Top Label Cuts CD Prices to Fight Net Downloads

In a step that could shake up the economics of the record industry, Universal Music Group said Wednesday that it would slash the wholesale price of its CDs by 25% in a bid to revive an ailing market and discourage piracy.

The move by the world’s biggest record label -- whose acts account for nearly one-third of new music sales in the United States -- upended years of industry orthodoxy. Before Wednesday, music executives had fiercely resisted cutting prices, contending that they were justified by the enormous costs and risks that record companies assume when investing in often-unproven talent.

Consumers may be the biggest beneficiaries of Universal’s action, while retailers could be among the biggest losers.

The Vivendi Universal Inc.-owned giant -- home to such artists as 50 Cent, Limp Bizkit and Jay-Z -- cut the suggested retail price of most new releases, which have gone as high as $18.98, by as much as 32%, to $12.98. Many stores traditionally have sold CDs for even less than the suggested figure.

“This is like a bombshell,” said Don Van Cleave, a Birmingham, Ala., music retailer who heads a coalition of about six dozen independent record stores. “People are like ‘Oh my God, are you kidding?’ ”

Although stealing songs off Web sites obviously carries the cheapest price of all, Universal said consumer research has shown that people could be motivated to rush into record stores when the retail price of a CD drops to about $13. One Universal executive called this “the sweet spot.”

Doug Morris, Universal Music’s chairman, said the price cuts were intended “to reinvigorate the music business in North America.” The company said the lower prices, expected to kick in Oct. 1, would be maintained at least through the year-end holidays.

By cutting prices, Universal is offering consumers a carrot, precisely as the Recording Industry Assn. of America is wielding a stick in the form of subpoenas and threatened litigation against those who take songs without paying via the Internet.

Only days ago, the trade association disclosed that U.S. music shipments dropped 15% in the first half of the year, twice the rate of decline of a year earlier. By the end of last year, overall shipments had fallen about 15% from their peak in 2000, triggering an industry-wide crisis that has spawned mergers, layoffs and widespread record-store closings.

Executives from Sony Corp.’s Sony Music Entertainment, AOL Time Warner’s Warner Music Group, the Bertelsmann Music Group and EMI Group declined to comment on the Universal move Wednesday. But it appeared that none was immediately ready to follow Universal’s move.

Privately, several competitors characterized the price reductions as a short-term solution intended to bolster Universal’s holiday numbers at the expense of the industry’s waning strength. They predicted that the gambit would be abandoned before long.

Competing executives also suggested that Universal could lose hundreds of millions of dollars in revenue and find itself hard-pressed to impose higher prices if the cuts don’t draw customers back into stores in huge numbers.

What’s more, if sales don’t rise sharply, the plan may trim the paychecks of many Universal recording artists, whose royalties are based on their albums’ wholesale price. Nevertheless, several artist managers expressed support for the move.

“As a company concerned mostly with overall artist development, we feel anything that increases consumer appetite for music -- as a price decrease should -- is good for the artist,” said Jeff Kwatinetz, chief executive of management giant the Firm, whose Universal clients include such top sellers as Mary J. Blige and Limp Bizkit.

The new Universal policy would reduce the wholesale price for most albums to $9.09 from $12.02. Albums by its biggest artists, including Eminem and Shania Twain, would be pared slightly less, to $10.10. The new pricing schedule doesn’t include Latin or classical recordings.

In a conference call late Wednesday, Universal told several retailers that in exchange for the wholesale price cuts, the record label expected the stores to guarantee that at least 25% of their shelf space would be devoted to the label’s acts.

Meanwhile, Universal also jolted retailers by disclosing a plan to halt discounts and “positioning” fees for prominent shelf placement -- two long-standing industry customs. Instead, Universal wants to redirect its efforts toward its own radio, TV and print advertising campaigns. Many record store owners have been earning more money from fees than they do from selling CDs.

Van Cleave, of the independent retailer group, questioned how successful an advertising blitz by Universal would be. “I don’t think the industry’s ever been that great about promoting a record outside of radio and MTV,” Van Cleave said. “How are they going to use those funds to motivate the consumer?”

Some industry observers voiced concern that Universal’s move would validate arguments that CDs have been overpriced -- a common rationale among computer users who download music for free from file sharing networks such as Kazaa.

But Universal executives characterized the price shift as a bold effort to rescue music in the U.S., the world’s biggest music market, from devastation.

“Music has always been a great value. It just got better,” said Zach Horowitz, Universal Music’s president and chief operating officer. “We’re not blind to the fact that [file sharing] services have ravaged our industry, which has absolutely nothing to do with the underlying value of the music. We have to take steps to try to deal with it.”

Universal Music -- which wasn’t part of this week’s proposed deal to merge parent Vivendi’s entertainment assets with NBC, a unit of General Electric Co. -- didn’t say how much the move might affect its earnings. But analysts were preparing to slash their profit forecasts.

Drew Borst, an analyst at Wall Street firm Sanford C. Bernstein, said he had projected that the music unit’s earnings would slip 15% this year to about $900 million, but now he would probably trim his estimate further. “It’s going to be pretty painful,” Borst said. “It’s pretty unrealistic to think that, in the short term, they’ll be able to make up the lost revenue with an increase in the number of units sold.”

Still, Borst added, he could see the logic in Universal’s strategy. “Long term,” he said, “I think it’s the right move to get this industry in a position where it can have a healthy demand” among consumers again.