Sunday, March 2, 2008

Wal-Mart stirs CD pricing pot with multi-tiered plan

By Ed Christman

NEW YORK (Billboard) -
The major music companies have been
resistant to lowering their price on CDs, but now they may be
dragged to that point: Wal-Mart, the largest retailer of music
with an estimated 22 percent market share, has proposed a
five-tiered pricing scheme that would allow the discounter to
sell albums at even lower prices and require the labels to bear
more of the costs.

According to sources, the Wal-Mart proposal would allow for
a promotional program that could comprise the top 15 to 20
hottest titles, each at $10. The rest of the pricing structure,
according to several music executives who spoke with Billboard,
would have hits and current titles retailing for $12, top
catalog at $9, midline catalog at $7 and budget product at $5.
The move would also shift the store's pricing from its $9.88
and $13.88 model to rounder sales prices.

Executives at the Bentonville, Arkansas-based discounting
giant wouldn't comment on the specifics of their promotion, but
Wal-Mart divisional merchandise manager for home entertainment
Jeff Maas acknowledged the proposal. "When you look at sales
declines with physical product, and you have a category
declining like it is, you have to make decisions about what the
future looks like," he said. "If you have a business that is
declining and you want to turn it around, it really takes
looking at it from all angles."

Maas referenced the DVD business as a model for tiered
pricing. "(It) has been around for years and has worked very
well," he said.

While Wal-Mart's negotiations with the labels have yet to
take place, the proposal is already causing agita at the
majors. Some consider the proposal a non-starter, others say
further negotiations might eventually yield a workable
solution, and a few see it as appropriate, given the big

"I don't think this is a Wal-Mart discussion," one top
executive at a major label said. "I think this is a
future-of-the-business discussion. Right now everyone is

Some executives raised the question of whether the Federal
Trade Commission
would take issue with such a program were it
rolled out only to Wal-Mart. But one executive said, "Making it
legal is not the difficult part. The difficult part is coming
to terms with it."

Another top executive said, "The decision might come down
to: Do we give up 20 percent of our business (i.e., Wal-Mart)
in order to not lose the entire business?"

That question assumes that Wal-Mart would either penalize
or stop doing business with a major that decides not to
participate in the pricing program. Moreover, if all majors
take a pass, some speculate that Wal-Mart could pull music
entirely from the store.

This type of speculation abounds, although the Wal-Mart
proposal was presented only as a starting point. One label
executive said, "This sounds like the Hail Mary pass, and if it
doesn't work, they could be out of the music business; or maybe
they reduce music down to a couple of racks" from the 4,000
titles carried by Wal-Marts with larger selections.

Maas declined to rule out those possibilities, but said
he'd rather look at how Wal-Mart can help a declining category.
"The customer votes every single day in our stores, and based
on what they want is how we merchandise our stores."


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