Back in February, I dissected an interview by one James Urie, president of Universal Music and Video Distribution. Today, the same Mr. Urie announced that Universal is taking down the wholesole unit pricing of most of its CDs from $12.12 to $9.09, and changing the recommended (list) retail selling prices from $16.98 to $12.98. That's a drop of 31% in the selling price, while keeping the retailer markup relatively constant: 41% in the old scheme, 43% in the new.

This comes in the wake of atrocious sales numbers posted by the RIAA: Unit sales down a total of 31% since 2000 (-12% CAGR). Down 15.8% year on year, so the trend is accelerating. Unit sales of top 10 albums, down at 19% CAGR since 2000, so the falloff is concentrated on the big acts. Profit impact not disclosed, but likely at least as much, since top 10 is the most profitable segment for a hit driven industry.

I'll have a rant some choice words on the reasons for this anon, but for now, let's think it through from the point of view of the retail music outlet: If you're running such a store, in the last three years you've taken about a 30% hit on your top line. If you're running a multi-line store, you've been cutting your music floorplan, and putting in something else. If you're a music specialty store, you're cutting staff and hurting, because your fixed costs haven't dropped by a third. Now Universal wants you to take another 31% haircut on the top line. That's something like a 50% dropoff in gross in three short years.

What you're seeing here is a big bet - perhaps of necessity - that the CD marketplace remains elastic, and that unit volume will bounce back sufficiently to repair the top line after such a price cut. If that is not in fact the case, if the buyers don't come back, because they're downloading (or boycotting) then the music specialists are going to start dying like flies, and the floorplan cuts in other stores will accelerate. (Note that simultaneously with the price cuts, Universal pulled back much of its 'co-op' advertising and promotion money, which is used to buy the loyalty of the channel. This is an implcit acknowledgment of a down shift in Universal's valuation of the retailers.)

This pattern has occured before. Remember there were once software specialty stores? For a variety of reasons, but particularly including Internet ordering and downloading as an alternate channel, those stores first consolidated, then vanished, followed by most of the broad line computer stores. Now software is a smallish section at Office Depot or Best Buys, a pale shadow of the old channel. Today, the music business may have taken its first overt step down that same path.

Update: Here's the AP's version of the analysis.

Update 2: Greg Ritter comments. And Roji-san has a long piece - his part 3 parallels my thinking. I don't disagree with him on the longevity of the CD form factor; an installed base can take a long time to succumb to attrition. But getting revenue from it gets harder and harder. A channel marketer comments, and opines in e-mail: "Few of my clients in the high tech and telecom industry make such gambles with their channel unless they are desperate."
4:31:53 PM