It looks like the music industry is starting to face reality: the optimal price for its product has fallen. Universal is cutting its wholesale price and pushing retailers to cap prices at $12.98 per CD.

Universal hopes the actual retail price of most of its CD will end up about $10 or less, comparable to the $9.99 retail price (search) that music fans enjoyed in the early 1990s, at the height of a price war between the recording companies. ...

Universal's current wholesale price for a CD album is $12.02, with a manufacturer suggested retail price of $18.98. Under the new pricing structure, the wholesale price would be $9.09.

I wonder if the music stores will go for it? Such a pricing scheme would cut their profit from $6.96 per CD to $0.90 -- if these numbers are correct -- and it's hard to imagine volume increasing by the (at least) 700% required to make up this marginal revenue difference.

The world's largest recording company hopes retailers, who have suffered as industrywide music sales dropped 31 percent the last three years, will follow its lead and pass on the savings to consumers. ...

"Our new pricing model will enable U.S. retailers to offer music at a much more appealing price point in comparison to other entertainment products," said Jim Urie, president of Universal Music & Video Distribution. "We are confident this pricing approach will drive music fans back into retail stores."

Well, I don't know about that, but it's certainly a good start. Simple economics has finally forced the music industry to adapt to the changing market; these drastic price cuts reflect their reluctant understanding that their stranglehold on music production and distribution is weakening.

The recording industry blames its sales slump largely on illegal music swapping over peer-to-peer networks and is expected to take legal action against hundreds of suspected file-swappers this month.

But industry critics say the record companies have, for more than a decade, ignored the effects of soaring CD prices on sales. They also contend the artistic quality of music has deteriorated.

"This is something that the industry has failed to address ... You could make downloading music go away tomorrow and the industry would still face challenges," said Sean Baenen, managing director of Odyssey, a consumer marketing research firm in San Francisco.

"All the data suggests that quality and price are major factors to the equation."

Not only that, but anyone who's been watching the stock market for the last few years should realize that music sales aren't the only thing that's been down 30%. Get a grip folks; even if file sharing has cut into your revenue (which is debatable), it's certainly not the only factor.

On another music-related note, I went to see Eleventeen at the Troubadour last night, and they were predictably awesome. The played a short set, but from what I heard it's because there were label scouts in the audience and the band only wanted to play their best stuff. There were also an extraordinary number of beautiful babies in the crowd -- possibly also due to the label presence. To the girl in the blue t-shirt and red hip-huggers: I love you.

I expect that in the future, most bands will reap most of their revenue from touring and performing live shows, and that they'll end up giving recordings of their music away for free. The social construct of intellectual property is on the decline, and I expect it to largely fade away as technology makes it ever-easier to share bits and bytes of raw, digital data. I'm not saying this is good or bad, but I think it's inevitable. The music industry as we know it may be the first major victim of this societal sea change, but it won't be the last. Movies, even books, will be forced to make more of their money from presentation rather than content -- at least as long as people are required to physically change location to engage in certain experiences.

Essentially, technology enchances competition, and that increased competition will drive profit and prices down, across the board.



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