Agency Assailed Over Claims on CD Pricing

When ‘N Sync released its “No Strings Attached” album in March, retailers began blowing the CD out the door for about $13.

Then, with great fanfare, came the announcement from the Federal Trade Commission that the agency had put a stop to anti-competitive practices in the record industry, a move that it claimed would drive CD prices down as much as $5 a disc.

So, how far have CD retail prices fallen since?

Not a penny.

Nearly four weeks later, Best Buy, Wal-Mart and other Southland retailers are still selling ‘N Sync’s CD for about $13 or $14, the same price as other hits from stars such as Eminem and Britney Spears.

Now, retail and music executives are accusing FTC Chairman Robert Pitofsky of misleading consumers and feeding the media “artificially inflated” pricing statistics, possibly to camouflage the lusterless findings of the FTC’s costly two-year investigation of CD advertising policies.

“Those figures are a bunch of bull,” said Russ Solomon, chairman of the Sacramento-based Tower Records chain. “Totally fabricated. There’s no evidence to support such ridiculous claims. The government just pulled those stats out of the air. Prices are not coming down. They’re already at rock bottom. It’s outrageous to mislead music fans to think otherwise.”

Pitofsky did not return repeated phone calls.

Eric London, director of the FTC’s office of public affairs, said the agency could not reveal how Pitofsky determined that the FTC agreement would save music fans $2 to $5 per disc.. Nor would London explain the basis for Pitofsky’s proclamation that advertising policies caused CD prices to be inflated $480 million since 1997.

“I know this may sound like doublespeak, but the reason we cannot disclose how we arrived at those figures is because they are based on confidential business information gathered during our investigation,” London said. “I can assure you, though, that our projections were very modest.”

Record companies and retailers are still trying to figure out how the FTC came up with its figures. No matter how you do the math, retail and record executives say, the numbers simply don’t add up.

U.S. retailers have sold about 1.7 billion CDs during the last three years, industry sources estimate. Assuming that consumers were overcharged $480 million during that time, it means retailers might have “gouged” them 30 cents per CD--far below the $2-to-$5 figure suggested by the FTC.

For consumers to save $5 on a top seller by ‘N Sync or Eminem, retailers would have to price CDs at $9. That’s about $2.50 less than what retailers pay for CDs.

It doesn’t take a rocket scientist to figure out that merchants who consistently sell products below cost won’t be in business very long.

Ironically, that’s how the “minimum advertising pricing” policy came into being.

Before implementation of the policy, predatory pricing by Best Buy and discount merchandisers had forced several giant record retailers into bankruptcy and left other music chains and independent retailers on the verge of collapse. The mass merchants were selling selected CDs below cost to pull traffic into their stores to buy bigger-ticket items.

Bowing to pressure from financially troubled retailers, the five largest record conglomerates initiated minimum advertising pricing policies in 1995. The record labels began requiring retailers to advertise prices from $12 to $14--about $1.50 above the wholesale prices.

Music producers pay most of the costs for retail music stores to advertise particular albums inside and outside the store. Under the policy, record labels could withhold thousands of dollars per month in advertising support to from retailers found to be violating their pricing guidelines.

The policy did not stop retailers from discounting CDs. It just restricted them from touting the lower prices in record company-financed ads. In 1997, the policy was expanded to prohibit retailers that accepted record-company money from running lower prices in ads they financed by themselves.

“I think the [minimum advertising pricing] policy was actually a somewhat benevolent move on the part of the record companies to keep the playing field even for the little guys,” said David Crouch, general manager of Rhino Records, an independent retailer in Westwood.

The fact is most music retail chains and mass merchants already dramatically discount new releases--and have for nearly a decade. Record labels ship CDs with a suggested retail price of about $18 or $19, but the recordings frequently are sold for $13 or $14.

Although mass merchants could revert to their old policy of using CDs as loss leaders, they now enjoy a slim profit margin on music. Industry analysts do not expect them to initiate broad price wars.

The FTC reported that consumers spent $15 billion on recorded music last year, but that figure was based on unit shipments--not sales--and calculated at suggested retail prices. But that number does not include standard discounting practices at most music outlets. In fact, consumers really spent closer to $10.5 billion on music in 1999, according to a SoundScan survey due out next week by the National Assn. of Recording Merchandisers.

Of all the suspect music industry practices that the government could investigate, critics wonder, why did officials target a policy implemented at the request of retailers?

A more direct challenge to inflated CD prices would be to investigate how CD wholesale prices continue to soar even though production costs have diminished, critics say. Why not take a deeper look at how music and broadcast conglomerates work together behind the scenes to circumvent payola laws by using independent contractors to obtain radio airplay?

And on the far more pressing issue of the theft of music on the Web, the government has done little to assure a legitimate Internet marketplace, an effort that could significantly reduce the cost of music.

The ongoing consolidation of the music industry has been the most serious threat to competition.

Antitrust regulators didn’t stop Seagram Co.’s recent acquisition of PolyGram--a deal that forged the world’s largest music company. And Washington isn’t fighting the pending merger of Time Warner with EMI Music or the merger of SFX Entertainment, the planet’s biggest concert promoter, with Clear Channel Communications.

In the end, Pitofsky and the FTC have done little but browbeat the record conglomerates into a seven-year ban on a relatively harmless advertising policy. Nobody went to jail. Nobody paid a fine.

And if you believe the people who make and sell music in this country, nobody is going to save a penny.

“The chairman of the FTC made some very irresponsible comments,” said Henry Droz, chief of Seagram’s giant Universal Music and Video Distribution division. “He gave the public false hope by leading people to believe that dramatic price reductions in recorded music are on the way. That is not going to happen.”