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Why Cutting CD Prices Went Off Track (HINT: blame it on the retailers)

Posted By Barry Ritholtz On June 4, 2004 @ 10:19 am In Music | Comments Disabled


If a price cut falls in a forest, and nobody hears it, will it have any sort of economic consequences?

Apparently, not:


WSJ [1]: “The world’s biggest music company, Universal Music Group, tried a bold gambit to revive the music business: slash the wholesale and suggested retail prices of its compact discs.

Universal, a unit of Vivendi Universal SA, was confident that price cuts of up to 30% would boost business for retailers and please consumers who thought CDs were too expensive. After all, that’s how marketers juice up sales of cars, hamburgers and lots of other merchandise.

But today the nine-month-old initiative, dubbed JumpStart, has been scaled back — for reasons that spotlight the industry’s deep dysfunctions and its uncertain future.

Here’s where things get interesting: How is it that, despite what they teach in Econ 101, major price cuts did not stimulate demand? To some degree, they did — sales rose 9% last quarter [2]. But that’s hardly the sort of pop a 30% price cut should engender, especially in an improving economy. Back to the WSJ:

“Many music buyers never even saw the lower prices. A wide swath of music retailers, from Virgin Entertainment Group Inc.’s Virgin Megastores to Trans World Entertainment Corp.’s FYE, either never adopted the cuts or were slow to implement them — and pocketed the extra cash. Retail prices on Universal CDs declined just 5% between the first quarter of 2003 and the first quarter of 2004, according to research firm NPD Group Inc. — instead of the planned 30%.”

Shocker! Retailers did not pass on discounts to consumers . . . Who ever saw that coming ?

Since “pricing” remains a big part of the problem for the industry, (and as this article makes so clear), a goodly chunk of blame for music industry woes must also fall to the retailers.

A good chunk of the economic issues the labels have run up against has been due to their trying to appease the large music chain retailers, instead of making bold strategic moves. The record chains — the Goodys [3], HMVs [4] and Towers [5] of the world — screamed bloody murder against “legal downloading.” Now we learn they subverted an attempt at price discounting.

When the market issues a strong demand for a product or service, those that fill that demand get rewarded. The industry essentially ignored consumers demanding downloadable music. They ignored that demand for a long, long time, electing instead to sue their own clients.

Adam Smith [6]‘s invisible hand [7] worked its magic, and — voila – a universe of P2P programs filled the void: Napster, Scour, Morpheus, Kazza, Acquisition, Limewire, Bit Torrent did what the labels wouldn’t and the retailers couldn’t.

But here’s an ugly truth no one wants to talk about: The music chains are now, and have been for quite a long time — way before downloading — a god-awful business. The Best Buys [8], Wal-Marts [9] and Targets [10] can sell discounted CDs cause they have so many other product lines. Indeed, I’d argue they HAVE TO sell them cheap, because they also sell DVDs [11] and Video Games — CHEAP – one aisle over. Competition for both time [12] and entertainment dollars has become tougher, especially with DVDs and video games [13] growing at double-digit rates.


Hypothetical question: If you were sitting on a VC committee in 1980, at the dawn of the CD, would you have voted for investing in a new chain of music retailer?

I would not have: Chain retailers have no proprietary advantages, they own little — if any — IP. These Music Retailers sell commodity products, over which they have little control regarding the marketing, promotion and pricing.

They are subject to fads and fashions which make anticipating demand for specific items or whole genres difficult if not impossible.

And as the industry has repeated whined through out its entire history — they actually give the product away for free on the radio, on MTV, and now over the internet . . . So who’s gonna pay for it? (At least, that’s what all the Labels had originally said).

Moreover, in the intervening years since the rise of the CD, the chain music retailers have simply been moribund [14]. There was little in the way of innovation or creativity since the 1970s. Listening stations showed up way, way too late to matter; By that time, Amazon was offering previews right on your desktop. Buying custom compilations or mixes is still mostly unavailable; Retail Clerks are unhelpful at best and disdainful [14] at worst.

Bottom line: Chain Music Retailers haven’t helped, and indeed, have actually hurt, music sales. The labels failed to adapt to new distribution channels. That was caused in large part by succumbing to pressure from these “legacy” distributors.

The music industry has demonstrated for many decades an irrational fear of technology. That phobia has once again hurt them, as it delayed for a long time, a transition towards — in part, at least — an online distribution method . . .

Why a Grand Plan To Cut CD Prices Went Off the Track [1]
Music Stores Put Up a Fight, Saying Universal’s Gambit Favored Big Retail Rivals Strategy Led to ‘Hurt Feelings’
By Ethan Smith
Wall Street Journal, PAGE ONE
June 4, 2004; Page A1


UPDATE: You can see the full article (free registration: name, zip and year of birth) at AZCentral [15]


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2004/06/why-cutting-cd-prices-went-off-track-hint-blame-it-on-the-retailers/

URLs in this post:

[1] WSJ: http://online.wsj.com/article/0,,SB108629665980928317,00.html

[2] sales rose 9% last quarter: http://bigpicture.typepad.com/comments/2004/04/album_sales_sho.html

[3] Goodys: http://www.samgoody.com/

[4] HMVs: http://www.hmv.co.uk/hmvweb/home.do

[5] Towers: http://www.towerrecords.com/

[6] Adam Smith: http://www.lucidcafe.com/library/96jun/smith.html

[7] invisible hand: http://plus.maths.org/issue14/features/smith/

[8] Best Buys: http://www.bestbuy.com/

[9] Wal-Marts: http://www.walmart.com/

[10] Targets: http://www.target.com/

[11] DVDs: http://www.corante.com/copyfight/archives/002787.html

[12] time: http://bigpicture.typepad.com/comments/2004/02/time_not_on_the.html

[13] DVDs and video games: http://bigpicture.typepad.com/comments/2004/03/cd_no_dvd.html

[14] moribund: http://bigpicture.typepad.com/comments/2004/02/tower_files_for.html

[15] AZCentral: http://www.azcentral.com/business/articles/0604cd-prices04-ON.html

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