The Wall Street Journal
April 18, 2002


With Recorded Music Sales Falling, Will Compact-Disc Prices Follow?

By JENNIFER ORDONEZ
Staff Reporter of THE WALL STREET JOURNAL

Among recent new music releases, "Ashanti," the debut album by the female
R&B singer of the same name, was expected to sell well. Her first single,
"Foolish," got heavy radio spins, good video rotation and press buzz --
all of which drove fans to buy the full album.

But there was another key reason the album debuted at No. 1 on the
Billboard top 200 charts and sold 751,000 copies just two weeks after its
March 28 release. It was priced unusually low.

At many retail outlets, the album sold for less than $12 after her label,
Murder Inc./Island Def Jam, offered retailers a $2 rebate on every copy
of the CD sold in the first two weeks. Retailers, in turn, were willing
to lower the retail price and push the album hard in stores, which helped
to quickly raise the new artist's profile. Now that the rebate program
has ended, Universal hopes enough buzz has been generated that consumers
will swallow a higher pricetag.

"There's a lot of experimentation going on," says Dave Alder, senior vice
president of product and marketing for Virgin Entertainment Group, which
owns the Virgin Megastore chain.
With sales of recorded music falling for the first time in a decade,
retailers and music companies are taking a hard look at
pricing. The average retail price of a compact disc hit $14.64 last year,
up from $12.75 in 1996, according to the Recording Industry Association
of America. Simultaneously, the number of CD units shipped by U.S.
manufacturers fell for the first time since the format was introduced in
1983. At a time when Internet music piracy and illegal copy of CDs are
also hurting sales, some retailers suggest that paying customers are
being penalized by high prices -- which make them reluctant to wander
into music stores.

In their defense, music companies argue that even at their highest list
prices, albums, which music buyers often play hundreds of times and over
many years, remain a good value compared with other forms of
entertainment like movies, sporting events and concert tickets. But
further complicating the music pricing equation, some say, are DVD's,
which, at prices as low as $10, have become a fierce competitor for the
entertainment dollar.

"Given equal price points, a 'Lord of the Rings' DVD will certainly give
the latest Britney CD album a run for its money," writes Michael
Nathanson, a media analyst with Sanford C. Bernstein, in a recent report
titled "U.S. Music Industry Still Singing the Blues."

Not surprisingly, pressure is building to bring prices down. Already some
music labels, including Universal and Sony Music, and retailers offer
some older catalog releases on CDs at reduced prices. And so-called
big-box stores like Wal-Mart Stores Inc. and Best Buy Co. often offer
deep discounts on new releases on their own, in large part to drive
customers into the stores who may in turn stock up on other goods.

Retailers like Virgin Megastores, meanwhile, that sell mostly music and
movies, are coming up with their own ways to entice consumers. Virgin,
working with music labels, this month is offering three CDs for $25, from
a selection of about 600 older titles from artists such as the Rolling
Stones and Sly and the Family Stone. The company also has an emerging
artists program to encourage music buyers to take a chance on unproven
artists. Working with Capitol Records, a unit of EMI Group PLC, the chain
recently offered a new album by the English rock band "Starsailor" for
$6.99.

But don't plan on seeing sharp price drops across the board. While for
new artists like "Ashanti," a discounting strategy may make sense to
drive early sales, for more established artists with a big fan base like
rapper Jay-Z, it makes more sense to price CDs according to demand.

"We do nothing by template," says Matt Signore, chief financial officer
and co-general manager at New York-based Island/Def Jam Music Group, a
unit of Vivendi Universal SA's Universal Music Group. "We are going to be
very selective about this."

For instance, with the debut album by rockers Sum 41, Island Def Jam
offered what it calls a "developing artist" list price of $12.98 for the
first month of sales. The latest CD rapper Ja Rule, on the other hand,
has top-of-the-scale suggested retail price of $19.98.

Record companies are also still raising prices when the opportunity
arises. After the soundtrack of the movie "O Brother, Where Art Thou?,"
released by Universal's Lost Highway Records, received a Grammy award for
album of the year in February, the album's suggested retail price shot up
a dollar to $19.98. The increase, which sold 58,000 copies the week
before the Grammys and 209,000 copies the week following, according to
SoundScan, didn't seem to drive away prospective buyers of the album.

But with retail margins shrinking and record sales still dropping,
however, Pam Horovitz, president of the National Association of Recording
Merchandisers, says prices will be given greater scrutiny in the next
year. "You really were seeing a bigger outpouring of pricing concerns
than we've ever seen," she says of both retailers and record companies
that attended the group's annual convention last month in San Francisco.
"I think what you're going to see for the next few months is a whole lot
of stuff getting tried."

Write to Jennifer Ordonez at
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