Priced to Lose? Labels Sell Music Online.

by Robert Menta 8/03/00

Recently, I was at a major record chain checking out the latest CD offerings, which are visibly positioned at the front of the store. Interspersed within are several CD's on sale for $11.99 or $12.99, all recent releases, all looking to do volume. Remember those prices, we will come back to them later.

Generally, I only by CD's from this store when they are on sale. Otherwise, I tend to buy them on Amazon for $13.99. I save the sales tax, but give it back on shipping and handling.

Richard Menta

Suggested list price for a CD today ranges between $16.99 and $18.99, but it has been quite a long time since I have had to pay full list. People who only buy their CD's online always pay at discount.

Now with digital downloads the Net promises even further discounts. Yes I know, Napster is free, but lets talk about the selling of digital content over the web.

To bring a CD to market there are quite a few hard costs. First there is the CD itself and the cost to print millions of them. Add to that the cost to print the inside booklet and cover art, the cost of the jewel case, and the cost to assemble all these pieces together and shrink-wrap them. Now come the distribution costs as we truck them all over the US to local record stores and to the warehouses of online merchants like Amazon. These costs include a distribution network of teamster drivers, local sales reps, and regional managers.

To distribute a digital music file is as simple as placing a simple link on a web page. You don't have to make multiple copies, you don't have to deliver it to the buyer they come to you. Yes, there are the IT network costs for an eCommerce site, but most of these costs are fixed and the overhead is much lower. See where the savings come?

With that in mind, sites like EMusic set the precedent, selling singles for $0.99 and entire albums for $8.99.

This Month Sony and EMI entered the digital download arena, selling secured versions of their music on the Net. Sony sells music directly on their site, while EMI distribute it through web vendors like HMV. When I visited their offerings I saw the prices. Here is where the confusion lies.

Sony only sell singles right now on the Net, hawking them for $3.49 for a single, and when they say single they mean one song, not an A and B side as found on 45 and cassette! EMI charges the same plus you can purchase albums for the very high price of $16.99.

Hey, where are the savings? They are charging me $3.00 to $4.00 more than what I pay for these songs on sale at the store. They are charging $3.00 to $4.00 more AFTER cutting out the middleman. They are charging $3.00 to $4.00 more and I don't get the CD, the cover art, or the booklet. Furthermore, if I pay for the Sony single, I don't own it. I am only renting it. Sony uses this odd scenario where the buyer must check-in/check-out the music they pay for.

Now let's bring Napster in the picture. Before the software ever hit the Net, the major labels were suing the likes of Diamond for its Rio players, Lycos for its MP3 website, and hundred of download sites it the attempt to shut them down and stop what they called piracy.

Net downloads were still the domain of in-the-know college student but the lawsuits had the side effect of bringing the MP3 format onto the front pages of American newspapers. Had the major labels instead took this time to explore the marketing potential of MP3 files and then build a plan of selling online tunes, it could have been different. They could have trained the later digital music audience that some MP3 tunes are free for promotion (the single) and the rest is for sale (the album). Sure, people would copy from the original buyers left and right, but the perception would have been that MP3 files were a commodity and that soon encryption would catch up and make copying more difficult.

Instead, panicked record executives rushed to their layers. When Napster came around, the heat turned up, becoming the biggest story of the last several months and turning into a virtual advertisement for the service. It also reinforced the image that MP3 music should be free and that the greedy record companies were only out to rip off the consumer. The government's price collusion charge against the labels only justified this attitude to millions.

So what happened when the RIAA managed to win a court order to shut down Napster? Millions of NEW users flocked to the software and several competing ones to get in on the goods before it closed down. Two days later, Napster won its appeal to stay open and today it's huge.

If you are the record companies, how do you compete against this?

Well, you compete. You compete with reasonable pricing. You compete with a better product. You don't tell consumers to buy your product because they are thievesif they don't, you convince them to buy your product because the product is better. It's called marketing. In all fairness to the labels, Napster makes this hard for them, but to date Napster earns no income nor does it know how or when it will.

A company has to earn money at some point to stay viable. We are presently watching dot-coms like and APB Newswire fold for lack of a working business model. More failures are coming. Established businesses with deep pockets like the record industry have a competitive advantage.

To date, the record companies have been their own worst enemy. They dismissed the MP3 digital format before the Diamond Rio explosion during Christmas 1998 and they mishandled it afterwards. Still, Wall Street has cut off much of the easy cash Net music had come to expect as matter-of-fact.

BMG recently made the best move by a record company to date buy purchasing the sinking CDNow and its large consumer audience. Emusic is burning through its cash at an alarming rate and is on many an analyst's list to run out within the year. The likes of Sony can swoop in and easily pick up the company when things are direst. Then Sony can augment the Emusic's stable of independent artists in the MP3 format with their own artists using Sony's proprietary ATRAC3 format. The push it would give the ATRAC3 format alone against a dozen or so competitors might alone be worth it.

Even the non-income producing Napster can be available for a price and turned into a subscription service.

But before any of that can happen they need to price Net music more competitively. The major labels can't have that percentage of users willing to pay for digital downloads walk away because they feel it is too much. If you do they lose.

But what we mean by lose is that they will control. Don't forget the promotional aspects of MP3 music. As Jupiter Communications found for the second year in a row, digital downloads stimulate CD sales. The music companies can still make out, they just wont be running the whole show. Of course, that is what they want more than anything else.

That is really what this is all about, control. The best thing yet to happen to the recording industry is that Napster WON its stay of execution. As Dave Marsh pointed out in his article 'Somethin's Happenin' Here; What It Is Ain't Exactly Clear', Napster's death would have accomplished more than its life.

In the end, winning in the courts is not what will win the Net. Winning over the consumer is.

iRiver Spinn is available on Amazon

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