HOME ENTERTAINMENT : High Cost of Listening : CDs rejuvenated album sales in the ‘80s, but business is declining again and retailers say that’s because the labels won’t cut prices

Joe Bonds, a 41-year-old manager of a Venice auto-marine parts store, wanted something special for his daughter’s 13th birthday.

Knowing how much she loves music, Bonds decided to buy her something that he hadn’t even bought himself: a compact-disc player.

Bonds found one on sale for $129 at an electronics store and then headed for Tower Records in West Hollywood to get her a $50 gift certificate. He figured that amount ought to enable her to get a good start on a collection--maybe six or eight CDs.

“Boy, was I wrong,” Bonds says, standing near the cash register. “I gave the sales girl my $50 and just before I left, I asked her, ‘So, how many CDs will my daughter be able to get for this?’ And she looks back at me and says, ‘Oh, maybe three.’

“ Three ? I was stunned. I feel kind of bad about the whole thing. Maybe I should have bought her a tape player instead of a CD unit. I mean, how’s she ever going to be able to afford to buy any music?”

Bonds isn’t the only record buyer who is complaining.

Most of the nation’s biggest record retailers agree that CDs cost too much--an average $15.98 for a superstar release, be it rock, rap, jazz or classical, versus $10.98 for the same album on cassette. A small percentage of new releases go for as much as $16.98.

“The superstars in classical music cost as much as in pop,” says Skip Webb, manager of Tower Records’ Classical Annex in West Hollywood. “The cost for any big artist such as Pavarotti or Domingo or Cecilia Bartoli runs about $15.98 or $16.98. Many of our customers complain to us that CDs cost too much. They say they wish the prices would come down. Many wait until we run a sale to purchase the CDs they want.”

Similar complaints are voiced by retailers specializing in other musical genres.

Many retailers, including Russ Solomon, president of the 73-store outlet, Sacramento-based Tower Records, say the cost of CDs is one of the critical issues facing the record business in the ‘90s.

“Music sales have slowed down for a reason,” he maintains. “And it’s not just because kids can’t afford to buy CDs. Adults can’t either. If the companies would drop the price, we could sell a lot more product. The high cost of the CD is inhibiting the growth of our business.”

But record company executives disagree. There is little chance, they say, that prices on new releases will come down.

“We believe that consumers are paying a fair price for an exceptionally durable product that is extremely entertaining,” says Rich Kudolla, senior vice president of sales at Columbia, a division of Sony. “CDs are infinitely better than albums or tapes, so why shouldn’t they cost more?”

The biggest thing to happen to pop music in the last decade, from a business standpoint, wasn’t heavy metal, rap or Madonna. It was the introduction in the mid-’80s of the compact disc.

For consumers, CDs offered three attractive advantages over the vinyl and cassette formats that had dominated the market for decades: superior sound, durability and ease of programming.

For record companies, CDs meant a virtual transfusion of sales during a critical period when retail volume was on the wane. More than half of the industry’s $7.83-billion annual revenue today comes from CDs.

Throughout the ‘80s, record-store owners and consumers were so enthusiastic in the initial frenzy generated by CDs that they didn’t seem to mind the hefty price tag. The assumption was that the price--as with almost every other home-electronic innovation--would eventually be reduced as demand increased and manufacturing costs dropped.

By the beginning of the ‘90s, however, superstar CDs had gone from prized novelty to the norm without any noticeable price reduction. When consumers started grumbling, retailers began pressuring record companies to drop prices. But they found a deaf ear.

“It’s almost as if the record companies are thumbing their noses at consumers,” says Pete Howard, editor of the International CD Exchange (ICE), the nation’s largest CD-audiophile newsletter. “When the CD arrived on the scene, it was a risky and expensive technological gamble.

“Because nobody knew whether it would catch on or not, the companies had a legitimate reason to charge as much as they did. But in the past five years, demand has increased and manufacturing costs have dropped considerably. I think just about everybody believes it’s time for the record industry to pass some of those savings on to the consumer.”

Recession-pinched record store owners believe that if companies would accept a lower profit margin, CD sales volume would increase across the board. Bonds, the Venice father, couldn’t agree more.

At present, retailers point out that record companies charge them $3.75 more for the same music on CD than on cassette, even though the unit manufacturing and distribution cost for CDs is only about $1 more than for cassettes.

“There’s a giant step in my mind between spending $10 and $16 for a piece of music,” says shocked CD-buyer Bonds. “I used to buy lots of records and tapes when they cost $6. I could even handle it when the price went up to $10. But 16 bucks--that’s just out of my league. It’s true that compact-disc players sound amazing and that they’re really cheap to buy these days.

“But what good is it to own a compact-disc player if you can’t afford to buy the music you want to hear on it?”

When the record industry introduced the compact disc to the U.S. retail market in 1983, skeptics were quick to dismiss it as merely another home-electronic gimmick.

In the last decade, however, sales of albums on CD have soared from less than 1% of total units shipped in 1983 (versus 36% for vinyl and 40% for cassettes) to 42% in 1991 (versus 1% and 45%, respectively). This year, CDs are expected to roll past cassettes--and never look back.

Initially, record companies blamed the cost of the CD on the lack of sufficient manufacturing capacity in the United States. Between 1980--when the first disc was developed in a co-venture by Sony in Japan and PolyGram in the Netherlands--and 1986, only one major CD pressing plant existed, the Sony-owned Digital Audio Disc facility in Terre Haute, Ind.

Back then, the average cost to produce a disc was $3. But additional plants have opened, and manufacturing costs have plummeted to about 85 cents a disc.

“When CDs first came out, retailers were led to believe that as costs dropped, prices would come down,” says Arnie Bernstein, executive vice president of the 1,000-outlet, Minneapolis-based Musicland, the largest record retail chain in the nation. “The companies asked us to hang in there until it happened. We’re still waiting.”

Retailers aren’t the only ones complaining. Artists and their representatives say record executives exploited the uncertainty of the CD’s future to secure “new technology” and “packaging” deductions on CDs from pop acts. Those deductions, which are still in force, allow manufacturers to pay artists about 15% less for royalties on CDs than on albums or cassettes.

Most pop stars earn a royalty rate of about $1.85, or 18% of the retail value of each CD--minus packaging and return deductions. Songwriters receive about 6 cents a song but not usually more than 60 cents for each CD.

“The record companies are taking advantage of performers,” says Los Angeles entertainment attorney Don Engel. “Although CDs are rapidly becoming the biggest-selling configuration, the companies refuse to pay artists the same royalty rate for CDs as for vinyl and cassettes. The way I see it, the companies have latched onto all these additional profits, and they just don’t want to let them go. There’s no justification for it.”

Expenses vary from project to project, but most CD releases cost companies about $6 a unit to make and distribute, sources say. Record labels charge retailers about $10.25 for a CD--or a difference of $4.25.

By contrast, record companies sell cassettes, which cost about $4.75 to make and distribute, to retailers for about $6.50.

That may sound like an outrageous gap--and some record officials acknowledge privately that it is. Still, there is no indication that companies intend to lower the price any time soon.

As it is, Americans--who make up about 34% of the global retail market--pay less for compact discs than do consumers anywhere else in the world. Retailers in Europe and Japan pay record labels $13 to $18 for superstar CDs and charge consumers $18 to $23. If anything, record retailers are prepared to see the labels raise prices in the United States to bring them more in line with what compact discs sell for overseas.

According to critics, the record industry has basically been playing a waiting game with consumers for the last decade, hoping that inflation in other parts of the economy will eventually catch up to the price of CDs.

But label officials say they have compromised with retailers by lowering prices on catalogue and non-superstar CDs, which now make up about 40% of the CD market. Retailers pay companies only about $6.25 to $9 for older catalogue titles that they sell to consumers for $9 to $14.

“I don’t think our customers are being taken advantage of,” says Columbia’s Kudolla. “Of course, as in any business, there has to be a reasonable profit margin. It’s true that some CDs are priced at $15.98, but those are albums by the superstar acts. But designer clothes and best-selling books by hot authors cost more in other industries. I don’t understand why music should be any different.”

Retailers say customers frequently hold them responsible for CD prices.

“What they don’t realize is that when we sell a Bruce Springsteen CD for $12, we make almost nothing on it,” says Jim Dobbe, vice president of sales at the Torrance-based, 304-outlet Wherehouse Entertainment chain.

“All we get is about $1.75 on each sale. And that’s before we subtract our own overhead. The record companies are the ones making all the money.”

Jim Feldman, executive vice president of merchandising and advertising at the Roslyn, N.Y.-based, 78-store Record World chain, concurs.

“Retail profits keep going down, while record company profits keep going up,” says Feldman, whose retail chain recently filed for bankruptcy. “Our markup is so small on CDs that it’s destroying the business. Right now, it’s the retailers who are hurting, but eventually I think the entire industry will suffer as a result of high CD prices. There is danger ahead.”

Executives say the additional profit margin they earn on CDs is needed to help defray spiraling expenses for superstar advances, recording fees, videos, independent promotion, marketing and tour support. Plus, label officials say they use revenue generated from superstar CDs to develop, record and promote unknown acts, which for the most part never earn a nickel.

“The cost of putting a record out has escalated exponentially in recent years,” says Rick Cohen, senior vice president of sales at Bertelsmann Music Group Distribution. “Only a small percentage of bands the labels invest in ever turn a profit. The margin that the labels now earn on CDs is vital to the industry.”

Another reason label executives might be reluctant to drop prices is that record companies must now conform to the business practices of the giant multinational conglomerates that own them. All the major record labels were devoured in a rush of corporate acquisitions over the last six years.

Warner Bros. Records’ parent company merged with media giant Time Inc., and RCA was bought by West German media giant Bertelsmann Inc. Officials at the four other major labels--Columbia, MCA, PolyGram and Capitol--now report to Sony, Matsushita, Philips and Thorn-EMI, respectively, all foreign-based electronics giants that manufacture, among other things, CD hardware.

“These giant corporations own other, non-music-related businesses that regularly turn a specific margin of profit, and they expect the profit margins for records to live up to what their other ventures take in,” says Rob Simonds, chief financial officer of the Minneapolis-based Rykodisc Records.

“What you have to remember is that this industry wasn’t always so profitable. In the ‘70s and the ‘80s the record business was in a very unhealthy economical state. But now, with CDs, the profit margin is finally more in line with what a business of their ilk should be commanding.”

Meanwhile, disgruntled consumers continue to wait for prices to come down.

“Music is real important to me,” Bonds says. “And I love the way CDs sound. Honestly, before I found out how much the discs cost individually I was ready to go out and buy myself a CD player too. But I just can’t shell out that kind of cash right now. The way I look at it, even though my tape player only sounds about half as good as my daughter’s CD unit, I can live with it for a while. At least until the price of CDs come down.”

Bits, Bytes of Making Music

The suggested retail price of a superstar’s new release is $15.98 on CD, $10.98 on cassette and $9.98 on vinyl (sale prices are about $11.99 on CD, $8.99 on cassette and $7.99 on vinyl). But average costs to produce the album are about half the sale costs:

COMPACT DISC (CD) Booklet: $.20 Disc: .85 Tray (that the CD sits in) .05 Inlay (under the tray/along spine): .10 Jewel box: .35 Long box (varies): .50 Handling (shrinkwrap, one sticker): .15 Additional sticker (optional): .10 Shipping (usually by truck): .05 MANUFACTURING COSTS: $2.35 Artist royalty (about): 1.85 Songwriting royalty (about): .60 Marketing costs (about): 1.20 TOTAL: $6.00 Next year (without long box): $5.50

CASSETTE Shell + manufacturing of tape: $.75 Plastic box: .10 J-card artwork flap: ($.10 - $.50) .30 Handling: .15 Shipping: .05 Additional sticker: .10 MANUFACTURING COSTS: $1.45 Artist royalty (about) 1.50 Songwriting royalty (about) .60 Marketing costs (about) 1.20 TOTAL: $4.75

LP Vinyl: $.70 Dust sleeve: .05 Jacket: ($.10 - $.30): .20 Handling: .15 Shipping: .05 Additional sticker: .10 MANUFACTURING COSTS: $1.25 Artist royalty (about) 1.50 Songwriting royalty (about) .60 Marketing costs (about) 1.20 TOTAL: $4.55 SOURCE: Recording Industry interviews