say your piece
OCTOBER 9, 2003
Feel the Beat...Drop
Universal Music Group Breaks Ground by Lowering Prices
By Jamie Gadette

ne month ago, Jon Tueller sat in a boardroom conversing with major record label executives. The vice president of music sales and head of marketing for Utah’s Graywhale CD Exchange had traveled to New York for the annual Music Monitor Network meetings. The event is designed to help independent retailers across the country strengthen lines of communication with larger record companies. Numerous topics were broached, but none gave indication as to what was about to happen. One week later, the Universal Music Group (UMG), a subsidiary of Vivendi Universal, dropped a bomb when it announced its decision to significantly reduce the price of CDs released under all of its labels.

According to a September 2003 press release, the new plan will result in a manufacturer-suggested retail price of $12.98. The change is a dramatic departure from CDs once priced as high as $18.98. Such drastic actions aim to draw consumers back into stores, thus boosting UMG’s dwindling sales. Ideally, these lower prices will provide enough incentive for shoppers to bypass, or at least supplement, virtual file sharing in favor of purchasing traditional hard copies.

The decision is great news for consumers, especially struggling college students who consider CDs luxury items. For those who have perfected the art of frugal living, record shopping is strictly an occasional indulgence, where choice runs second to the availability of previously owned products.

According to Greg Jones, Universal’s college and lifestyle marketing representative, the price drop will give financially disadvantaged fans a relatively guilt-free way to boost their record collections. “It’s easier to justify spending 10 bucks when you’re living off of ramen, as opposed to 20 bucks,” he says.

While there’s certainly nothing condemnable in saving money, there is more to the story than “everybody wins.”

“All is flux, nothing stays still.”

Heraclitus may have been speaking within the context of late-6th century Greece, yet his words resonate astoundingly in today’s ever-changing economy.

According to Alan Sandomir, associate professor of marketing at the David Eccles School of Business, UMG’s policy is simply a part of market evolution. “Consumers have been waiting for prices to fall,” he says. “Capitalism, in almost every case, serves the consumer because the markets are adjudicated by consumer demand.”

By that logic, the buyer will benefit—and UMG is a huge company with giant profit margins, so it can afford to take a hit. But how well will retailers absorb the blow?

Virgin Megastore refused to make any comments regarding the price-drop policy. Smaller and potentially more vulnerable stores are more comfortable discussing the prospect of an initial decrease in profits. “This is something that we’ve been asking for for years,” Tueller says. “We think it’s a good thing—they want to sell more records.”

Greg Jones, Universal Records' college and lifestyle marketing representative, is optimistic about the price drop.  

Part of Tueller’s confidence stems from the fact that Graywhale carries a huge supply of used CDs and independent labels. The store’s profit margins are not entirely dependent upon UMG or any other corporate conglomerates. Specialty stores such as Modified Music are even less affected by the change, as they can still charge higher per-unit prices. As long as Modified continues to stock rare imports, devoted customers will remain loyal. Graywhale caters to music purists, but its clientele also extends to casual listeners.

“Our main concern is a perception of what’s going on versus reality,” Tueller says. The average consumer is not aware of whom UMG’s policy will affect, making it difficult for them to conceptualize broader ramifications.

However, it seems that consumers are not the only ones who need to re-examine their perceptions. Although the policy is designed to help retailers, stores will have to be aggressive in their efforts to survive.

“This is an old story, this notion of adapt or die—a reminder that the marketplace is duplicative of Darwin’s biological thesis,” Sandomir says, suggesting that smaller retailers are not necessarily fated for ruin. Owners will have to employ ingenuity in order to stay in business. They will have to acquiesce and charge what UMG dictates, lower operating costs or increase added values.

In regard to the latter method, Graywhale is right on task. The newly relocated store features such additions as an in-store coffee shop, candy stand, DVDs and video games. The seemingly superfluous items might alienate music purists, but these extras just might help keep the store afloat.

If UMG’s business dealings drop from an 80 percent to a 40 percent profit margin, the distributors will drop to 20 percent and the retailers will also drop to 20 percent. Unfortunately, this means that after selling to the consumer, retailers will be left with a slim 5 percent profit margin—nearly 20 percent less than they might have previously accrued.

In order to cut costs, UMG will no longer pay retailers to help promote musicians. Still, Tueller isn’t lingering over what this means for Graywhale. He finds the new policy’s affect on developing artists more troubling. “It takes a lot to get your name out there,” Tueller says. “You almost need the label to contribute money to [succeed.]”

Jones disagrees—the manufacturer shouldn’t shoulder all of the responsibility. “Breaking artists has always been a grassroots effort,” he says. “The co-op dollars don’t make a difference. It’s up to us as employees to help break those artists.” However, relying on representatives to market clients is not enough.

Essentially, UMG is taking matters into its own hands, eliminating the middleman by stopping payment to retailers previously funded to promote the company’s artists. In order to compensate for the loss in advertising, UMG plans to run a series of television spots similar to those touting Now That’s What I Call Music, a series of compilations featuring artists deemed “hot” by committees composed of representatives of Universal, Sony, EMI and Zomba.

The commercials—basically stylized infomercials—will serve as free advertising for the retailers. The publicity is one example of UMG’s continued commitment to smaller businesses. Tueller is confident that the labels understand the importance of independent music outlets, citing the passion they bring to the market.

“There’s a general rule in business—you play by the law, by the rules of the games,” Sandomir says. “On the other hand, there aren’t many laws or many rules.”

UMG controls more than 25 smaller companies including Interscope Records, The Island Def Jam Group, Lost Highway Records, Mercury Nashville, Motown Record Company and Roadrunner Records. Of all of those labels, only Dreamworks and Hollywood Records are abstaining from embracing the price-reduction policy.

  In recent years, the market has become a battlefield. Inflated CD costs have resulted in widespread public backlash.  

In addition, remaining major record industry players—BMG Entertainment, Sony Music Entertainment Inc. and Warner Music Group—are also waiting to judge the repercussions of UMG’s actions before jumping on board. They are understandably wary of consumer will.

In recent years, the market has become a battlefield. Inflated CD costs have resulted in widespread public backlash.

“If [the record labels] weren’t gauging audiences, we still would have used the Web to steal music—that’s just what we do,” Sandomir says. “But you wouldn’t have seen this kind of movement to steal music.”

Given the rapid increase in technologies, it hasn’t taken long to locate ways of sticking it to the man. File sharing, downloading and “burning” have quickly displaced a previous reliance upon the almighty retailer. “Consumers have found a way to circumvent the producer by stealing from KaZaA (popular file-sharing software)—and it is theft,” Sandomir says, citing multiple copyright violations. Yet the immoral behavior is nearly justified by the label’s lack of ethics: “They have been acting as if they were a monopoly. The consumers have basically said, ‘you can’t do that to us anymore.’”

Those involved in the practice are tired of being screwed. However, most are not aware that piracy threatens to exploit musicians as well. “People who are burning and downloading are not thieves,” Jones says. “They just aren’t educated.”

Artists have been long been fighting for their freedom. Most of the struggles are targeted against the major labels. In May 2003, Michael Jackson sued Motown Records after learning that he had been cheated out of royalties on five Jackson Family songs. In 2001, former Hole frontwoman Courtney Love went to trial against Universal Music for the label’s “unconscionable and unlawful” business actions.

Shady industry practices also spurred creation of the Recording Artists Coalition (RAC), a non-profit, non-partisan organization designed to uphold musicians’ rights. RAC, which boasts such high-profile members as Don Henley, the Dixie Chicks and Jurassic 5, has held several benefit concerts in support of contractual legalities, as well as a number of other issues threatening artistic freedom.

Many musicians are just as incensed with fans engaged in downloading as the record labels that drove them to it. Even artists who use the Internet to spread their music and connect with larger audiences stress the importance of utilizing technology in a respectful manner. Such high-profile artists as Lou Reed, Lars Ulrich, Peter Gabriel and Neil Young have been particularly outspoken on the issue. All of them feel cheated. In a statement posted on the Recording Industry Association of America (RIAA), Reed said, “Artists, like anyone else, should be paid for their work.” What exactly does it take to ensure this right?

Solving the problem is a daunting endeavor. How do you stop a nation of faceless opportunists? In September, the RIAA brought 261 lawsuits against randomly selected downloaders. The organization tracked down offenders by ordering Internet service providers to report any illegal activities associated with their customers. Although the case certainly helped shed a serious light on file sharing, it enraged as many people as it frightened. Moral and legal threats won’t prevent piracy. There needs to be more of an incentive to abandon the practice. UMG may have discovered the solution.Value is subjective. The first CD that Sandomir bought cost $12.99. He thought it was a bit expensive. Now $12.99 sounds like a reasonable price. Society has been psychologically positioned to buy more.

Sandomir predicts that once prices drop, consumers, even starving college students, will increase spending habits once they think they’re getting a good deal. Four CDs at $6.99 a piece sounds better than two CDs at $8.99.

The current economic climate will benefit from this type of development. “Once the price of CDs falls, they’re going to believe they can spend more,” Sandomir says. “They can’t really spend more, but they can get more for their dollar, which means they are going to be using their Visa cards to buy even more. Consumer card debt is good for the economy.”

Of course, that’s not to say that students should run out and stock up on all of the records they’ve been missing. Consumers need to be savvy. There’s a lot going on behind the curtain, and it’s up to the public to make sure it’s not getting a raw deal.

Sandomir says that record companies currently holding their breaths are right on Universal’s heels. Soon, Sony, BMG and others will be following in the trailblazer’s footsteps.

”They will not wait,” he says. “They don’t want to lose any potential of competitive edging…or the opportunity to show to their investors that they’re paying attention to the market. I’m surprised, quite frankly, that they all haven’t jumped on it already.”

However, even UMG is treading carefully. On Oct. 1, only new releases will be priced at $12.98. Back issues won’t feature the newly suggested price until Jan. 1, when the fourth quarter—and holiday shopping—is over. The cautious approach should yield lucrative results. UMG’s per-unit profit will fall, but the company hopes that eventually gross profits will more than compensate for that initial decrease.

In the end, success will be entirely dependent upon public response. As long as store owners like Tueller develop ways to strengthen their clientele, business should proceed as usual.

The end goal is that enough people will recognize the limited benefits of piracy and consider the greater consequences of their actions. UMG’s price-reduction policy is a step in the right direction—but there is still much ground to cover.

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