The Start Of A Cd Backlash?

Remember the CD Revolution? When sophisticated music lovers discovered the crisp sound of the digital discs, the predictions went, they would snap them up despite their hefty price. Then, as demand boomed, CD prices would tumble and the record-buying masses would join in. Pretty soon the LP would go the way of the Victrola--but with a better-sounding and longer-lasting alternative, who would miss it?

Well, it hasn't entirely worked out that way. The suggested list price of CDs by bestselling pop artists like Madonna and Phil Collins has fallen just slightly, from $17.98 to $15.98. Sales bring prices down to around $12, at best. The red-hot growth in CD sales of a few years ago has begun to cool off. And with cassette sales also starting to decline last year, the music business is buzzing with a nervous question: are CD prices frightening away all music buyers? Record labels, though generally reluctant to talk about the issue, say price has nothing to do with the slowdown. Yet some retailers say that unless labels lower their CD prices, the precious little disc that helped revive the industry in the 1980s could create problems in the 1990s. Says New Jersey wholesaler Jerry Richman, "We're getting killed."

The CD era started with the sweet tune of overnight success. Sales skyrocketed 6,500 percent in the first four years, as manufacturing costs fell by two thirds. (Digital Audio Disc Corp., the nation's largest CD maker, says a CD now costs only about 90 cents to manufacture.) The big companies made hefty profits and celebrated by snatching up smaller independent labels. PolyGram paid $500 million last fall for A&M Records. In March, MCA acquired Geffen Records for $545 million.

Now the music has turned less giddy. CDs are "out of the high-growth cycle and into the mature part of the curve," says Morgan Stanley analyst Alan Kassan. Growth in sales fell from 93 percent in 1987 to 38 percent last year. Critics say the trend toward big-label consolidation has meant less incentive to cut prices. (The Recording Industry Association of America, a trade group, declined to comment.) According to CD Review magazine, six major organizations--WEA, CBS, PolyGram, MCA, BMG and CEMA--now sell 94 percent of the nation's recorded music.

Changes in the other formats have also done little to push down CD prices. Many consumers have simply stopped buying easily damaged and increasingly scarce LPs. Meanwhile, the price of pop cassettes is edging up. The new Madonna and New Kids on the Block tapes retail for $10.98 and MCA recently announced that its top cassettes will match that price. The newest thing in audio technology, the digital audio tape from Japan, is still far too expensive for most Americans.

With tougher times have come calls for change. An editorial in this month's CD Review demanded that the labels STOP GOUGING ALREADY! David Campbell, owner of The Music Man record store in Norfolk Va., last March put an ad in the trade press calling on the major labels to WAKE UP to the disgruntlement with CDs. When Campbell converted from an all-cassette inventory to a partial CD stock, he says, "There was this pall of death over the store." No one was buying the $15.98 CDs. Then he cut prices to $11.98. Sales skyrocketed from 13 percent of the store's sales to 42 percent. Since the CDs cost Campbell about $10, his margins weren't enough to cover his overhead and he ended up losing money. Yet he says he proved his point: that if the labels cut prices, rapid volume would make up for lower margins.

Mediocre music: CD pricing is a sensitive issue. MCA declined comment, as did WEA, a division of Time Warner Inc. Others say the finger pointing is unfair. Mike Bone, president of PolyGram's Island Records division, says there's no room for a price cut: "It costs more to do business today: materials costs are up, marketing costs are up, competition is up." Some industry execs predict the dollar volume of CD sales will soon surpass cassettes, perhaps as early as next year. Terre Haute, Ind.-based Digital Audio Disc is running full out, making 10 million discs a month to meet demand. Some larger retail chains, which are often able to cut better deals with suppliers and sell CDs for less, side with the labels. Bob Henderson, senior vice president of the 770-store Musicland chain, says, "We don't feel people are walking away because the price is too high." Peter Paterno of Walt Disney Corp.'s new Hollywood Records division says the real problem is that "the music [being recorded today] is mediocre." What the U.S. market needs, says Paterno, is a wildly popular new product, like Michael Jackson's 21 million-selling "Thriller."

Yet even if a monster hit were to materialize, would it be a smash on CD? The labels see no reason to think it wouldn't. "The CD is an amazing thing," says Island's Bone. "It's worth $15.98; it's worth every penny." For those who can afford it, that may be true. Yet what the record industry is hearing now is something else: the grumbling of some consumers who say that at these prices, they would rather tune out.