Universal Slashing CD Prices
New Strategy Targets Song-Sharing Audience
By Frank Ahrens
Washington Post Staff Writer
Thursday, September 4, 2003; Page E01
The world's largest music company said yesterday that it will lower prices on compact discs to lure back customers who get their music digitally, and often free, over Internet file-sharing services.
Universal Music Group, which accounts for about 30 percent of all music sales worldwide and is home to stars such as Eminem, Shania Twain, Nelly and U2, said that beginning in the next few weeks it will put a sticker on almost all newly pressed CDs suggesting a $12.98 retail price -- about $6 less than the current sticker.
At the same time, the company will drop its wholesale cost to retailers from $12.02 to $9.09 per CD, except on releases from top-selling artists, such as Eminem, which will drop to $10.10 wholesale for the first few months of their release and then drop to $9.09.
The music industry has suffered from slumping sales over the past few years, blaming the drop on the rise of free Internet song sharing, or copyright-violating piracy, as the industry calls it. Shipments of new CDs to stores dropped 10 percent in the first half of 2003 compared with last year, the industry said in late August, mirroring the yearly decline since the late '90s when a program called Napster introduced the mainstream to online song swapping.
The record industry, led by its lobbying group, the Recording Industry Association of America, is mounting a vigorous legal defense of its copyrighted work and will unleash hundreds of lawsuits against song sharers in the coming weeks.
The industry has drawn criticism for trying to stop piracy without offering viable alternatives. Yesterday, Universal Music chief executive Douglas Morris said his company's price slashing was part of the industry's strategy, mentioning the lawsuits as well as legal Internet sites, such as Apple's iTunes, where fans can buy digital music for 99 cents per song.
"Given the difficulties we have experienced, we are convinced it is time to do something dramatic to jump-start sales," Zach Horowitz, president of Universal Music, said during yesterday's announcement. "Many of the people who are acquiring music are simply not paying for it. We are besieged by rampant piracy. But these same services have shown the tremendous appeal of music."
Universal Music, which is owned by French media giant Vivendi Universal, said it expected that retailers will begin selling the lower-priced CDs as early as Oct. 1.
Retailers are under no obligation to follow a manufacturer's suggested retail price. If such a price sticker is already posted on a CD, however, consumers may react negatively if they see a retailer has marked up a CD. For many retailers that do not rely on music for primary revenue, such as Best Buy, CDs are "loss leaders," meaning the store sells them at a loss in hopes of enticing consumers to buy pricier items such as television sets.
As the largest music company, however, Universal already enjoys some muscle with retailers, which includes getting prime shelf space for its new CD releases.
"Frankly, I think because of the market forces, the retailers are going to abide" by the new pricing structure, said Jim Urie, president of Universal Music and Video Distribution. Because Universal Music is dropping its wholesale cost, retailers should continue to make money on CDs even at $12.98 apiece, he said. It costs 75 cents to $1.10 to create each CD, Urie said.
Universal Music said retailers would be advised by e-mail beginning yesterday afternoon of Universal's price cutting.
Several major retailers contacted after yesterday's announcement said they were unaware of the plans. Only Best Buy said it knew Universal Music's announcement was coming, but it would not say whether it would slash prices in accordance.
In an interview after the announcement, Morris said he was hopeful that the four other major music companies -- Sony Music Entertainment, Warner Music Group, BMG Entertainment and EMI -- would drop their prices, as well. Owing to antitrust laws, Morris said, he had not discussed Universal Music's price-slashing plan with the other companies.
Sony and Warner Music had no comment on Universal Music's move, though many in the industry knew it was coming. Morris said the plan has been in the works for about six months.
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