Price vs. Industry

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This is Celia Hirschman for On The Beat.

No one said the record business was easy, and judging from where I sit, we should prepare for a difficult road ahead. Since the Universal Music Group made the decision to lower prices at retail, it remains to be seen which labels will follow.

Right now, most of them are taking a "wait and see" attitude about changing their pricing structure. It's not surprising, as lowering list prices could be a high risk move. Here's why. The contractual arrangements for a lot of where the money goes in a record deal is negotiated upfront. So changes in income can have a huge affect on the bottom line.

Right now, records have a suggested list price of between $17 and $19 each. At a reduced list price of say $14 subtracting distribution costs, CD manufacturing and royalties, the label is left with a little more than $4.00 net.

For that $4.00, record labels will usually pay an advance to sign the band, rent the recording studio, master the record, manufacture promotional copies for radio & press, organize and manage radio promotion, publicity, street marketing, and online marketing, pay retail sales programs to position the record in front of consumers, as well as buy consumer advertising, lend financial support to the band to tour, perhaps make a music video if radio airplay warrants, and of course, run the record company and pay the staff.

Notice I haven't even mentioned profits to the band or label yet. That comes afterwards.

Consider that annually less than 10% of records released by major labels are profitable and you can begin to see that there's an extraordinary imbalance in the music business, in spite of popular opinion otherwise.

If the list price of records is reduced across the board, what will happen?

I expect most labels won't be able to operate their companies with high risk for small margins so we'll see a lot less record labels. Right now there are five major label conglomerates, each with their own distribution company, generating 70-80% of all CD sales in the United States.

They are EMI, Time Warner, Sony, BMG and Universal. Of the five conglomerates, all but Universal are in consolidation discussions with one another. If rumors turn to reality, we could soon find the music business headed by three consolidated conglomerates, financing the majority of creative music produced, each with their own distribution network. And if that happens, we will have witnessed the most significant change the record business has ever known.

What happens to the wonderful world of independent labels in this game of monopoly? Chances are better that most will not be able to survive alone against the small the margins of profit, and will either go out of business, join forces with other indies or build a new paradigm to survive.

No matter what, one thing is for sure. Next year will be the real testing ground for record labels in the music business.

Whatever the economic climate is, history shows us that most artists are driven to create - with or without a marketing infrastructure. Given that, I expect we'll find a lot of great talent inspite of the changes. It may just be a lot harder to find it. And with an ever changing business environment, the music might be that much more interesting after all.

This is Celia Hirschman for On The Beat.