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Does a CD have to cost $15.99?

In a Rolling Stone report on Wal Mart's push for $10 dollar CD's there's this interesting sidebar:

Does a CD have to cost $15.99?

Major labels insist that the low prices mass retailers such as Wal-Mart and Best Buy demand are impossible for them to achieve. But Best Buy senior vice president Gary Arnold counters, "The record industry needs to refine their business models, because the consumer is the ultimate arbitrator. And the consumer feels music isn't properly priced." Labels point to roster cuts and layoffs as evidence that they can't sell CDs cheaper.

This breakdown of the cost of a typical major-label release by the independent market-research firm Almighty Institute of Music Retail shows where the money goes for a new album with a list price of $15.99.

$0.17 Musicians' unions
$0.80 Packaging/manufacturing
$0.82 Publishing royalties
$0.80 Retail profit
$0.90 Distribution
$1.60 Artists' royalties
$1.70 Label profit
$2.40 Marketing/promotion
$2.91 Label overhead
$3.89 Retail overhead

That's a pretty remarkable breakdown. Label get $7.01per CD and retailers get $4.69 for a combined percentage of 73% of the price of each CD. Royalties, artists, and manufacturing costs combined total only $4.29.


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Comments (15)

"$2.40 Marketing/promotion"... (Below threshold)
Mark Buehner:

"$2.40 Marketing/promotion"


Think about this. How often do you see a billboard with your favorite artists name on it?

Know where that money goes? It gets funnelled through independent labels to the radiostations to play specific tracks. Radio stations are essentially getting paid 150% of what artists get paid just to have the songs played. Its a total disgrace. The silver lining is that record companies are completely useless at this point, they are basically just huge money machines that pay to get the artists records played. Between satellite radio and online retailing, that niche is going to go up in smoke. Thank god.

Those numbers are quite sus... (Below threshold)
Paul:

Those numbers are quite suspect considering classic CD's sell for 3 bucks all day long.

There's an equally interest... (Below threshold)
Matt:

There's an equally interesting thing from the other side of this.

When I worked for Wal-Mart corporate, we spent (literally) years negotiating with the labels and with movie companies to allow us to pay only the actual material cost of a CD or DVD until the item had gone through the register. The pupose, obviously, would be to reduce shrink. If WM only pays a couple of dollars to take delivery of the product and then passes along the rest as it sells, they would be able to reduce losses from theft/damage dramatically in what is the highest shrink category for them.

This does nothing for the consumer, but it would sure make the shareholders happy.

This is why people justify ... (Below threshold)
Bob Arthur:

This is why people justify the stealing of music, via filesharing. They know that so little of the $15.99 ends up with the actual artist, that they don't feel convicted about cheating an unjust system. It isn't right, but that's where the justification comes from.

I was a full-time band manager, and I continue to do it on the side. I have been watching the record industry destroy itself for the last five years. I can confirm that breakdown of itemized costs from first-hand experience. It's in the ballpark, at least.

However, an artist RARELY makes $1.60 per unit. That money usually goes to the label, too. Record contracts always have clauses that limit artist profits until all the label's 'recoupable costs' are repaid. Usually, the costs of making a CD project are much higher than the potential profits, and that unit sales level is never reached... so the artist never sees a dime.

Walmart and BestBuy are right, of course. The proper price for a product is always dictated by what people will pay. It is up to the producers to change, to accomodate that price, or face death in the market. There is plenty of wiggle room in the production of music, to accomodate the $10 CD (or even a $6 CD). The artists are more than ready for it.

The only question is if the industry has the will to change.

I don't think it's accurate... (Below threshold)

I don't think it's accurate to say "Label get $7.01 per CD."

Assuming the numbers are accurate, I don't know why you consider something like "marketing/promotion" and "distribution" and "packaging/manufacturing" attributable to the label any more than to the artist. The money may go through the label's hands, but it's equally for the benefit of the artist and the retailer as for the label.

If you really want to talk about equities in where the money goes, just look at the profit figures of artist, label, and retailer. I have no opinion on whether those amounts are themselves fair, but that's the only fair way to look at the numbers.

A favorite topic of mine, a... (Below threshold)

A favorite topic of mine, and a great potential entry for Carnival of the Capitalists.

As someone who was in a ban... (Below threshold)
Wesley:

As someone who was in a band, and around the music business for years, I have to disagree with prevailing opinion on this. Kevin points out that the labels receive more than $7 per cd, well of course. Labels are basically a bank for bands, and take a huge risk on each band by lending them anywhere from thousands to millions of dollars to promote their music. Lables get the most back from CDs, becuase they take all of the risk. Its that simple.

Lets say you are in a garage band that finally gets signed. The label lends you $40,000 to make the record, $200,000 to promote it, $100,000 on a music video, etc. Your band is now in debt for $340,000 to the label. The label gets paid back first, so until your CD makes $340,000 profit, you get zilch.

Bands DO NOT make the majority of their money from selling CD's. They make the majority of their money from concerts. When you have a hit record, you sell lots more tickets, so the label is doing you a big favor by pushing your CD for their own profit, because it drives more to your show. Also, musicians who write their own songs can make a lot more than the label in the end if their songs stand the test of time through royalties. I once remember hearing that a certain mediocre classic rock band got over $1 million each year for one song that got good airplay on classic rock radio.

My point is this: Just because you don't like paying $15 a CD does not mean its your right to then steal in rebellion (by illegal music swapping). You are not helping your favorite band, you are keeping them in debt to their label. While I have plenty of greivances with labels, they are rightfully trying to turn a profit. Without them, we would be missing a lot of great tunes, as their investment in artists often leads to breakthrough albums that they would have never been able to make on their own.

I think the labels will eventually have to change, but that means a lot of people will lose their jobs as labels will have to slash overhead in the short term.

Well then, Wesley, bands ou... (Below threshold)

Well then, Wesley, bands ought to be happy about any distribution model that gets their music out there and thus helps market the concert tours.

Of course, I am much more likely to buy CDs than attend concerts. Guess the bands are SOL where I'm concerned. I would actually be doing my favorite acts a favor by stealing their music, don't you think?

The prevailing opinion here is that the business model is screwed up, and Wesley's point only supports that conclusion.

Wesley, thanks for chiming ... (Below threshold)

Wesley, thanks for chiming in. I think the point is that the economic model must change, and that there are areas in the current allocation of the dollars spent on CD's that are ripe for reduction.

The record companies have never had a company like Wall Mart with 20-25% of the market share. Maybe it will take a retailer of that magnitude to change the market economics.

So where does the money go ... (Below threshold)
spd rdr:

So where does the money go when I spend $15 bucks on a John Coletrane CD?

Law of unintended consequen... (Below threshold)
Mark Buehner:

Law of unintended consequences. Most bands dont care about file sharing, some openly promote it. As Wesley rightly notes, only the very smallest percent of bands actually make any money off their albums. If you are one of the others lucky enough to have a record contract, any way to get your music out there and have people buying swag and attending concerts is a good thing.

Sidenote: Pearl Jam came up with a brilliant business model. They record every concert and have it available for download for a couple bucks immediatly after the show. I cant recall but they might turn it around so fast you can buy a CD at the actual concert you just heard. Practically zero overhead, pure profit, and makes the fans happy. That kind of thing is going to be the future of the industry.

Well, everyone is making go... (Below threshold)
Wesley:

Well, everyone is making good points here. I think I didn't stress enough that I agree things must change, and believe they will. That's just how the marketplace works, and its a great thing.

Yet, let's look at the numbers again. In the numbers I gave before, when you are in debt over $300,000 to the label, according to the breakdown Kevin gave, the band would have to sell well over 40,000 albums just to pay your debt, only a TINY percentage of bands EVER sell that many records.

Another thing I wanted to throw out there is this: Why do number of good people turn off their sense of ethics (morality, law & order, whatever you want to call it) when it comes to swapping music. Its simply not legal and not the right thing to do. Yet, family and friends constantly say to me: "Oh, I'm just getting a few songs for free, the labels and bands are millionaires, they are making too much money anyway." Leaving out the fact that 99.9% of bands are NOT millionaires, even those on MTV, what kind of talk is that??? Why not just say "Sure I stole that guys car, but he's rich and has three other cars."

McGehee says that bands should be happy whenever their music is distributed, legally or illegally. Well, many bands do feel that way. About the same number don't (Metallica, etc.). But that still misses the point. Labels enter into contracts with bands (even though some make the bands virtual SLAVES), and they have the right to collect on the investment they made. Plain and simple.

This just feels like to me to be a blind spot for so many that would naturally laugh at a Democrat when they drone on and on about Big Oil, Big Pharmaceuticals, and the rest of the greedy American companies that just happen to provide jobs for thousands and improve lives. Well, Big Record Labels can be blasted all you want, but at the end of the day, without them, much of your favorite music would never have been heard at all. Maybe someday it will be different.

One last thing about McGehee's comment that bands would do just as well if you downloaded their music and went to a concert... Wrong. Bands get signed bases on ability to sell records. Period. If they don't bring back enough profit to the record company, they are dropped. And while you may like it when your favorite band stays "indie" and would rather them not "sell out" to the corporate bigs, in reality that means you want to keep your favorite band working a second job, living off ramen noodles.

Wesley's comments are excel... (Below threshold)
Steve L.:

Wesley's comments are excellent. There is no rationalization for stealing music. Sure, lots of people come up with a series of lame excuses, but the bottom line is that they want something for nothing. How would you like it if you spent endless hours creating something only to see someone come along and steal it rather than buy it. If it was your livelihood, you would be angry.

That's not to say the record companies cannot do things better. They have actually listened to the complaints of people and started changing some of their marketing models. Now, you can buy songs a la carte. The costs are lower since it is a download, so the prices are lower.

People whine and complain about the price of CDs, but simple economics tells us that CDs are probably priced just about right. If they were truly over-priced, people would not buy them. If they were under-priced, you wold not be able to find a CD on the shelf. Instead, we have CD sales falling off some. In part, this is due to music stealing. People don't buy what they can steal (despite what they claim in surveys.) The relative price stability says that CDs are priced just about right. If people stopped buying CDs, prices would fall. We don't see that happening.

Groups that go out of their way to encourage people to download their music are likely doing it out of a sense of revenge. They are unhappy that the record company makes so much money off them (per Wesley's explanation of costs) and want to get back at the labels. If they are making theirs off concerts, screw the labels that gave them their break.

Ironically, stealing music actually hurts the new bands more than anyone else. The labels use the money they earn off the sales of the big names to finance the careers of the small names. If they make less money from a big band, there is no money for the small ones.

Why do CDs cost more than m... (Below threshold)

Why do CDs cost more than most DVDs? The latter has considerably more data and cost of production?

I wouldn't be opposed to technology that trashed hard drives for copying content w/o intent to pay. Got no problem with backups or redoing person mixes based on content one has paid for but nobody has the right to content.

Whenever I hear about music... (Below threshold)

Whenever I hear about musicians or athletes getting "screwed" by labels or the teams they work for, I have to laugh. I have no pity for either.

"MTV Cribs," "Lifestyles of the Rich and Famous," "People," etc. are full of minor celebrities living much better than their talent in a "fair" world would ever entitle them to.

Are there bands out there that never make it? Sure. Are there athletes who don't? Sure. Are there plenty of dropouts who aren't Bill Gates? Sure. Are there plenty of college graduates who aren't Jack Welch? Sure. Doesn't mean they got "screwed" or that someone is unfairly making money off their hard work.

Welcome to capitalism. Don't like it? Do it on your own. Create your own business model and succeed or fail on your own merits. But don't put your playing piece on someone else's gameboard and complain because you don't like the rules.

To all the musicians and athletes who think they're getting a raw deal: get over yourselves. The rest of us have to live in the real world, maybe it's time you do too.




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