorded music is declining in the market. Clearly, people do not want to pay $18.99. And while I think it’s true that the more CDs would be sold if they were listed at $9.99 or less, it’s pretty clear that “free” has probably changed the market forever. You can sell to a narrow niche like Dischord does and never push 100,000 units of the entire catalog. Yeah, you can do that but the core of the industry isn’t made up of thousands of niches; it’s been built for the masses. The legacy costs (catalog, existing mechanical contracts, entrenched distribution systems) are simply too high.

That said, with the market signaling yet again (sales down 20% this month compared to last year) that things are getting worse instead of better, we can expect prices to continue to fall.


— john Davidson    2007-02-16 23:51    #

The niche point is quite salient. True, “the core of the industry isn’t made up of thousands of niches,” but I do think it’s moving in that direction. If you look at what has happened in jazz and classical, they used to be significantly represented on major labels, but when the majors’ business model changed to rely much more heavily on mass-market sales (a gradual process that started in the ‘80s and accelerated drastically this decade), they abandoned even big-name artists to niche labels (McCoy Tyner on Telarc, the Philadelphia Orchestra on Ondine, etc.).


— Steve Holtje    2007-02-17 22:37    #

This is an interesting piece. Where I take slight issue with it is that you are making the argument that prices cannot be reduced beyond a certain level because of costs, but you’re assuming away most of the variability in those costs (I’m looking at your comment regarding legacy contracts, outdated distribution systems, etc…).

One point regarding costs that I don’t see discussed above is that the music industry takes the exact opposite of internet companies’ fabled “long tail” approach. Rather than acknowledging the existence of hundreds of niches, the majors continue to try to push big hits into the center of the bell curve. I guess what I wonder is – couldn’t they lower prices across the board if they weren’t spending tens of millions of dollars trying to convince us to buy Ashlee Simpson CDs?


— Eric Wiesen    2007-02-19 10:42    #

I’ve kind of addressed your points in previous posts, but this is a good occasion to recap.

You are exactly right that variability is a key element when determining cost. But I’d also assume that given the scale and scope of operation in the major label cartel (and to a lesser extent, even in the indie world) that manufacturing/distro cost variability is heavily mitigated by development cost: majors get eaten alive by trying to develop hundreds of acts at one time, resulting in overhead and marketing costs that figure prominently in the bottom line. Compounding this is falling sales, which complicates the math even further. The labels need to increase sales by 20% this year, just to keep up with 2006…the third or fourth year of falling sales in a row.

As I’ve noted before, the major labels are struggling against the institutions and culture that they’ve built, which grew into a behemoth that was designed to service platinum artists. I agree completely that dubious moves like signing Kevin Federline or Ashlee Simpson was a waste of money, but it is nearly impossible to reconfigure a large corporation into something nimble like an indie label. There are simply too many entrenched interests involved, going from the executive suites and all the way through the vertical conglomerates that have governed the industry for the past two decades.

It’s been very sad to watch the major labels self destruct, because as they continue to struggle and fire people, it has created an environment of chaos for everyone else involved. Lots of really good people and bands have been ruined by the upheaval of the past 5-10 years. Nobody knows what to do, and worse, very few people are willing to risk it all.


— john Davidson    2007-02-19 17:33    #