Universal slashes topline MSRP from $18 to $12

[Rspaight]

I wonder how this relates to their just-announced merger with NBC.

Universal Music to Cut CD Prices to Under $13

By Derek Caney

NEW YORK (Reuters) - Universal Music Group, the world's largest record company, on Wednesday said it will cut list prices on compact discs by as much as 30 percent in an effort to boost sales that have been stymied by free online music-sharing services such as Kazaa.

Starting in October, Universal, the home to such artists as Mary J. Blige (news), U2 and Elton John (news), will trim its prices on most of its CDs to $12.98 from its current $16.98-$18.98 range of prices.

"Our research shows that the sweet spot is to sell our records below $12.98,' said Universal Music president Zach Horowitz. "We're confident that when we implement this we will get a dramatic and sustained increase."

Historically, large retailers have sold new CDs at considerably less than the so-called "manufacturer suggested retail price."

"We expect this will invigorate the music market in North America," said Doug Morris, the label's chief executive. "This will allow retailers (to sell) for $10 or less if they so choose."

The price cut comes as the company has endured the enormous popularity of free music sharing services, which the labels blame for music piracy.

Universal, which is owned by Vivendi Universal, sees the price cuts as part of a larger strategy to discourage people from downloading music from the free services.

The record industry has already begun suing individual users of these services for copyright infringement. The labels have also begun offering their music to online music services that charge for each song downloaded, one of the most popular of which is Apple Computer Inc.'s iTunes.

"As people will begin to migrate from illegitimate services, they're going to be exploring a host of options -- some online and some through retail," Horowitz said. "We felt that the most important thing we can do to encourage people to go back into stores is to reduce our prices dramatically."

Wholesale prices for CDs would decline to $9.09 from $12.02. For a handful of bigger name artists, wholesale prices would be $10.10 for a short period of time.

Universal also said it would stop "cooperative" advertising, in which the label subsidized advertising by retailers in local markets and instead advertise directly to consumers. It will also withdraw other discounts to retailers.

"(Our buyers) haven't had a chance to talk with Universal at this point to get details on how it might affect the business," said a spokesman from Circuit City Stores Inc. . A spokeswoman from Best Buy Co. Inc. declined to comment.

Amazon.com Inc., Tower Records and Trans World Entertainment Corp. did not immediately return phone calls requesting comment.

The other major labels -- AOL Time Warner Inc.'s Warner Music, Bertelsmann AG (news - web sites)'s BMG, EMI Group Plc (news - web sites) and Sony Music Group -- declined to comment.

Some music executives questioned how much impact the price cuts will have.

"This doesn't have as much impact as it looks," one record executive said. "The labels were offering some discount programs to the retailers that would now end. So it's not entirely clear how much of a change there is for retailers' margins."

Another executive noted that larger retailers like Wal-Mart Stores Inc, Best Buy and Circuit City already sell CDs at around $13 anyway to get people into the stores to buy bigger ticket items.

"It remains to be seen what this means for the specialized retailer of CDs," he said.

[Rspaight]

And here's an internal e-mail that was posted over at SH.tv:

From: UMG Corporate Communications
Sent: Wednesday, September 03, 2003 12:12 PM
Subject: A MESSAGE FROM DOUG MORRIS AND ZACH HOROWITZ

Dear Colleagues:

Today we are making a major announcement which we wanted you to hear about directly from us. We have made a decision to significantly reduce our CD prices in the U.S. starting in the 4th quarter. On virtually all top line CDs, we will lower the wholesale price from $12.02 to $9.09, with a Manufacturer Suggested Retail Price of $12.98 (eliminating the $16.98, $17.98 and $18.98 equivalent MSRPs). With this new pricing model, we believe that most retailers will be able to offer our music for less than $10.00, if they so choose.

This is an aggressive move - but the state of the business calls for bold actions. The stores and consumers have been telling us that CD prices are too high. Because many music fans are getting music for free through online piracy, we believe that we need to lower prices to be more competitive with the illegal market. We are also vying for consumer dollars and shelf space with more and more forms of entertainment media. Our new policy will enable music to be offered at a much more appealing price point in comparison to these other entertainment products.

As part of this initiative, we are also planning to significantly increase spending on direct-to-consumer advertising that will greatly raise awareness of our artists and their music as well as highlight our new, everyday low prices. We are confident this will help drive fans back to the stores and increase our overall sales.

If this new pricing initiative is to succeed, we will need a meaningful increase in our sales to offset the reduction in our wholesale prices. All of our research indicates that these new, everyday low prices can lead to dramatic increases in sales at retail. Since UMG is responsible for more than one out of every four albums sold in the U.S., we are uniquely positioned to implement this new strategy. Our size affords us the critical mass to really give this a chance and, hopefully, reinvigorate the retail business.

At the same time, we are ramping up our efforts to counter the illegal distribution of our music on P2P services. The technical countermeasures we are using to frustrate the P2P experience are working. The dangers of P2P services - including viruses and privacy issues - are being revealed as never before. This month, the Judiciary Committee of the US Senate will hold hearings alerting the public to the uncontrolled dissemination of pornography through P2P services. Oftentimes, a search by the name of a recording artist is the vehicle that leads unsuspecting music fans to pornographic images, including child pornography.

Additionally, in the weeks to come, the industry will begin its lawsuits against P2P users who are illegally distributing our music online. These suits will supplement the educational campaign we launched over a year ago. They will send a strong message that it is illegal to distribute our music online without authorization. And they will make it very clear that those who engage in these activities face serious legal and financial repercussions. The lawsuits, together with the educational campaign and the public awareness of the dangers of P2P use, will lead many to explore purchasing music legitimately again - both online and at retail. Reducing our prices at retail now will underscore that music is a great entertainment value.

And, of course, at the same time, UMG is aggressively making its music available online through an ever-increasing number of legitimate services. We continue to be the most innovative in our offerings and have priced our music so that online retailers can sell it for as low as .99 a track and $9.99 per album.

UMG has consistently re-written the way business is done in the music industry. We have broken all records and set the bar for what a music company can accomplish. We are once again making a bold step with this move. The willingness to take a chance is what makes our company's culture so special.

[lukpac]

A good move, IMO. I remember when Best Buy was selling all CDs for under $10. Quite an enjoyable time...

[Xenu]

Wonder how much the research costed...beh. PR...it's amazing. Artists probably won't get *anything*.

[Grant]

I recall the companies announcing something similar a year or two ago and nothing happened. The prices kept going up.

[hobokenlad]

As the music division of Universal in NOT included in the sale to GE, this move has nothing to do with the merger (which is not yet confirmed; they are merely talking, albeit exclusively, at this point).

There is also question of the "details" of the program, which include stores devoting 25% of their display space to Universal product in order to get the new pricing, which may be a problem for "mom and pop" stores.

Overall though, I think it is a bold move.

FYI: the artists currently under contract to Universal will continue to get their contractually agreed upon royalty rate. However, this will probably impact royalty rates for new signings.

[Rspaight]

As the music division of Universal in NOT included in the sale to GE, this move has nothing to do with the merger (which is not yet confirmed; they are merely talking, albeit exclusively, at this point).

It's been speculated elsewhere that this is (at least partially) a move by Vivendi to beef up the balance sheet for Universal Music, in order to attract a buyer in the next few quarters.

Ryan

[Xenu]

Interesting theory.

[mikenycLI]

They just want the stock "bump" for the merger with NBC. It seems, they will do ANYTHING to get that effect, only, in addition to getting consumers to purchase more Universal music products. One thing for sure, the person who came up with this idea, is hoping they won't be dumped, as a result of the new corporate structuring.

There is only so much of THAT stuff, a person can buy, right ? How many consumers purchase music by the Music label, ONLY ? I don't think THAT many to make a difference...but then, they want to make us very conscious of what Universal makes.

I feel it will be neglible, to our general music buying costs.

Now, if "they", ALL, cut their prices, now, that will mean something ! Until that day, when Hell freezes over, it's a whole lot of meaningless, self-promotion, and "branding" strategy by these guys.

[Patrick M]

Any word on how this will affect SACD prices?

[Rspaight]

Hard to say.

My uneducated guess is that if the "stealth hybrid" approach (a la Pink Floyd, Stones, Dylan and Tommy) becomes the tactic of choice, they'll almost have to price them the same as CDs. If they choose to market them as premium items along side separate CD versions, though (like Gabriel, Police, and Norah Jones), they'll probably be pricier.

Ryan

[Patrick M]

I thought the Norah Jones was a hybrid that supplanted the redbook CD. It's not?

[chrischross]

My wife just layed down the law after hearing about the RIAA's $2,000 squeeze on the 12-year old honor student -- NO MORE CD'S!!!!

Good going RIAA -- you've just alienated a volume buyer's significant other. A price cut makes absolutely no difference, as the recording industry gets zero dollars from my wallet. Guess I'll get to live vicariously through the various forum postings when new releases come out.

[Rspaight]

I thought the Norah Jones was a hybrid that supplanted the redbook CD. It's not?

I hadn't heard that, but don't have an official announcement either way.

All I was going by was that at my (and your, I guess) local Best Buy, the normal CD fills the CD rack, while the SACD lives over in the SACD ghetto. It would certainly appear they're still pressing the CD, unless they're just working through a warehouse full of redbooks.

Ryan

[Rspaight]

My wife just layed down the law after hearing about the RIAA's $2,000 squeeze on the 12-year old honor student -- NO MORE CD'S!!!!

Ouch. Not even used or indie?

That was a particularly boneheaded move by the RIAA, who has a long history of boneheaded moves. Guess that's what happens when you scattershot lawsuits everywhere, huh?

You'd think they'd have realized the chances that many, if not most, of the biggest pirates out there are minors, and considered the PR implications a little more carefully.

Ryan