Compact discs have always been pricey, but when they debuted in 1983, music fans figured they had to pay for the new technology.
Now the technology isn't so new, yet CDs still cost significantly more than cassettes and records (R.I.P.).Although CDs may cost a dollar or two less than when they debuted, that decrease doesn't compare, percentage-wise, to the drop in CD manufacturing costs.
Customers complain that they're less likely to plunk down $60 for four CDs than they were to splurge for a similar number of records at maybe half the price. Retail store owners are also angry - they say they'd like to lower prices and sell more units, but the major record labels keep wholesale prices too high.
In the meantime, the labels say there's no problem and have been signing performers to record-breaking contracts. They point to their own rising costs in recording, royalties and artists' advances, and they take the traditional free-market position: If consumers thought CDs were overpriced, they wouldn't be buying so many.
The issue challenges one's notions of how much pristine-quality music is actually worth. But more on the minds of consumers is why do they have to pay what they pay, and where is their money going? Are they being gouged?
In the convoluted music world, which can resemble an army of octopuses simultaneously rubbing each other's backs, easy answers aren't forthcoming. So let's try to add it up.
MANUFACTURING COSTS
Now that CD production is streamlined through an increased number of plants - some owned by record companies - the labels are paying significantly less for manufacturing than they were several years ago.
Warner Brothers spokesman Bob Merlis said his company pays $1.80 for the manufacturing of the entire CD package, including the disc itself, booklet, jewel box, back-of-CD insert and longbox. A cassette costs the label 75-80 cents, and records cost maybe a nickel more.
Other industry spokesmen considered these figures to be in the general ballpark. Smaller labels, which operate at lower volume and don't own manufacturing plants, pay a dollar or two more.
The figures represent about half of what the labels paid when CDs first became available.
PRICE FOR DISTRIBUTORS
The finished CD packages move from the manufacturing plants to the stores through distributors, which buy them from the labels, then charge the stores the wholesale price.
The six major record companies that control the market - Sony Music, the Warner Music Group, Bertelsmann Music Group, Thorn-EMI, MCA and Polygram - all control their own distribution companies. Independent labels use outside distributors.
Merlis said Warner Brothers' distribution company receives 14 percent of the received wholesale price. Translation: For a CD that sells to a store for $10.25 - the general ballpark for top-of-the-line CDs - the distributor receives $1.44, and the remaining $8.81 goes to the label.
Cema Distribution president Russ Bach said his company, the distribution arm of EMI, pays the label $9.10 for a CD it will sell to stores for $10.25.
"Obviously the cost of producing the compact disc has been reduced quite dramatically, but the manufacturers have not reduced their prices to distributors, and that's what the retailers are screaming about," said a Chicago-based independent distributor's sales manager, who asked not to be identified.
WHOLESALE PRICE
The amount that stores pay for CDs vary based on bulk discounts and whether a store buys the discs directly from the label or through a "one-stop" middleman. A store generally pays a cheaper rate for a bulk order than for a couple of replacement copies.
Here is roughly what stores pay for CDs in three popular price ranges, ranked according to industry list prices, though actual store prices vary.
- $10.25 to $10.60 for CDs that list for $15.98. (Most of Billboard's Top 100 and consistent sellers by established artists.)
- $9.15 to $9.75 for CDs that list for $13.98. (Works by newer performers.)
- $7 to $8.25 for "midline" and "budget" items that list for $9.98 to $11.98. (Reissues, catalog products and less recognizable or lower-fidelity classical recordings.)
SELLING PRICE
Many stores charge near or even above list, while others discount items a few dollars below list. Pop best-sellers, which move in huge volumes, often are discounted more than classical CDs.
The retailers point to the large gap between the amount that the discs cost to manufacture and the prices that distributors and stores pay. But the labels argue that their expenses have risen, and these costs make up the difference.
Merlis said Warner Brothers budgets the $8.81 it receives for each top-of-the-line disc as follows:
- 40 percent for artistic costs (advances to bands, recordings costs and royalties).
- 30 percent for manufacturing (the $1.80 CD, the cover art and the cost of overstocks and "cut-outs").
- 20 percent for overhead (salaries, rent, utility bills).
- 20 percent for promotion and publicity (including making the videos).
Keeping track? That adds up to 110 percent, which would mean that Warner Brothers is losing money.
But Merlis said the company takes in an additional 15 percent on foreign licensing, which, when added to the previous equation, results in a 5 percent profit for Warner Brothers - 44 cents a disc.
THE PRICE DEBATE
"The prices are a function of our costs," said Arthur Moorhead, director of U.S operations for the Warner-owned classical label Erato. "We didn't just say, `Let's see if we can get $15.' The (profit) margin is basically the same as it was when we were producing LPs."
"If we had tacked on all the inflationary increases over the past 10-15 years, you would be paying a lot more for music," added Dennis.
Yet the labels have reaped huge benefits from CDs. One key revenue source has been back catalog items, many of which are discounted. "If CDs had not come along, would one million people have bought `James Taylor's Greatest Hits' again?" asked Lou Dennis, Warner's senior vice president of sales.
CDs generated $4.3 billion in sales last year, offsetting the other slumping formats to spark a record $7.8 billion in U.S. sales, according to Recording Industry Association of America statistics. CDs now surpass cassettes in dollars generated and in units sold.
In the meantime, performers such as Madonna, Michael and Janet Jackson, the Rolling Stones and Barbra Streisand have inked unprecedented multi-multi-million dollar recording contracts.