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September 04, 2003

CD Prices

Friedrich --

I was thrilled to read this morning that Universal is cutting music-CD prices by 30%. The dam may finally be breaking, and huzzah to that. But I can't be the only person reacting to the announcement by thinking, Sheesh, what took so long?

I'd love to know the answer and haven't run across it in any of the coverage. Haven't people hated absurd CD prices for ages and ages? And I know that Naxos has developed itself a nice little business by selling classical-music CDs for attractive prices.

So why has it taken the majors so long to make a move on prices? A matter of pure greed? Of inertia? But aren't markets supposed to respond more quickly than that? So do we blame it on Evil Monopoly Control? Or has it just been a matter of a bunch of Goliaths staring at each anxiously, their hands on their holstered guns, saying, "You first, pardner"?

Do you know the answer? Do any of our visitors?



posted by Michael at September 4, 2003


The reason the majors haven't done it before, Michael, is that they're not set up for your benefit, they're set up for their own benefit. Every time you shell out an extra $5 when you buy a CD, that's basically $5 of pure profit going straight to Universal's bottom line. The majors don't want a "nice little business" a la Naxos, they want a nice BIG business, which maximises their profits from their own intellectual property.

Basically, this would never have happened if it wasn't for the internet changing the way that many people acquire their music. People still prefer a $15 CD to a free download, but not by so much that they're willing to shell out $15. So they make do with the free download, or the $10 album from the iTunes Music Store. Of course, you can sell your CD once you've bought it, but the situation with respect to iTunes music is much less clear.

Universal explicitly says that this move is a direct response to file sharing: "If you look at what's going on, it's the first time that there has ever been an industry impacted by illegal activities," says UMG chairman/CEO Doug Morris.

In any case, it would be wonderful if this worked out: if the extra number of CDs sold makes up for the lower margins. I hope that's the case, because then the rest of the industry will happily follow suit.

Posted by: Felix on September 4, 2003 12:35 PM

Hey Felix, I do understand that Universal isn't looking out for my good, believe it or not. What puzzles me is that it's taken the majors so long to make a move on pricing. There's more than one major -- why wasn't one of them more adventurous earlier? I mean, there are a limited number of automobile makers, yet they can't maintain absurd prices -- they'll attack and undercut each other, at least in the really competitive parts of the market. So why hasn't one of the music majors tried to attack and undercut the other music majors before? Besides, there is the possibility of selling so many more discs because of the lower prices that they could wind up making more money than they're making now. Any thoughts on this?

Posted by: Michael Blowhard on September 4, 2003 12:51 PM


I read someplace that when business people run into situations where they don't feel confident predicting outcomes, they tend to assume a worst case scenario. I suspect if sales volumes had been down without online file sharing being in the mix, they would have dropped prices long ago. But with online file sharing being in the mix, they had to wonder if the problem was price or if all the sales loss was due solely to online file sharing. If the latter,they would just be giving up revenue by cutting prices. I suspect they would consider the online file-sharing scenario to be by far the worst-case scenario, so their efforts have gone into things like these mass lawsuits aimed at people doing online file sharing.

According to the WSJ, what seems to have unfrozen Universal was extensive market research which convinced them that consumers really felt that CDs costing more than $13 were overpriced. Then the only thing necessary was some managerial cojones.

Anyway, that was what we all agreed at the last meeting of WWCTROMC--(the World Wide Conspiracy to Rip Off Music Consumers)--oops, I wasn't supposed to mention that. Dang, I'm gonna be in trouble again.

Posted by: Friedrich von Blowhard on September 4, 2003 1:07 PM

The British music industry recorded the highest sales of music cd albums ever in the second quarter, because the prices dropped so significantly.

In the best analysis I've read so far on the high prices of cd's - unfortunately done by an anonymous insider - the music industry was totally willing to change their business model to electronic delivery as early as the late 1980's. This was one of the reasons manufacturers like Sony and Philips started to buy so many record companies then.

However, these companies sound found out they would have to battle other monopolies - like the national phone companies - for years in order to get a decent system for electronic delivery; an Internet with a good enough speed. [Compression methods weren't invented yet]

Calculations were made, and it turned out that sticking to the old system was far more profitable. Also because huge investments had been made in pressing factories, transport systems, warehouses, and retail companies.

This business model hasn't changed. So it still is normal in the music industry to have a business model in which >60% of what the buyer pays for are costs related to transport and stocking.

Posted by: ijsbrand on September 4, 2003 4:04 PM

The dirty big secret of American business is that there is a lot of cartel price-fixing, with the price of CDs being one of the most obvious. I looked into it a decade ago, when CDs cost $4 more at retail than tapes, even though CDs were cheaper to make. The six big music companies all punished retailers who cut prices too low by withholding fees the music companies paid back to the retailers to buy advertising. They all did it the same. It doesn't necessarily take "rival" executives meeting at midnight in parking garages to set it up. It's just an "industry standard."

Posted by: Steve Sailer on September 4, 2003 4:41 PM

Thanks for the info -- all fascinating. I talked to an insider friend, who pitched in some info and ideas too about "why now."

* They kept prices high as long as they could. But business has been terrible for a few years. Maybe a "something's gotta happen" desperation point got reached.

* DVD prices have gotten so low in the last few years that it's brought a lot of resentment about high music-CD prices to a head.

* Lousy acts, no audience enthusiasm -- gotta try to move the product somehow.

* Entering the fourth quarter, time to show some results.

* You've got to get the retailers onboard, which can take a long time.

* And, as Felix argues, the file-sharing thing has everyone terrified.

Posted by: Michael Blowhard on September 4, 2003 4:45 PM

Don't forget that the various record companies are selling (arguably) different products, so there isn't really the possibility of "undercutting" each other. Columbia records has a monopoly on Bruce Springsteen albums, and if they keep their prices high, fans aren't necessarily going to switch to Britney Spears.

Posted by: Jacob Weber on September 4, 2003 6:43 PM

In a follow up, I noticed that the rest of the industry is working hard to justify their own reluctance to reduce prices by claiming that this change will decimate the ranks of smaller retail music outlets. Like they care about the growth of the WalMarts and the Best Buys at the expense of Mom and Pop record stores.

As an attorney I knew once remarked: "Every year I get more and more cynical, but I just can't keep up."

Posted by: Friedrich von Blowhard on September 6, 2003 1:24 AM

Did you know that Universal's price cuts don't apply to classical music? I'm not sure it matters much. The high-priced items are the new releases, and how many really interesting new releases have we been getting from the major labels? The real action is in the back catalog, and there, Universal has been offering some great Collectors' Edition boxes in cheap slimline packaging for around six bucks per disc. (If you missed all those Haydn operas the first time around, now's your chance!) For new product, I look to the independents, whether it's a cheap Naxos or a pricey Hyperion.

Posted by: Sporkadelic on September 7, 2003 1:01 PM

CDs compete under monopolistic competition, rather than pure competition. As Jacob Weber says, a Bruce Springsteen CD is a very different product from a Britney Spears one, and not generally as substituable as a car. Therefore record companies face a sloping demand curve, which is different from what the manufacturer of a CD player faces (let the CD player wander away from the price/quality frontier and, assuming perfect knowledge, sales would collapse to zero).

Plus record companies face high fixed costs compared to low marginal costs. (It costs a lot to record a CD and advertise it and maintain the distribution system and etc, compared to the cost of printing another CD).

I've never come across an economic model that clearly lays out how items with these features should be costed, like the marginal cost pricing under perfect competition does, if anyone knows of one let me know.

Posted by: Tracy on September 7, 2003 11:05 PM

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