The $12.99 CD - will it pay off for Universal?

By Joshua O'Connell
Posted Monday, September 15, 2003

Many were surprised when a week ago, Universal Music announced that it was lowering its CD prices to a $12.98 top retail price, and tapes (remember those?) would be dropped to a high of $8.98. Universal Music is responsible for almost a third of all music sales in the United States, so when they announced this, it was shocking and a pleasant surprise.

A lot of people in the media think that this is a direct response to consumers' concerns that CDs are priced too high. The evidence to support that theory is overwhelming. CD prices had been ticking up slowly but surely until they struck $18.98 for so-called "superstars," which basically is anyone you've probably heard from quite a bit on radio the past couple of years.

There's definitely an ulterior motive here. CD sales are in their third straight year of decline, affected by the economy, slimmed-down artist rosters, lack of titles selling as highly as N'Sync, Britney, Backstreet Boys and so on sold at the height of the teen craze, and, of course, music piracy through the likes of Kazaa and other programs.

However, a deeper look at Universal Music will paint a company that's struggling to hang on.

Universal's been through quite a few mergers and owners in the past 10 years, and currently is part of Vivendi Universal, which bought up a ton of media assets (both here and abroad) and is now finding itself with billions of debt to pay off. They're in talks with NBC to create a media group that would include TV and music assets, sort of like Time Warner without an internet division. So, lowering their prices might seem like a good move to bolster sales and help make the company more attractive. So far, there haven't been any announcements from other labels saying they'll follow suit, so if consumers bite, and they will, Universal will gain market share just for dropping the price they charge retailers by a dollar or two per CD.

Of course, that drop will add up, so they'll need a good 10-15% bump in CD sales to justify this as a permanent change. If they can sustain this decrease in price and help rejuvenate the music industry, the other labels, who are obviously watching closely, will follow suit.

Along with the proliferation of music choices online such as iTunes Music Store and buymusic.com's new CD store (Rhapsody, powered by listen.com, is now being offered at Best Buy), this is a big win for consumers. They've shown they'll pay $12.99 for a CD - consumers are moving more and more to shopping at Target over Sam Goody, Best Buy over FYE. While these mass merchants, and others, don't have the selection in stores that the music specialty stores do, they have the price point that people will buy at. So while CD sales have tanked, it's the music specialty stores that are suffering, and that's why when you go in to an FYE today you see more and more floor space being allocated for console games and movies.

Universal may be trying to save their company, but this is a great opportunity for music fans. We can not only expect the major music retailers to mark their CDs down, but we can also expect a further increase at the Best Buys and Targets. They tend to sell their CDs at either a thin margin or even a loss so you'll come in, buy a CD, see an iPod that you really want, and will buy that too. The upsell possibilities have been quite beneficial over the years to these chains, so we could see a further price war as stores take advantage of these opportunities.

In fact, Universal was quoted in a recent AP radio report as encouraging retailers to offer the CDs for less than $10. This is a major change in attitude for a music company, when all of them were griping not even a year ago about how the Targets and Wal-Marts of the world were screwing up their business model. Obviously, piracy has finally become enough of a concern for labels to take a reactive stance.

Universal could bankrupt themselves over this, but I don't see this happening. The new pricing structure, which can be absorbed when sales increase accordingly, along with the increased promotion Universal's willing to provide as part of this new system, will increase awareness for music, allow for more avenues of hearing new music and ultimately providing less expensive CDs just in time for the holiday season. This is what CD buyers have been waiting for, and this, combined with the RIAA's continued enforcement of copyright law and the legal online services picking up steam may finally be the right formula to get the music industry out of its slump.

Universal should be commended for their gutsy move, and consumers should reward them the best way they know how: by buying more copies of Eminem, Shania Twain, Mary J. Blige and Elton John, all of whom are on labels owned by Universal. The tide is finally turning, and for once, the consumer is the winner.

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