Merging Ministry and the Business of Music
The major's "Velocity" pricing program responds to the continuing plunge in CD sales, taking aim at brick-and-mortar retail stores that have scaled back on floor space dedicated to music. The pricing adjustments will also bring CD prices more in line with what consumers pay for digital albums at online retailers like iTunes and Amazon.
"We think it will really bring new life into the physical format,"Universal Music Group Distribution chairman/CEO Jim Urie says.
Universal, which accounts for 28.7 percent of year-to-date U.S. album sales, according to Nielsen SoundScan, will cut UMG's main wholesale price point of $10.35 to about $7.50 or less for front-line releases, which are generally by established current artists. It's also breaking with prevailing industry practice by putting suggested retail prices on CDs, ranging from $6 to $10.
UMG is betting that it can offset the loss in revenue per CD with increased sales volume and the rollout of greater numbers of higher-priced, higher-margin deluxe editions of albums. The new CD pricing structure could also spur UMG imprints to find ways to reduce CD costs, such as embracing less elaborate packaging on standard single CD releases or placing fewer songs on albums in order to reduce mechanical royalty payments to songwriters.
Most new releases will carry the new price points, although there will be the occasional exception, UMG sources say. The Velocity program will begin in the second quarter and run through most of the year. Sources say the first titles to be released under Velocity are expected to include new albums by Godsmack, Game and Taio Cruz.
Retailers should respond well to the new price points, given that many of them were already pricing many new releases at $10 and absorbing the loss to generate foot traffic to their stores.
But their enthusiasm may be tempered by the narrower profit marginsexpected under the new pricing structure. According to sources, front-line UMG releases will carry a 25 percent profit margin, down sharply from the customary 35 percent. That means CDs with a suggested list price of $10 would wholesale for $7.50, those with a $9 list for $6.75 and so on.
The move may not go over well with retailers that buy from wholesalers and already reap a narrower margin than those that buy direct from labels. And merchants accustomed to having free rein in setting retail prices may chafe at the suggested list prices. Meanwhile, UMG artists and their managers may grumble about the pricing initiative, since royalty payments, usually a percentage of sales, will be calculated based on the lower price points.
"We are happy to see that a major music vendor has made a decision to lower its price substantially," Bob Higgins, chairman/CEO of retail operator Trans World Entertainment, says, "because it's what the customer wants today, and (because lower pricing is needed) if we are going to see a viable CD business continue."
Similarly, Newbury Comics CEO Mike Dreese says he gives the initiative "two thumbs up," but adds that the industry still needs the other major labels and independents to make similar reductions in front-line pricing to boost overall CD sales.
Merchants have long clamored that lower pricing alone would prolong the life of the CD, sales of which are down 15.4 percent in the United States so far this year from the same period in 2009, according to SoundScan. With retail Sunday circulars and the home page of Apple's iTunes store touting hit titles at $9.99, it became conventional wisdom among merchants that $10 was the magic price point that would induce consumers to buy more CDs.
UMG was the first major to cut wholesale CD prices when it initiated its JumpStart pricing program in 2003. The other majors initially condemned the move, but eventually began reducing prices on their own catalog titles. Such initiatives have brought wholesale prices down to the $6-$8 range for midline and full-priced titles. Front-line pricing, however, remains a mixed bag, with UMG's main wholesale price point at $10.35, Sony's at $10.50, EMI's at $12.04, and Warner Music Group's at $12.05.
Last year, Trans World enlisted the participation of UMG, Sony and EMI in a pricing experiment to sell every CD for $9.99, an initiative that it has extended to more than 100 of its stores.
"Things are not going to get better for CD sales unless the price point is addressed," a senior retail executive says. "One thing that the Trans World test shows for sure: $10 will drive sales and traffic."