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.”