Must a CD Cost $15.99?

scionite0 sends us to Rolling Stone for an in-depth article on Wal-Mart and the music business. Wal-Mart is the largest music retailer selling "an estimated one out of every five major-label albums" in the US. Wal-Mart willingly loses money selling CDs for less than $10 in order to draw customers into the store, but they are tired of taking a loss on CDs. The mega-retailer is telling the major record labels to lower the price of CDs or risk losing retail space to DVDs and video games. (Scroll to the bottom of the article for a breakdown of where exactly the money goes on a $15.99 album sale.) "[A Wal-Mart spokesman said:] 'The record industry needs to refine their business models, because the consumer is the ultimate arbitrator. And the consumer feels music isn't properly priced.' [While music executives are quoted:] 'While Wal-Mart represents nearly twenty percent of major-label music sales, music represents only about two percent of Wal-Mart's total sales. If they got out of selling music, it would mean nothing to them. This keeps me awake at night.' [And another:] 'Wal-Mart has no long-term care for an individual artist or marketing plan, unlike the specialty stores, which were a real business partner. At Wal-Mart, we're a commodity and have to fight for shelf space like Colgate fights for shelf space.'"

Wait

I thought all you guys stole all your music.

Re:Wait

I thought all you guys stole all your music.

Well, stealing music [wikipedia.org] is only a misdemeanor with a few hundred dollar fine if you get caught. copyright infringement [uncyclopedia.org] is a civil matter that can cost thousands upon thousands if you get caught.

So is it any wonder that those guys steal it rather than infringe copyright?

Myself, I'd rather buy indie music on CD from the bands themselves. $15.99? Hell, $10 is too much, most of the time they'll sell me two or three CDs for ten bucks. And it cost them a hell of a lot more to get them recorded, stamped, and packaged than it costs the major labels.

No matter what you think about WalMart, they're in the right on this one. As evil as WalMart may be, the major record labels are far more evil.

-mcgrew

2004?

Hardly news considering the article was posted on Oct 12th, 2004!

Who the hell approved this?

Re:2004?

Take it easy on him... he's a slow reader

Re:2004?

Well, it's been brought up again recently [yahoo.com].

All Wal-Mart needs to succeed with this is to have one record company break off and decide to join them and have $5 to $10 CDs. Which brings me to this point:

Maas referenced the DVD business as a model for tiered pricing. "(It) has been around for years and has worked very well," he said.

DVDs weren't always so dirt cheap. Aside from dot-com era startups selling DVDs for $1, DVD prices were extremely high for a long time. Even in 2000, it was difficult to find a lot of DVDs for much under $15-$20 at your big-box discount stores like Best Buy, etc. I remember reading an article around that time that one of the executives at Warner Bros. wanted to make a DVD an impulse buy, with a price matching that of a magazine ($6 or so). At the time, it sounded insane. A few years later, it was a reality: bins of $5 titles at Wal-Mart. Two-for-$5 titles on Black Friday. Even at corner drugstores, $10 DVDs.

Record companies have done this. They usually repackage artists into a new "best of" and sell it for $11 or less. And Best Buy has had new releases of artists for $7 and below for many years, although that's usually limited to a single week and a handful of new untested artists.

If one of the majors breaks off and starts offering discs at below-iTunes prices, the others will have to follow. They can still follow what they've been doing by mirrorring the DVD market: sell the basic CD for peanuts, sell the enhanced CD+DVD with a t-shirt or a poster or more tracks for $20.

Re:2004?

The really interesting thing about those two articles in tandem is that the quotes go from Wal-Mart being 10% of the record industry's business to 20% in three or four years.

Can anyone say, "Vlasic" [fastcompany.com]?

Re:2004?

I remember reading an article around that time that one of the executives at Warner Bros. wanted to make a DVD an impulse buy, with a price matching that of a magazine ($6 or so). At the time, it sounded insane. A few years later, it was a reality: bins of $5 titles at Wal-Mart. Two-for-$5 titles on Black Friday. Even at corner drugstores, $10 DVDs.

I was working at a Wal-mart back when they introduced the $5.50 DVDs (I think that's the price they were at first, I may have it confused with the current price though). There was an article in the company newsletter about it and according to that this was Wal-mart's idea. One of the buyers at HQ got the idea, and managed to convince a studio or two to go along with it. Once it was introduced and they started selling like hotcakes the other studios very quickly decided to jump on the bandwagon, and the rest is history.

Personally I'm glad Wal-mart's putting pressure on the record labels, there's a lot of inefficiency in how they do things. I'm quite certain they could get that price down to around $10 pretty easily if they wanted to. It's really hard to believe that it costs more to produce a CD than it does to produce a DVD when movies cost a hell of a lot more to make. The record companies don't even want to lower the pricing on back catalog CDs, ones where they long ago recouped all investment they made in the actual production and marketing of it.

One thing I thought of: if Wal-mart succeeds in this it should lower wholesale prices for everyone, including the mom and pop record stores. Wal-mart may still get them a bit cheaper (after all they buy in rather large volumes), but if CDs come down to close to $10 wholesale it'll be easier for the small stores to compete. Basically everyone wins -- except the record companies and probably the artists. I'm sure they'll find some way to screw the artists over.

Re:2004?

Hardly news considering the article was posted on Oct 12th, 2004!

Who the hell approved this?

There's more. It's a dupe [slashdot.org]. Wow.

Commodity?

At Wal-Mart, we're a commodity and have to fight for shelf space like Colgate fights for shelf space.

And you expect sympathy somehow? I mean, let's be serious: the music industry did all it could to make music a "commodity and throwaway product". I sorry, but what did you expect? You wanted to sell a commodity product, then you live by the rules of commodity products. Geez.... These people are obtuse...

'bout time, music really is a commodity item

Let us price it like one. Whoever thought that it would be Wal-Mart to break the industry.

Costs should be lower and/or falling

OK. The article is old news, but it's a good topic for anyone interested in the industry's future to consider, and most of the points are still relevant.

Consider this:

Production costs should be down with the advances in tech and refinement of manufacturing.

Wal-Mart *is* a distributor, so distribution costs should be lower.

Promotion costs *could* be lower if more of the music industry understood new media rather than treating it as somewhere between anathema and tolerable evil.

So, real CD costs should be falling. They probably are *somewhat*, given inflation, but in context of the given advances, it really doesn't seem like enough.

The costs in the article are also interesting. Some of 'em look on, but others don't:

$0.17 Musicians' unions - Unions get royalties on CDs? That's interesting. I've never heard that before.
$0.80 Packaging/manufacturing - You can get smallish (2000-5000) runs for near this cost. A major label release really should be benefiting from an economy of scale here.
$0.82 Publishing royalties - if it's cover songs, sure. If this is original material written for a contract or under licensing from a signed artist, this cost shouldn't be this high.
$0.80 Retail profit - $.80 ain't anything a profit I'd begrudge the retail establishment.
$0.90 Distribution - See Wal-Mart *is* the distributor.
$1.60 Artists' royalties - Given the information available about industry accounting practices, is anyone else skeptical that the artists are getting this money?
$1.70 Label profit - I'm OK with this.
$2.40 Marketing/promotion - Since this is what a label is really supposed to do, I'm not surprised it's this big a portion, and maybe that's OK.
$2.91 Label overhead - What exactly is supposed to be here other than production costs and everything else on this list? I suspect this is really one of two big issues.
$3.89 Retail overhead - And this is the other one.

Those last two numbers pretty much tell the story of why disintermediation is going to continue to be a strong trend for the music industry. Slash them numbers and you're down *below* Wal-Mart's sale price and certainly competetive with prevailing online retailers. Fail to do it and you're not. Especially if you're acting like you're entitled to it in the meanwhile.

surprise, surprise

'Wal-Mart has no long-term care for an individual artist or marketing plan, unlike the specialty stores, which were a real business partner. At Wal-Mart, we're a commodity and have to fight for shelf space like Colgate fights for shelf space.'

Why are people constantly surprised by the fact that at some point, they need to pay the piper?

When you do business with Walmart, you should know that you're going to be asked to reduce your price. When you stop supporting mom-and-pop shops by not giving them the volume discounts you give to Walmart, to the point where Walmart has a potentially sufocating grip on your retail pipeline, then you're in trouble.

This is what happens when you dance with the devil... you find out he's clumsy and steps on your feet, and has bad breath to boot.

There's an op-ed piece written by the founder of Snapper that sheds a lot of light on why/how a manufacturer should choose not to do business with Walmart. Too busy to dreg up a link, but well worth the read, for anyone who cares enough to do a google search.

Memo to Record Labels

Memo to record labels: What's wrong with having to fight for shelf space like everyone else? Competition? Has it occurred that maybe Wal-Mart would like to sell even more?

Previous breakdown

I'd be curious to compare this against the breakdown when the CD was introduced. I vaguely remember something like, "Sure, it's $16 now, but if everyone gets on board the economy of scale will reduce the price closer to the record prices you are used to paying! (~$8)". I think these misc. overhead costs are probably just fudge factors to avoid listing them under profit, like how movie production companies make up data to keep their net profits artificially low.

Re:Proposed new budget

Seems arbitrary. I notice you stuck up for the union...God forbid they feel the pinch of the industry.

All this tells me is that artists should market aggressively with digital format music, and keep CD sales as a small-time sideline; they could charge 5 bucks plus shipping and handling and make a ~3 bucks a pop.

Re:Proposed new budget

17 cents per CD...I missed where they contributed anything there...Are they singing backup?

They're certainly not doing ~20% of the work that the retailer is doing, or ~13% of the work the artist is doing...Just irritates me. Artists are getting fricking screwed all the time; why do they even have a union?

Re:Proposed new budget

Musicians unions often give significant emergency aid to musicians fallen on hard times. Were it not for help from the composers union, for example, Bela Bartok would have been dead two years earlier than he was. I see no reason to protest.

Re:Proposed new budget

Artists are getting fricking screwed all the time; why do they even have a union?

The RIAA and its members would steamroll 99% of artists into taking *less* than the 10% royalties they're getting now, if they were unionless. If anything, musicians need a stronger union.

I'd hate to be a small time, MTV2 band without a union to back me up against a major label.

Re:Proposed new budget

What amazes me most about that breakdown, is if you look at it, it's hard to figure out why the labels are whining about the iTunes pricing model.

It seems like they'd get just as much money per track, and cut out a lot of overhead. That sorta seems to support this push to get higher pricing on iTunes tracks is just a cash grab (surprise) by the labels.

Cheers

Re:Proposed new budget

Distribution, $0.90? $900 for a thousand CDs? No way, not for WalMart.

This is WalMart you're shipping to. You ship to them by the truckload, not one CD at a time. Any in-store costs come under retail overhead, not distribution.

The promotion costs need to shrink. Maybe we'll see the labels begging for time on webcasts. Label overhead is far too high. The labels don't really do much today except promote; they don't directly employ artists, they don't run recording studios, they don't manufacture CDs, and they don't do physical distribution and warehousing. That's all outsourced. But management overhead hasn't been cut accordingly.

As the WalMart VP says: "The labels price things based on what they believe they can get -- a pricing philosophy a lot of industries have. But we like to price things as cheaply as we possibly can, rather than charge as much as we can get. It's a big difference in philosophy, and we try to help other people see that."

Re:Proposed new budget

As the WalMart VP says: "The labels price things based on what they believe they can get -- a pricing philosophy a lot of industries have. But we like to price things as cheaply as we possibly can, rather than charge as much as we can get. It's a big difference in philosophy, and we try to help other people see that."

Walmart, sucks to be their vendor, great to be their customer. I love it when two things I consider to be evil lock horns. Its why I'm a libertarian.

Re:Proposed new budget

I printed 1,000 CDs for a personal indie project that I did (*cough*shameless self plug [cdbaby.com]*cough*) and $0.80 / CD is around what I paid INCLUDING what I paid the artist to do the art work.

There's no freakin' way that that major labels are paying $0.80 / CD when they print runs in the tens of thousands. They should be getting WAY better bulk deals.

Re:The breakdown

Somehow I knew that this would be the first response. "But making a video game costs money! It doesn't cost anything to produce a record!" I'm not saying that I agree with how the major labels operate (I worked in the music industry for a number of years, FWIW. And part of that was for a major label.), but it's disingenuous to say that it only costs a coupla grand to make an album that will sell millions of copies. Or should we also base the entire software world on the success and relative costs on something like, say, Geometry Wars?

Re:The breakdown

Having dealt with both sides, it's a hell of a lot cheaper to put together a good album than it is a good game. The tools you need to put together a good album are cheaper, they don't suffer from the pace of obsolescence that afflicts high tech gear. You need the musicians, you need a sound guy (if you're not doing it yourself) and you need a decent recording space.

In the old days, you had to do that in some big recording studio, but these days there isn't any reason you couldn't do it in a sufficiently padded basement with a laptop running some basic music software.

Now some games, obviously, are cheaper than that...Your 60 dollar figure is pretty much aimed at the console market, where the margins are also quite thin since they have all the expenses above, plus a hefty licensing fee. But the vast majority of developers have huge NRE in terms of equipment, artists, programmers, etc, even on failed games that sell poorly.

In short, it's not an apples to apples comparison. It'd be like complaining when a movie DVD is cheaper than a music CD, without acknowledging the tiny difference the box office returns make in the movie profits.

Re:Costs too much

While I agree with you, this reasoning may not hold up very well, since the movie more than paid for itself and DVD production at the box office - the DVD is gravy. (Assuming a movie worth getting the DVD for.)

The CD on the other hand doesn't have that - maybe there's a concert tour, but the tour usually makes money on merch and CD sales, so we're back to the CD being the main profit center again.