This editorial came from Moses Avalon's terrific newsletter www.MosesAvalon.com MAJOR LABEL SLASH N' BURNS CD PRICES & CANCEL POPs ================================================================= With an eye towards tilting Christmas sales figures, Universal Music is planning on announcing this week that they are reducing the sticker price of CDs to about $10. And the price will likely go down from there, depending on where you buy the CD. Naturally, the wholesale price would have to come down as well or retailers would simply go out of business. But there's a good chance that retail stores will be adversely effected anyway, as UNI is claiming that they are discontinuing the policy known as MAPS (see Moses Supposes - January 2003) and aborting the use of POPs: (Point of Purchase advertising.) This would cut off music retailers at the knees and leave them starving for revenue at the most important time of the year. To summarize MAPS and POPs for those new to the game: Whenever you see big, life-sized cardboard cut-outs of your favorite pop-stars at the front of the record store, that likeness did not get there because the store clerk thinks that artist is cool. The record labels pay big bucks for that placement. About $50,000 per chain. The cardboard cut outs are called POPs (point of purchase materials). It's been argued that record stores make more money renting floor space for POP displays than they do on the sales of CDs. The big question is, if UNI's plan of slashing prices in hopes that buyers bypass the POPs and bee-line for the cheap CDs succeeds, will the other four of the Big Five follow suit, drop prices and also discontinue POPs? If they do, we could see the brick and mortar "record store" as we know it, vanish, literally over night. RESISTANCE IS FUTILE Major retail chains will have the initial urge to ignore the new price point and keep CD prices artificially high, to make up the revenue lost from discontinued POPs sales. But this will likely be short lived, as smaller Mom and Pop stores (who don't have POPs as a profit center) will certainly take advantage of the new vig, keep prices low and a price war will ensue. Or, this Big Five could turn out to be the genius of retail, causing so many units to move through stores that it restores faith in the industry AND creates huge profits for everyone. Any way you look at it, it's going to be an interesting season as the love/hate relationship labels have with brick-and-motor retailers enters a new (and potentially final) chapter. ARTISTS ROYALTIES - GOOD NEWS, PERHAPS There is another issue related to this that I will be keeping my eye on. If full price for a CD is now $10, artists might find themselves earning more money than ever from CD sales. How, you ask? Virtually all major label contracts have royalty plateaus, whereby, if the record sells for full price (normally $17) the artist gets the full royalty. (This is called a "top line sale" in most major label contracts.) If it sells at below $12 the artist gets a three-quarter royalty. (This is called a "mid-priced sale.") And if it is sold for below $10 they get a half royalty (called a "budget sale"). Whereas before the artist only got a half royalty on a CD that sold for $10, because the price was more than 40% lower than the "top line" price of $17, now $10 would become the new "top line" rate and the artist could get a full royalty. Universal definitely has the "top line/mid-price/budget" structure in their contracts, and it represents the largest number of artists in the US market place. By way of an example, an artist who might have earned a $.90 royalty on an album sale would now earn about $1.20 on that same sale. Call your lawyer or manager and ask him how the "top line records" clause reads in your contract. Ask him if this change of "top line" pricing will make an impact on your royalty statements. I think you'll see his eyes light up a bit at the question. I have little doubt that this label will try to assert that their artists should be paid the "budget rate" for these sales. But contractually the artist may have some leverage here. INDIES BEWARE While artists signed to majors may get a windfall from this development, this move could have negative rippling effects for those selling their CDs off the side of the stage and through indie distributors. Y'see, the perceived value of a CD is largely based on the retail value set by the major chains. People will pay $12 for an Indie CD because it "feels" like a bargain, when they consider that CDs from major artists sell for $15 to $17 in stores. But if suddenly those same top 40 artists' CDs are only $10, my guess is that indies will have to lower their price to stay competitive. Will their distributors do the same, and lower their distribution fees to keep pace? If not, indie artists will find themselves squeezed by this price compression.