Retailers Say CD Prices Need to Drop : Disc Biz May Lose Hard-Won Market Share, Industry Watchers Warn

Bring compact disc prices down.

That’s the message being sent to record companies this holiday season by retailers who are concerned about the future of the goose that laid the platinum egg.

CDs have been largely responsible for what retailers and record company executives are predicting will be the most profitable year ever in the music business. The tiny metallic discs, which were introduced in 1983, now account for about 24% of the industry’s estimated $4.6 billion-plus yearly sales, according to the Recording Industry Assn. of America.

But retailers say there are signs of consumer resistance to the cost of CDs, which are typically marketed for $13 to $15 per album, compared to $7 to $8 for vinyl or cassette copies of the same album.

Russ Solomon, president of the 45-store Tower Records chain, believes that price gap has to be narrowed to keep CDs from losing momentum.

“We’re politicking like mad to get labels to reduce CD prices,” he said. “I would be extremely surprised if prices didn’t drop.

“Record companies are making about $5 per unit on front-line CDs, which is great for their profits. But (that pricing pattern) is definitely slowing down sales. Front-line CDs are basically bought by younger people who just don’t have $15 to spend. We’d like to see it come down to an everyday price of around $13 and a sale price in the $10 to $11 range.”

Mitch Perliss, director of purchasing for the 50-store Music Plus chain, was even more emphatic. “They’ve got to reduce prices to continue a growth factor on CDs. How much product is worth paying $6 to $8 more to have it in the CD configuration?

“Even people who own CD players are buying CDs only on key items, and for the rest of their music, they’re buying cassettes. If the price difference was much less, people with CD players would tend to pick up the CD. If the price was the same, CDs would just go absolutely bonkers.”

Many major labels have already reacted to consumer price resistance by shifting hundreds of older, “catalogue” CDs from their full-priced “front-lines” to their “mid-line” series, which are generally priced $3 to $5 less than front-line releases.

But reducing catalogue prices is not enough, said Perliss. “That’s a first step, but labels need to bring prices down even on new releases.”

The biggest sign of CD price resistance is a surprising slowdown in sales of CD players. Last January, the Electronic Industries Assn. issued a projection that 4 million CD players would be sold in 1987--which would mean a whopping 54% increase over the 2.6 million players sold in 1986.

But in October, the Washington-based trade group issued a sharply revised estimate of 2.9 million players, for a modest 11% increase over the last year. Since prices on players have dropped substantially in recent years, most observers blame the high price of CDs for the player slowdown.

John Tavenner, CBS Records’ manager of marketing development in New York, acknowledged that the biggest reason people give in surveys for not buying a CD player is that the discs are too expensive. “People find out they cost a lot more than records and they stop right there,” he said.

The pricing issue may be determined by what happens to CD player sales this holiday season.

“There are two scenarios,” said Keith Benjamin, Wall Street analyst with the New York-based firm Silberberg, Rosenthal & Co. “Let’s say this turns out to be a good Christmas at the retail level. We beat CD player sales estimates of 2.9 million, and CD unit sales are also very strong. Record companies in that case don’t yet have a strong incentive to do anything.

“Scenario two: It’s a lousy Christmas in terms of CD player sales, and CD demand is off. That’s the time that labels would seriously consider lowering the price of front-line product. I feel it’s inevitable: Whether it’s this Christmas or next summer, you’re going to see a dramatic slow-down in CD player sales and then in CD sales.”

Gary Ross, senior vice president of marketing and merchandising for the 608-store Musicland chain, said a drop in CD prices may “give non-CD-purchasing consumers--the 91% of American households who do not own a CD player--the incentive to go out and buy one.” The general retail mark-up on CDs is 33% versus a 37% mark-up on vinyl albums and cassettes.

Henry Droz, president of Warner/Elektra/Atlantic Corp., said he is closely monitoring CD sales this Christmas.

He acknowledged that CD activity “flattened” beginning in April, and remained flat throughout the summer. That prompted WEA to mount an aggressive campaign to boost CD sales.

“Since September, we have been discounting rather heavily. We’ve been offering our (wholesale and retail) customers a 10% discount through the end of the year--double what we offer on cassettes and LPs. We’ve also introduced some mid-lines. And beginning in mid-September, our CD sales resumed an upward trend.

“So it’s not that everyone has been sitting on their hands,” Droz said. “We’re very well aware of what CD has contributed to our industry and we’re going to do whatever needs to be done to encourage its continued growth.”

David Berman, president of Capitol Records, noted that Capitol has also announced a line of mid-line or budget-line CD releases. “That is partially in recognition of the fact that there may be some consumer price resistance to catalogue items,” he said.

At the very least, observers expect labels to drop the price of new CDs by new or middle-level acts, which are currently priced the same as new releases by established stars. This “variable pricing” has long been the norm with records and cassettes.

As a result of feverish construction of CD plants, CD manufacturing supply now outstrips demand. This has served to sharply reduce the cost to labels of manufacturing CDs. In fact, Pete Howard, editor of the International CD Exchange newsletter, said it costs labels only $1 more to manufacture the CD than a phonograph record.

Wall Street analyst Benjamin offered another reason for labels to act now to drop CD prices. “Labels have a strong incentive to accelerate the penetration of CDs before they start introducing DATs (digital audio tape) . . . They won’t displace CDs, but they will provide an alternative.”

Wan Seegmiller, president of Laser Video, a CD manufacturing plant in Anaheim, noted: “Record companies will sell CDs for as much as they can get for as long as they can get it. But I think they’ll react to the marketplace and to supply and demand. Nobody has repealed that law yet.”