From: velde2@jhunix.hcf.jhu.edu (Francois Velde)
Subject: CD prices
Organization: HAC - Johns Hopkins University, Baltimore
Date: Thu, 24 Dec 1992 19:12:43 GMT


I just want to comment on Chris Brewster's comments about the prices 
of CDs.  He posted a text by R. Goiffon, the president of Harmonia 
Mundi USA trying to convince consumers to tolerate even higher prices 
for classical CDs.

*** warning *** warning *** warning ***

The author is an economist. Proceed at your own risk.



Goiffon writes:
>>"Back in 1982 - the year Harmonia Mundi USA started operations - a good
>> classical LP lasting 60 minutes cost around $12.  Today, taking into
>> account the cumulative effect of inflation over the past 10 years
>> (around 50%), a CD which gives you 75 minutes of music (i.e., 25% more)
>> should cost $22.50!"

Chris answers:
>These figures are *way* off.  in 1982 a good classical LP cost $8-10,
>and averaged around 45-50 minutes in length.  Cumulative inflation has
>been higher than 50% (which works out to slightly over 4% per year).
>And, most importantly, the average CD does not give you 75 minutes of
>music.  From my database of over 2500 classical recordings, the overall
>average is 56 minutes per disc.  For Harmonia Mundi releases:  I have
>47 releases constituting 69 discs which average 60:25.  

Let's give the man a break. His point is: take the LP that gave you the most
music, take the CD that gives you the most music, compare prices in real
terms. He was not claiming that all LPs were 60mn, or all CDs are 75 mn.

Now: his figure for LPs is 20 cents/mn, yours is 900/47.5=19 cents/mn, close
enough.  What about inflation? As it turns out, the Consumer Price Index
inflation from the 1982 average to November 1992 is 47% : so 19 cents 
are worth 28 cents now; which works out to $21 for a 75mn CD. I think his
point is taken. If you want to compare to a 60mn CD, you find that such a
CD would cost $16.75 if it were at the same $/mn price as LPs were: which
tells us that today's CDs give us more music for the buck ($16.75 being the
close to the upper bound on CD prices in the US).

>If the price is lower, more people will buy.  Increased volume
>can make up for decreased price, and everyone wins.  For example, I would
>probably buy *more* than twice as many Harmonia Mundi CDs if the price
>was $10 instead of $15-17.  

I comment on this infra.

Goiffon writes:
>>"For example a $60,000 recording released as a well-presented, well-
>> documented CD retailing at $15 needs to sell almost 25,000 copies
>> worldwide just to break even.  If the retail price were $21, as it 
>> is in Europe, the break-even point would come down to 15,000, which 
>> is still high.  (An average sales figure for a classical CD is 5,000 
>> copies worldwide over the first two years; 15,000 is considered a "hit".)"

Chris answers:
>The math is faulty here.  $15 x 25,000 does not equal $21 x 15,000
>(i.e., $60,000 was lost somewhere in the translation).
>Also, according to this calculation, a per CD price of $21 would only 
>break even if the average number of copies sold tripled.  Or, given the 
>current sales figures, the break-even point is about $63 per CD.  

Goiffon is anything but clear; I'll nonetheless give him the benefit of
the doubt. I think the key fact is that the costs are not *linear* in the
number of CDs made: there are fixed costs, so that the total cost of 
making 25,000 CDs need not equal the total cost of making 15,000 CDs.

(Dang, what I need is a blackboard...)

Suppose that the cost of making x CDs is a*x+b. The fixed costs are b,
encurred no matter how many CDs you make, the variable, or marginal cost
is a per CD (all in $).  Then a=6 and b=225,000 are consistent with the
numbers Goiffon gave, and a=6 is consistent with Chris's own calculations
below ($2 manufacturing + $4 retail margin).

Now the break-even number of CDs as a function of the retail price is 
         b
x(p) = -----  which you can plot as a hyperbola with a vertical asymptote 
       p - a
at p=a.  In other words, the closer p falls toward $6, the larger the
break-even number of CDs is, and it grows *very* fast.  So, to get back 
to the above comment, if p=10 you find that you need to sell over 56,000
CDs to break even, instead of 25,000 at $15. For p=$10 to be sustainable,
therefore, you would need *everyone* to buy more than twice as many CDs.
Chris volunteered to do so, but (forgive me) Chris may be a bit of an outlier
in this, and a collection of 2500 CDs (that's one a day for 7 years) 
indicates a man with unusual tastes for classical CDs. I doubt the market 
would follow at that pace.

It is left as an exercise for the reader :-) to add the demand curve to 
the above plot: suppose a downward-sloping curve (the higher the price, 
the smaller the demand), and you can see graphically that it would require 
a very steep curve to make it worthwhile for the industry to move to lower 
prices.

>I think it's pretty clear that
>the middleman is the prime expense, and as such, this is where the costs
>need to be reduced rather than simply increasing retail price to offset
>inefficient distribution.

The middleman is such a tempting target :-) Seriously, I do think that 
a large part of the costs of CDs has to do with distribution; but 
distribution may not be that inefficient. Remember that the market for
classical music is about 4% of the total recorded music market in the US
(I'll leave aside Europe, with its even more inefficient distribution and
high taxes).  It's a small market, spread around, and the difficulty is 
finding the customer: hence, I suspect, mail-order houses can sell CDs
for $8 a-piece (the same as those you find in record stores).  See it 
another way.  Go to Tower records, look at the floor surface occupied
by classical CDs, count the number of customers, compare with the rest 
of the store. The inventories are huge, the turn-around is very low. 
This opera by Cavalli has been sitting in this bin for over 2 years now:
that means it is taking up costly shelf space, and costing money (someone
is lending $30 to the maker of the CD for an indefinite amount of time).
Compare with Guns'n'Roses or Madonna: just pile them on the floor and they're
gone in a few days. 
On the other hand, BMG disc club has no shelf space, knows where the 
customer lives, doesn't have to keep indefinite inventories, etc.

Ye, it's the middleman, but you need the middleman, because you need 
your record store: and the market is too thin to have competition 
effectively inducing efficiency (remember, I am talking about classical).

Otherwise, I agree with most of what Chris Brewster wrote, and I certainly
find Goiffon's plea clumsy and unconvincing, to say the least.

-- 

	Francois Velde

Newsgroups: rec.music.classical