Will the Price Be Right to Turn Around Fortunes?

For consumers, CD prices have looked like an auction in reverse lately. Want that new Bruce Springsteen or Linkin Park? Here, buy it for $13.99--no wait, make that $11.99. How about $9.99? Interested in that hot new band the Vines? Here, take the disc for $6.99. It’s not a CD single; it’s the whole album, really.

After years of grumbling that CD prices are too high, music fans are finding at least some relief from the $18 CD as major retailers and some record labels turn to discounts to resuscitate their wheezy business.

This week, the Recording Industry Assn. of America released sales statistics for the first half of 2002, and the numbers are grim. Shipments of new music sagged 7% after a decline last year of more than 5%, numbers that may sound mild but are nothing but bad news for an industry accustomed to growth since the introduction of the CD in the mid-1980s.

The trade association also presented a new survey of young music fans with Internet access. One-third of those fans reported that when a new song by a new artist catches their interest, the first thing they do is go online to cop the tune from a file-sharing service.

That groaning you hear is from the music labels and merchants.

“It’s a tough market, and it’s a hard one to gauge when the new reality of a price range is ‘free’ on one end and ‘$20’ on the other,” said Pam Horovitz, president of the National Assn. of Recording Merchandisers, the trade group for music merchants.

The larger retailers are no strangers to discounting CDs, with such chains as Wal-Mart, Best Buy and Circuit City using selected low prices to lure customers who might walk out with armloads of DVDs or new computer equipment.

It’s an even more comfortable environment for those discounts now, though. Two years ago, a Federal Trade Commission inquiry prodded the recording industry to abandon a practice that authorities said was a not-so-subtle attempt at price fixing. In essence, the record labels were punishing the discounters by denying huge advertising subsidies to any merchants who strayed below certain price levels.

That practice also led Eliot Spitzer, New York state attorney general, to file a lawsuit in August 2000 against the major labels and largest retail chains. Twenty-nine other states (California, a hub of the music industry, not among them) have joined the lawsuit, which has cited consumer damages of $480 million because of alleged price fixing. A spokeswoman in Spitzer’s office said this week that a settlement will probably be announced in September.

Ironically, the record labels that are accused of keeping prices high have in recent months displayed a new passion for discounting.

Record labels are experimenting with discounts and rebates for key releases by new artists, an effort to entice and excite consumers. Hot R&B; newcomer Ashanti, for instance, saw her debut album in March score one of the year’s best first-week totals, selling a surprising 502,000 copies.

Radio airplay was part of the success story, but so was pricing; her label, Murder Inc./Island Def Jam Records, offered retailers a $2 rebate per disc, so instead of being offered for, say, $15, the Ashanti album coaxed on-the-fence buyers with prices in the $11 to $13 range.

That type of splashy debut tactic can have an ongoing effect. Cary Sherman, president of the Recording Industry Assn. of America, the trade group for the music labels, points out that early momentum catches the attention of the music press, radio programmers and retailers making decisions about what their new focus will be, and a self-fulfilling prophecy kicks in. An album that looks like a hit becomes a hit.

“But of course, at some point, the music has to hold up or none of that matters,” Sherman said. “You can’t make a hit unless the music is there and people want to hear it.”

Within the music labels, the long-standing reluctance to discuss pricing continues. Executives with such top labels as Sony Music, Capitol/EMI Records and others declined to be interviewed for this story despite their recent discounting overtures with new artist releases.

One executive offered a practical explanation: “You can’t convince people that a CD’s cost is driven by the huge expenditures on making, marketing and maintaining a music career. So defending the pricing is nothing but a losing proposition.”

When the CD arrived in the mid-1980s, many industry voices said that the new format would be cheaper to produce than LPs and tape cassettes (and, indeed, it costs about 40 cents to make a CD, and the packaging adds 25 cents to that) and that the savings would be passed on to retailers and consumers once the new format was phased in.

That, of course, never happened, and the industry had a historic windfall as fans replaced their vinyl collections.

That profit party was crashed, however, by a consumer revolt called digital download. Now the music industry, which has long described its hit albums in terms of platinum and gold, is wondering how to make CDs a precious metal again. Among some of the approaches that appear to be headed to stores:

* Best Buy is quietly pushing for $10 to become a more prevalent price; executives there say prices north of that turn off casual-interest buyers and send fans to the Internet. Some competitors, though, say the major retailer is only angling for more market share or trying to launch another price war that smaller chains can’t fight off.

* The definition of a CD may change. When Interscope Records released “The Eminem Show,” the hottest album of the year, it knew the music had already been widely pirated online. To fight back, the label offered the first 2 million buyers a free DVD bundled with the hit album. Industry observers say packaging and extras are the most viable way to get kids away from keyboards and back to cash registers.

* Some retailers are pushing for the single format to become viable again. Horovitz, the recording merchandisers president, said retailers would like to see the format or perhaps even four-or five-song CDs become more meaningful, to give younger consumers a middle-ground choice between nothing (or a free download) and the full album. “It’s easier to get a song illegally than it is legally for the kids,” she said.

Still, tinkering with the price of CDs may have unexpected downsides. Rand Foster, owner of Fingerprints, an independent music store in Long Beach, says there is a huge outcry for music labels to lower the prices of CDs but that, until they do, the retail-driven discounts create a frustration similar to that of an airline passenger who finds out the person sitting next to him paid hundreds of dollars less for the seat.

“It makes people feel like they’re getting cheated when they see that Springsteen CD going for $15 and its throws into question consumer shopping confidence,” Foster said. “They see Springsteen at $9.99 for a one-day sale, and they don’t know that chain is losing money, a lot of money. There’s already a lot of anti-industry feeling these days and questions about the value of music. And that situation does not help.”