From: cb@tamarack13.timbuk (Chris Brewster)
Subject: CD Pricing
Reply-To: lampson@pulse.com
Organization: pubs
Date: 16 Dec 92 12:41:08 CST


Reply-To: lampson@pulse.com

This week I bought a Marco Polo CD (Humperdinck: Moorish Rhapsody;
Sleeping Beauty; etc. 8.223369), and I found a rather interesting
piece of propaganda in the booklet as a separate insert.  It is a
4-page flyer containing a message from Rene' Goiffon, the president
of Harmonia Mundi USA, Inc.  As this message pertains to a discussion
we had a while back on the price of CDs, I thought I'd include it
here.  BTW, I bought the Marco Polo CD for $13.99 on sale, which in
my experience is quite typical for this label.


                 CLASSICAL CDS - SHOULD THEY COST LESS?
                                NO, MORE!

          INDEPENDENT CLASSICAL LABELS, AN ENDANGERED SPECIES?


Dear Music Lover,

Thank you for buying a CD from the Harmonia Mundi catalogue (or from a
label which we distribute, among which are Hyperion, Gimell, ASV, Astree,
Wergo, etc.).  You probably think you paid too much for it and that 
someone along the line is ripping you off and making a lot of money.  
I would like to seize this opportunity to make some comments which I 
hope will help your understanding of CD pricing.

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!

Despite the fact that CDs in the US sell for half as much as in any other
country, for some reason the media, the record buying public, and certain
segments of the record industry feel that a CD should not retail for more
than $15; the justification offered is that the cost of manufacturing a CD
is only about $2.  However, what we are selling, and what costs money is
the MUSIC, not the object on which it is stored, i.e. the CD.  (When you
buy a bottle of Pouilly-Fuisse', you pay for the wine, not the glass.)
Even if by some magic the cost of making a CD came down to 5 cents, it
would barely reduce the retail price; the cost of the music would remain
unchanged.

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".)

Of course, you can - and maybe should! - sell a CD for under $15 IF you
can get the music at zero or very little cost.  Two possible ways of
doing this are:

- to be one of the "majors" who reissue repertoire from a huge and 
    already depreciated stock of (often excellent) recordings.
- to be a vanity - or even better a pirate - label, with no recording
    costs at all and minimal presentation.

Quality new work, however, using talented artists, recorded in suitable
venues with good sound, and the production of booklets with interesting
texts written by authorities on the repertoire, translated into several
languages, unavoidable results in costs which are too high for retail
prices to be $15 or less.

If media, dealers, and public are not prepared to recognize and accept
this very soon, the survival of what I would call the serious and
committed independent classical labels is doomed.  They will simply
disappear, and with them, much of the adventurous repertoire not
otherwise available to you, such as the Harmonia Mundi catalogue.

A $20 price tag for 75 minutes of music which you can enjoy over and
over again is probably the cheapest form of intelligent entertainment
today (in many cases cheaper than going to a concert to listen to the
same program once!).

May I enlist your support in informing your "friends and family" to explain
why in fact some CDs need to be more expensive that they are today.  If
you wish to write to me on this matter I will be happy to give further
information.  Ma Musique est notre Amitie'.

Rene' Goiffon
President, Harmonia Mundi USA, Inc.    Oct. 1992


------------

My Comments:

"[...] You probably think you paid too much for it and that someone
 along the line is ripping you off and making a lot of money. [...]"

No, but I do think distribution costs are inflated, and the main losers are
the original artist and the recording company, in addition to the consumer.
I know *somebody* is making a lot of money, or they wouldn't be in business
long.


"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!"

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.  Though several
of these are in excess of 75 minutes, I have 11 which are less than 50
and 6 less than 45 (shortest: 40:23).  I tend to keep duration of the CD
in mind when making a purchase, so my averages may be slightly *higher*
than the average for the entire label.


"Despite the fact that CDs in the US sell for half as much as in any other
 country [...]"

Not true, as you later state yourself.  Though in some locations the price
might be twice that in the US, as anyone who reads Gramophone knows in the
UK the prices are generally 30-50% higher than in the US.


"[...], for some reason the media, the record buying public, and certain
 segments of the record industry feel that a CD should not retail for more
 than $15"

The reason, Mr. Goiffon, is that many people feel that there is a
significant price barrier at $15, and perhaps another barrier at $10 as
well.  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.  Also, bringing the price down encourages
experimentation which can potentially increase the effective market
for more specialized labels.  So, not only would the existing market
buy more, but the market as a whole could actually grow.


"[...]; the justification offered is that the cost of manufacturing a CD
 is only about $2.

No, that is only one factor, as described above.


"Even if by some magic the cost of making a CD came down to 5 cents, it
 would barely reduce the retail price; the cost of the music would remain
 unchanged.

No, it should go down by $1.95, unless you are applying an extremely
uncommon system of economics.


"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".)"

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.  If this
is true, then it is doubly amazing that the number of small independent 
labels has gone from 1100 in 1982 to over 2600 in 1992 (as listed in 
Schwann Opus).  This is fairly substantial growth for an industry where
you are bound to lose money very quickly at current prices.

Let's look at this another way.  If the break-even point is $15 x 25,000
copies, then this yields a gross revenue of $375,000.  If the recording
cost $60,000, the manufacturing cost is $50,000 ($2 per CD), and the retail
margin is $100,000 ($4 per CD), then this leaves $165,000 in distribution
and overhaed costs.  That's $6.60 per CD.  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.


"Of course, you can - and maybe should! - sell a CD for under $15 IF you
 can get the music at zero or very little cost."

But by your own numbers, the cost of the recording itself is only 16% of
the total cost, or $2.40 per CD if 25,000 are produced ($4 if 15,000 are
produced), so how is a $6 per CD increase in customer price justified 
based on your own calculations?


"Two possible ways of doing this are:

 - to be one of the "majors" who reissue repertoire from a huge and 
     already depreciated stock of (often excellent) recordings.
 - to be a vanity - or even better a pirate - label, with no recording
     costs at all and minimal presentation."

Interestingly, the "majors" seem to be able to produce large numbers of
new recordings, frequently with big name performers and orchestras, for
$15 per CD or less.  Or, a better example, several independents (Naxos
for one) are successfully marketing new digital recordings with good
presentation and frequently fine performances for $5-6 per CD.  According
to a recent interview in Fanfare with the president of Naxos, they are
doing very well.  Yet even he called for higher prices in the US for his
company's full-priced Marco Polo CDs.  How very odd.  Interestingly,
though Naxos (budget-priced) and Marco Polo (premium-priced) are produced
by the same company.  Yet Harmonia Mundi will not distribute Naxos, as the
suggested retail price does not allow the distributor (Harmonia Mundi) to
add a sufficiently high distribution fee per CD, whereas Marco Polo
apparently does.


"Quality new work, however, using talented artists, recorded in suitable
 venues with good sound, and the production of booklets with interesting
 texts written by authorities on the repertoire, translated into several
 languages, unavoidable results in costs which are too high for retail
 prices to be $15 or less."

A statement wholly unsupported by any facts presented so far.


"If media, dealers, and public are not prepared to recognize and accept
 this very soon, the survival of what I would call the serious and
 committed independent classical labels is doomed.  They will simply
 disappear, and with them, much of the adventurous repertoire not
 otherwise available to you, such as the Harmonia Mundi catalogue."

The market sets the prices, not the media, dealers or public.  If 
Harmonia Mundi believes that they can remain viable with CD prices 
at $21 in the US, then they are perfectly free to give it a try.  
The fact is that the US market is a coveted share of the worldwide 
market because of *volume*, not because of price.  You can't have
it both ways.  If you want a higher price on a non-essential
commodity, then you have to be prepared to sell fewer units. 
And, fortunately, the relationship is not proportional.  Doubling
your price would take away far more than half of your market share.
And, I submit, the total cost of decreasing your price would be
more than offset by the increase in units sold.


"A $20 price tag for 75 minutes of music which you can enjoy over and
 over again is probably the cheapest form of intelligent entertainment
 today (in many cases cheaper than going to a concert to listen to the
 same program once!)."

OK, $20 for 75 minutes means that your average CD should be priced at $16
(for 60 minutes of music), and your shortest CDs would be only $10.67.
If recording companies were actually to charge for the goods delivered
for each release, and for the cost of the performers (i.e., piano CDs
would be much cheaper than orchestral CDs), I'd favor such a pricing system.


"May I enlist your support in informing your "friends and family" to explain
 why in fact some CDs need to be more expensive than they are today."

If you had any information to support this contention, then you would
simply raise prices and let the market decide.  As it is, the market
won't bear higher prices, as you well know or you wouldn't be requesting
the comsumer's collusion in price-fixing.  This is one of the drawbacks
of dealing with a (relatively) free economy.  Ideally, each individual
consumer votes with his dollar.


"If you wish to write to me on this matter I will be happy to give further
 information."

(I've included my response in a letter to the president.  If any response 
from Harmonia Mundi is forthcoming, I'll post it.)

In conclusion, while I do strongly agree that CDs are a good value, even 
compared to LPs, I do not believe that prices are substantially lower
than they should be, or lower than necessary for record companies to make
money and remain healthy.  The fact that since 1982 the number of available
recordings has almost quadrupled is proof that the market is healthy, and
the successes of budget labels demonstrates that there is a significant
untapped market in classical music whose primary barrier is price.  If 
this is true, then lower unit prices and higher volumes will produce both
more profits for the recording companies and performers, and larger 
markets for future releases.

Independent labels have everything to gain by increasing their markets
and everything to lose by increasing their price.  Long live the
independent record producers.

Dave
lampson@pulse.com