to article from the New York Times
Universal to Cut Prices of Its CD's
By AMY HARMON
Battered by online piracy, the Universal Music Group, the world's largest record company, said yesterday that it would cut prices on compact discs by as much as 30 percent in an aggressive attempt to lure consumers back into record stores.
The deep price cut — the only one to apply to new CD's since the format was introduced in the early 1980's — represents a gamble by Universal that more consumers will buy more CD's once the price dips below $13. It also reflects the profound degree to which Internet file-trading has managed to undermine the music business, Universal executives said.
"We are in the middle of a terrible situation where our music is being stolen," said Doug Morris, chairman of Universal, which includes labels like A&M and Island Def Jam and artists like Eminem, Elton John and U2. "We need to invigorate the market, and as an industry leader we felt we had to be bold and make a move."
Under the new pricing scheme, Universal would lower its wholesale price on a CD to $9.09 from $12.02. The company said it expected retail stores to lower CD prices to $12.98, from the $16.98 to $18.98 they now charge, and perhaps to as low as $10. When CD's first arrived on the market they cost $15.98, and have climbed from there.
The result could be a broadening of the music market, which has contracted as prices have increased. Music consumers have complained for years that CD prices are too high, and many people who copy music online without paying for it cite high prices as the main reason.
"Music is not supposed to be an elitist product," said Josh Bernoff, an analyst at Forrester Research. "We're not talking about Lexus here. It's better to have more people buying music at a lower price than to have it priced out of the market."
But the move will put even greater pressure on Universal's profit margins at a time when the company is experiencing sharp revenue declines. And some music industry analysts caution that high prices and piracy are not the only reason CD sales have dropped off.
Some of the research on older consumers shows that "not finding what they want is more of a reason for not buying than pricing," said Russ Crupnick, vice president of the NPD Group, a market research firm. "They still need to put out content that's appealing to people," he said, referring to the record companies.
Whether price cuts will revitalize the company's sales will depend largely on how retailers pass them on to consumers. A spokesman for Tower Records said no one was available to comment last night, but large retailers have traditionally sold new CD's at a discount from the suggested list price.
Universal also plans to shift tens of millions of dollars in advertising revenue from in-store promotions to television and print ads featuring the $12.98 price in an effort to drive consumers into stores.
Several other major record labels said they had no comment on Universal's price cuts. But industry analysts said it was probable that others would follow the company's lead.
Universal, which is owned by Vivendi Universal, sees the price cuts as part of a larger strategy to discourage people from copying music using file-swapping programs like KaZaA. The Recording Industry Association of America, the industry's trade organization, is expected to file suit next week against hundreds of people suspected of illegally trading music online.
The labels have also begun licensing their music to online music services like iTunes of Apple Computer, which allows songs to be downloaded for 99 cents each.
"What we're trying to show people is that music is a good value, even if you have to pay for it," said Zach Horowitz, president of Universal Music.
But some analysts said the price cut signaled a long-awaited recognition that the music industry needed to adjust its business model to fit a world where music can be sold or copied song by song. That might mean the industry needs to sell more music for less to make the same amount of money.
"This is a step toward realizing the reality of what business conditions are today," said Hal Vogel, author of "Entertainment Industry Economics"(Cambridge University Press, 1998). Mr. Vogel said that some estimates indicate that the record industry's revenues worldwide had declined to $30 billion from $40 billion a year in the late 1990's. "The cuts are going to put a squeeze on profit margins but it will allow them to start building a relationship with the public again," he said.