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Sep 5, 2003 | LOS ANGELES (AP) -- Universal Music Group's strategy of lowering its CD prices is good news for music fans, but some traditional music retailers on Thursday worried the move may damage their business.
A day after Universal announced a cut on the wholesale price of most of its CDs and an end to advertising discounts, retailers large and small began assessing how the new pricing plan would affect them.
Large retailers such as Borders, BestBuy, Wal-Mart Stores Inc. and Amazon.com generally reserved judgment Thursday on the change, although several noted it could be an effective consumer lure. Several of them declined to discuss how Universal's initiative would affect their profit margins; music represents only a fraction of sales for such merchants.
"There's going to be a lot of deflation ... fewer gross margin dollars per CD, and we hope because of that we'll attract a lot more people to the store," said Mike Spinozzi, Borders' senior vice president and chief marketing officer.
Universal's new pricing strategy will take effect next month. Universal said it hopes to revive CD sales after a three-year decline the recording industry blames largely on illegal Internet file-sharing.
The company said it would cut the wholesale price of most top-line CDs to $9.09 from $12.02. While it changed its suggested retail price to $12.98 from $18.98, it hopes retailers will charge below $10.
Spinozzi said CDs at Borders sell for between $11.99 and $13.99, but it's possible Universal CDs will be reduced to below $10.
"We intend on passing the reduction to the consumer," he said.
Some independent record store operators said they were not sure how far they would discount Universal CDs or how the new pricing policy would benefit them.
"I like the idea of CDs coming down in price. It's a fundamental thing that has to happen in the industry," said Rand Foster, owner of Fingerprints, a record store in Long Beach, Calif. "Unfortunately, we're at the stage where there are way more questions than there are answers."
Foster said he is particularly worried about losing the so-called co-op money that helps pay for advertising and in-store promotions such CD listening stations. Universal said Thursday it would stop the common industry practice of giving discounts to retailers who spend their own money to advertise or prominently display its CDs.
The end of the co-op discounts will mostly hurt large chain CD music retailers like Virgin Entertainment Group and the parent company of Tower Records, said Phil Leigh, an analyst at Inside Digital Media in Tampa, Fla.
Calls Thursday to Virgin and Tower Records' parent were not immediately returned.
Analysts have reported in recent weeks that Internet music downloads from pay services will gradually overtake the physical CD in coming years, and Leigh said Universal clearly recognizes the old music-marketplace rules won't apply much longer.
Still, the number of people getting their music over the Internet through for-pay services like Apple Computer Inc.'s iTunes Music Store or BuyMusic.com have yet to equal those using file-sharing networks. But by selling the equivalent of a full album's worth of music for about $10, the Internet retailers have helped foster the view that CDs are overpriced.
And the competition CD retailers are facing from the Internet keeps growing. Sony Corp. plans a new Internet music service that will launch in Japan, and by next spring, in the United States and Europe. Microsoft Corp. began offering music downloads in Europe last month in a partnership with On Demand Distribution. And a revamped version of pressplay is scheduled to debut by year's end under the brand name Napster 2.0.
Leigh predicted the other four major recording companies will follow Universal's lead.
"The labels had an interest in protecting (music stores) because they had large receivables from them and it was their standard distribution channel," Leigh said. "Now the Internet comes along and over time it begins to erode the foundation of the incumbent distribution channel. It's no longer worth it to protect your incumbents."
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