Giving price cuts a spin
No. 1 record firm Universal Music looks to get sales back in groove
SAN FRANCISCO -- The Universal Music Group, the world's largest record company, said yesterday it plans to cut prices on its compact discs by up to 32 percent in an attempt to jump-start its flagging sales.
The music company, whose stable of artists includes U2, Mariah Carey, and Eminem, said it would cut the wholesale price it charges retailers starting Oct. 1 and dramatically increase its advertising spending.
Universal officials said they expect stores to pass along savings to customers, as the recording industry struggles to deal with digital piracy and a rise in competition for the entertainment dollar from video games and DVDs.
The music company, a unit of Vivendi Universal, lowered its suggested retail price on CDs to $12.98, from $16.98 to $18.98. Universal cut suggested prices on cassettes by its top-tier artists to $8.98.
"We are confident this pricing approach will drive music fans back into retail stores," Jim Urie, president of Universal Music and Video Distribution, said in a prepared statement.
With nearly 30 percent of US music sales, Universal could trigger an industrywide price cut many analysts and retailers believe is long overdue. "It will take prices back to where they were four or five years ago and make music more competitive with other home entertainment options," said Mike Dreese, chief executive of Newbury Comics, a Boston music chain, calling the price cut the largest in the industry's history. "It's as if General Motors set prices on all of its cars at 15 percent less."
Representatives from other major record labels would not comment on Universal's announcement.
Although they will pay $9.09 for most Universal CDs instead of $12.02, record stores may have trouble lowering the prices as much as Universal wants them to. Universal plans to spend more on direct-to-consumer marketing like radio and print ads, but said yesterday it would eliminate its "co-op advertising" program, which gives money to retailers for in-store advertising, better placement of some CDs, and subsidizing local media buys.
"They're giving us reduced prices, but the rules of engagement still have to be sorted out," Dreese said.
For the music industry leader, the pricing changes mark a dramatic shift in the face of sales that have slumped four consecutive years, said Urie, the Universal president.
Music shipments industrywide in 2002 fell 8.9 percent from the previous year, according to the Recording Industry Association of America.
Hit singles have borne the brunt of the decline. Sales of top 10 records fell to 34 million in 2002, from 60 million in 2000, the RIAA said.
"If you could turn on your spigot at home and Pepsi came out, Pepsi would have a hard time selling any," Urie said in an interview. "This is an industry that is being sabotaged by illegal behavior."
But Brian Zisk, technologies director of the Future of Music Coalition, a nonprofit group in Washington, D.C., that advocates on behalf of recording artists, said pressure from discount chains like Wal-Mart Stores, Best Buy, and Circuit City played a much larger role in Universal's move. Billboard, a music industry trade magazine, recently reported that those chains had exerted heavy pressure on record labels to cut their prices.
"I think [Universal officials] were reacting to the demands of the market, but most importantly they were reacting to the demands of their retailers," Zisk said.
Regardless of the reasons for the price cuts, CDs and even DVDs will eventually go the way of vinyl records as fee-based downloads of music and movies take hold, predicts Forrester Research, a Boston research firm.
In a report issued this week, Forrester analyst Josh Bernoff predicted that 33 percent of music sales will come from downloads by 2008, compared to only a tiny percentage today.
For independent music stores that count on in-store sales, not online sales, that comes as bad news. But Joe Goldmark, a partner with Amoeba Music, an independent record store in San Francisco, was encouraged by Universal's price cuts.
"They certainly have the room to come down some," he said. "I think they should try this tack before they give up the ghost and go the online route."
Chris Gaither can be reached at email@example.com. Steve Morse of the Globe staff contributed to this report from Boston.
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