Sing along with me…F-Y-E…U-M-G…M-O-U-S-E: The Tale of the Ten Dollar CD

Do y’all know who Trans World Entertainment is? Probably not. They’re the Albany-based company that’s pretty much considered the “last man left standing” in music retail. Over the years they have acquired the carcasses of pretty much every national and regional record store chain in America including Sam Goody, Musicland, National Record Mart, Wherehouse Entertainment, Specs and a bunch more smaller ones we’ve all forgotten about over the years.

At one time they had almost 2000 locations with multiple brand names and now they’re down to about 550 FYE stores. These are located predominantly in malls and they sell a mix of music, movies, video games and assorted “lifestyle” junk.

A typical CD at an FYE store can retail for up to $18.99. Does that sound a little steep? Most consumers must think so too because Trans World has seen their music sales shrink steadily and in fact, up until a few weeks ago, they have not reported a profit for three years. Imagine that.

One more piece of information you’ll need for this tale: UMG is the multi-national entertainment and media giant known to you as Universal. They own the film studio, theme parks, god knows what else and the world’s largest holdings of music labels and distribution. (Many advertise here actually…hope I don’t get them upset.)

So that’s the background story…..and here’s the news story that broke today:

Big Music’s Digital Strategy: Cheap CDs
The Universal Music Group has announced that it will begin testing a new pricing structure in the second quarter designed to get single CDs in stores at $10 or less.

In the last few months, Trans World Entertainment began testing the $9.99 price point in over 100 stores. The test–in which most independents and every major except for the Warner Music Group participated–produced units sales increase of more than 100%, according to label executives who participated in the tests. The Trans World test helped sell the new pricing model to the Universal labels, sources say.

Wow….are you as shocked as I am at these results? Cut the price almost in half and the sales double.

Let’s take a moment to review:
-Music has been free on streaming sites and these services are getting bigger and bigger.
-An entire generation has been illegally downloading music for free since the advent of Napster.
-You can legally download from iTunes and Amazon anything you want for as low as $5 and as much as $9.99. Oh yeah..and you can buy just one track at a time too.
-Wal Mart and Best Buy have knocked CD prices down to under ten bucks for years and have driven out most of the indie stores, Tower, Virgin and a lot of the smaller chains that Trans World bought (and then closed).

And so here you have Trans World…home of the blatantly bloated and over-priced CD…finally cutting prices to below ten dollars and guess what…it increases sales. We’re talking extremely high level think tank stuff here.

Which leads me to this quote from the president of Universal Music Group Distribution…actually a very bright and nice man who has been living in the corporate suite so long that he must need an oxygen mask to breath:

“After extensive consumer research and conversations with our retail partners, we found that there is a large segment of consumers who want to purchase CDs, but have been holding back due to a difficult economy and the value proposition of physical media,” said UMGD President/CEO Jim Urie. “This test will seek to address these issues by offering a greater selection at sharper pricing, creating an even more compelling physical entertainment option for music consumers. We think [the new pricing program] will really bring new life into the physical format.”

Translation: We’re toast. The CD is dead. We’ll be dropping prices as fast as we can to milk every drop of sales. We’ll get some great press, and next year we’ll show shareholders we’re increasing sales percentages while profits continue to tumble. But with a little luck, the couple hundred of us still working here might last another year or two and take advantage of the 401K plan.

And now here’s one last bit of the story that was sort of buried in the copy:
The company’s Velocity program will introduce the lower CD prices. Single CDs will have the suggested list prices of $10, $9, $8, $7 and $6.

If you’re a consumer of music, happy days are here again. For the moment.

Because….if you can buy a CD for $6…iTunes and Amazon will eventually drive it lower to $3-4. And that means if you’re an artist or indie label within a niche…not your Lady Gaga or rapper or American Idol type of act…your business model, as fragile as it is, has just been shattered.

And that cool indie record store that survived selling used CDs? Soon to be gone…because their $7.99 used discs are now worth next to nothing if you can buy it new for less. Uh-oh.

The end.