Wal-Mart Wants $10 CDs

“There is some impending doom associated with us not helping them.”
-unnamed music industry exec

Does a CD have to cost $15.99? That’s the question mass retailers like Wal-Mart and Best Buy have been asking for some time now. The Major labels have come to realize that when Wal-mart asks a question, well, it not a request. The nation’s largest retailer is also the country’s biggest record seller, and if it cannot lower its prices — they are threatening to take their ball and go home. Wal-Mart has quietly implied it will back out of the music retialing business.

Labels claim the low price demands are impossible to achieve. Best Buy senior vice president Gary Arnold counters, “The record industry needs to refine their business models, because the consumer is the ultimate arbitrator. And the consumer feels music isn’t properly priced.”

This breakdown of the cost of a typical major-label release by the independent market-research firm Almighty Institute of Music Retail shows where the money goes for a new album with a list price of $15.99.

$0.17 Musicians’ unions
$0.80 Packaging/manufacturing
$0.82 Publishing royalties
$0.80 Retail profit
$0.90 Distribution
$1.60 Artists’ royalties
$1.70 Label profit
$2.40 Marketing/promotion
$2.91 Label overhead
$3.89 Retail overhead

Whether a market-research firm who sells their work tto the industry can truly be called independent is an issue we shall save for another day. But the data provided above certainly reveals plenty of fat in the equation: Just three ill-definded and squishy line items — Marketing/promotion, Label overhead and Retail overhead — account for $9.20 of $15.99 CD.

Rolling Stone had a full article on the subject; Here’s an excerpt :

“Wal-mart wants every CD you buy to cost less than ten bucks. And the nation’s largest retailer — which moved a quarter of a trillion dollars’ worth of goods last year — usually gets its way. Suppliers who don’t accede to Wal-Mart’s “everyday low price” mantra often find their products bounced from the chain’s stores, excluded from being sold to the 138 million people who shop at a Wal-Mart store every week.

In the past decade, Wal-Mart has quietly emerged as the nation’s biggest record store. Wal-Mart now sells an estimated one out of every five major-label albums. It has so much power, industry insiders say, that what it chooses to stock can basically determine what becomes a hit. “If you don’t have a Wal-Mart account, you probably won’t have a major pop artist,” says one label executive.

Along with other giant retailers such as Best Buy and Target, Wal-Mart willingly loses money selling CDs for less than $10 (they buy most hit CDs from distributors for around $12). These companies use bargain CDs to lure consumers to the store, hoping they might also grab a boombox or a DVD player while checking out the music deals.

Less-expensive CDs are something consumers have been demanding for years. But here’s the hitch: Wal-Mart is tired of losing money on cheap CDs. It wants to keep selling them for less than $10 — $9.72, to be exact — but it wants the record industry to lower the prices at which it purchases them. Last winter, Wal-Mart asked the industry to supply it with choice albums — from new releases from alternative rockers the Killers to perennial classics such as Beatles 1 — at favorable prices. According to music-industry sources, Wal-Mart executives hinted that they could reduce Wal-Mart’s CD stock and replace it with more lucrative DVDs and video games.

“This wasn’t framed as a gentle negotiation,” says one label rep. “It’s a line in the sand — you don’t do this, then the threat is this.” (Wal-Mart denies these claims.) As a result, all of the major labels agreed to supply some popular albums to Wal-Mart’s $9.72 program. “We’re in such a competitive world, and you can’t reach consumers if you’re not in Wal-Mart,” admits another label executive.

Long overdue . . .

Sources:
Wal-Mart Wants $10 CDs
Biggest U.S. record retailer battles record labels over prices
Warren Cohen
Rolling Stone, Oct 12, 2004
http://www.rollingstone.com/news/story/_/id/6558540/thekillers