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

By Ed Christman Sat Mar 1, 9:14 PM ET

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 picture.

"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 paralyzed."

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."

Reuters/Billboard

Ruh roh, Raggy ...

Dear Music Industry,

Don't you just love it when the 800 pound gorillas you helped create start throwing their weight around and now have you bent over the proverbial barrel? Looks like your biggest customer is gonna start a whole new game of hardball and dictate terms to you, the very people whom they pay to supply them with their music stock. Funny old world, isn't it.

I can see you all sitting in the meeting rooms, throwing up your hands and crying poverty and maintaining to anyone who will listen that Wal-Mart is asking for the moon and stars, yet at the same time I can hear the wheels turning upstairs as you try to think of how this idea might .... just might ... bail your asses out of the frying pan, at least for the short term. We all know how seductive short term thinking is for you guys, but before you pick up the pen in desperation and sign on to this agreement, try just for once to think beyond the next quarter and walk this thing through. I'm not saying "NO! DON'T DO EET! EET'S TOO SEXY!!", but asking in effect how you're going to handle the rest of your business if you give in to your rampaging pet monster once again. What next? Will an almost certainly enraged Best Buy get the same pricing consideration when they angrily demand it? How about Target? One-stops? Independent accounts?

I guess we'll just have to wait and see how all of this falls into place. Depending on how serious Wal-Mart is with this idea (and whether they use it as a "either you are with us or against us" tactic to get their way), I get the impression this deal will not get off the table in its present form, but I can't rule out the idea of a compromise reached by all parties, especially as Sony/BMG and Universal are already experimenting with deep-discounting their lower-priced catalog tiers in a pricing fashion similar to what is in this article. If these new promotions are tied into the proposal reported above, it's not very difficult to imagine WEA and The Company That Was Once Respectfully Referred To As EMI falling into line.

I'd be delighted to see an across-the-board re-figuring of pricing strategies from the label, but I want to see these new prices offered to everyone, not just the one or two companies who can scream louder than all the others combined. That said, remembering how Universal caved in to these guys in the wake of the JumpStart kickoff, I'm also bracing for bad news.

I guess this is where Matt Drudge would say "developing ..."