CD retail prices drop for 2002

U.S. shoppers may think they have seen enough bargains during the holiday season, but CDs at $9.99 may soon be a standard offer at music stores as retailers

U.S. shoppers may think they have seen enough bargains during the holiday season, but CDs at $9.99 may soon be a standard offer at music stores as retailers slash prices in bid to battle the scourge of online music piracy. So for studios, artists and retailers alike, 2001 is closing out as a year of few sweet notes as the industry is also being hit by a lack of blockbuster pop music releases. "It looks like it will be another year of flat CD sales and I think to some degree that's got to be attributed to the fact that there's so much music available online," Tom Adams, president of entertainment industry research and consulting firm Adams Media Research said."I also think (the price cutting) is also as much to do with the fact that the economy is terrible and holiday sales were off overall," he told Reuters. Alternative media such as the increasingly popular DVDs also successfully won consumer interest, dampening sales of other entertainment products, analysts said on Thursday. Adams said the music industry may not know the full extent of the piracy impact on CD sales since many music-swapping services have opted to discard single servers, which allowed better monitoring of online traffic in the days of Napster. Although the once popular music copying service Napster service has been idle since July, analysts say the Internet song-swapping has just kept evolving, pushing retailers and recording companies into the cold.Just to show how edgy the retailers have become, popular music retailer HMV already has a sale offer on its Website dubbed the '02 Blowout Sale', while rival Virgin -- part of Richard Branson's Virgin Entertainment Group -- calls its markdown blitz, the Red Sale. Virgin, which has a megastore in New York's Times Square, is offering CDs priced as low as $3.99, with more other popular hits priced at $9.99. Discounts of up to 80 percent is a far cry from the average prices of newly released CDs of $17.99 to $14.99, a step which analysts said is bound to stifle profits for both retailers and recording companies."The record company is going to make their profit one way or another on a per CD basis, but they need to reevaluate their business model on the whole because it's clear that these free online services have eviscerated a large part of their market," said Kenneth Freundlich, an entertainment attorney in Los Angeles.Basically, if a CD sells for $13, a record company takes in about $8, of which it deducts artist, publishing royalties and manufacturing, promotional and marketing costs. The artist generally makes between 50 cents and 75 cents per CD, while the record company clears between $3 and $4 per CD. The artist further has to pay back advances made by the record firm, which further cut the artists' royalty, often dwindling to nothing, according to music industry insiders."(We) believe music software CD prices may soon permanently decline to $9.99 given weak sell-through of new artists and continued Internet piracy that appears unstoppable," Peter Caruso, a retail analyst at Merrill Lynch said. "This should force a shakeout in the music retail business," he added in a research note. Adams, at Adams Media Research, said the music industry was also not being helped by its slow transition into full subscription online music services. "I think we are in for a slow transition to a very different model for the audio distribution business where a lot more happens online through legitimate services like those being launched now," said Adams. "I think that will be a growth business which ends up generating revenues for rights holders and probably to some extent at the expense of CD sales," he added.Among the recently launched legitimate online music services is Pressplay, an online music joint venture between Sony Corp. and Vivendi Universal. Pressplay's debut on Dec. 19 came on the back of a test launch for a similar service called MusicNet, backed by big record labels, including AOL Time Warner's Warner Music Group, Bertelsmann AG's BMG Entertainment, and EMI, along with Internet media delivery service RealNetworks Inc. EMI owns a 43 percent stake in British books and music retailerHMV Media Group.—REUTERS