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Monday, September 09, 2002
Recording industry faces music: CD prices may need to fall

Brace yourself to see something startling next time you go to a record store. You might see some reasonably priced CDs. Most of the major music companies are starting to offer retailers limited-time rebates on some releases. As a result, many consumers paid just $10 for new albums by young performers including Ashanti and Vanessa Carlton, as well as veterans Sean ''P. Diddy'' Combs and Bruce Springsteen.

That's a big deal in an industry that consistently raised CD prices since 1996. Consumers now pay about $14.70 for CDs, although most new releases list for $19 or more.

But don't cheer too loudly just yet. It's still way too early to say how widely or how long companies will offer discounts. Most executives, and even the industry's trade organization, don't like to talk about pricing.

And, strange as it sounds, lower prices may backfire on consumers. Music companies aren't rolling in profits anymore. Most would probably get a higher return by putting their cash into bonds instead of albums, although industry leader Universal Music generates a tidy 15% margin. So price cuts mean ''they'll have to fire people, renegotiate artist contracts, make fewer videos and sign fewer bands,'' says Sanford C. Bernstein analyst Michael Nathanson.

Why are they doing it?

''There's a good deal of panic in the recorded music business,'' says investor Strauss Zelnick, who used to run Bertelsmann's BMG music arm.

Sales of albums and singles are off 11% this year following a drop of 10% in 2001 and 7% in 2000. Only 21 albums sold more than 1 million units in the first half of this year vs. 37 albums during the period in 2001.

Lower prices may at least stop the bleeding.

But that's tough for executives to admit. It calls into question their long-held belief that CDs are not only fairly priced but a good value.

The Recording Industry Association of America ( news - web sites) (RIAA) likes to remind people that most albums lose money after you factor in artist royalties and marketing. What's more, a study it recently commissioned found that if CD prices had grown as much as inflation since they rolled out in 1983, they'd now be $38.23.

So $14.70 should be seen as a bargain.

''People spend quite a bit of money to go to a concert,'' Artemis Records CEO Danny Goldberg says. ''Sometimes the parking costs more than a CD. So they're willing to pay'' for music.

He says the recent price cuts are merely a tactic to help companies introduce new acts. ''For developing and new artists you'll see lower prices for the first 100,000 units sold.''

Yet executives may soon be forced to acknowledge that a few, isolated cuts won't do the trick -- that consumers really are fed up with rising CD prices.

A lot of that skepticism is natural as people discover that it costs them just about as much for an hour-long stereo CD as it does for a DVD, which offers a two hour-movie and six channels of sound.

Music executives counter that the CD is meant to be played over and over, while people usually just watch a movie once.

But that's not true anymore. Consider Monsters, Inc.

The coming-soon, two-disc DVD, priced on at $18, will have two short features, outtakes, games, a music video, a sound-effects only track, storyboards and a look at how computer animation is done, in addition to the movie.

That looks like a heck of a bargain next to the one-disc CD soundtrack of the movie with Randy Newman's songs and score. It's just $3 less on Amazon.

And it's not a given that CD buyers will play popular albums over and over. Most know what it's like to buy a CD based on a hit song, only to find that the remaining tracks are mediocre filler.

What's more, CDs are a bigger gamble for the consumer than some other forms of entertainment.

''When you go to a bad movie, you're not angry about what you paid,'' says Zelnick. You only expected a two-hour experience. ''But if you buy a bad CD, you are because you expected to listen to it more.''

It's no wonder that so many consumers look for ways to avoid that letdown. They simply copy CDs and swap them with friends. It's easy to make digitally perfect replicas of albums on recordable CDs that cost less than $1 apiece.

Many also download tunes for free over the Internet. The RIAA is so frightened about this that it is starting to go after individual music fans who send and receive music over the Web -- not just services that facilitate the practice as Napster ( news - web sites) did.

Last month the trade group subpoenaed Verizon to identify a broadband subscriber believed to be transmitting music online. Verizon refused, arguing that it violated legal procedures and the customer's right to privacy.

But executives don't want to go to war with their fans. And some acknowledge that they have to find ways to give consumers more value, even if today's price cuts don't last.

For example, Goldberg says, companies might package CDs with videos and opportunities to buy front-and-center concert seats or go backstage.

''The actual audience for music is bigger than it's ever been,'' he says. ''And the older generation is more interested in music than ever.''

For now, though, all eyes are on how consumers will respond to the new, low prices.

''That is the punter's bet -- that what you lose in pricing you make up in volume,'' Nathanson says. ''But we haven't seen it yet.''

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