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