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Thursday, September 04, 2003
A few more thoughts on the UMG situation:

This VR post has a pretty helpful and, I think, accurate breakdown of how this deal effects artists' royalties.

After reviewing the info available to me, here's how I would score the outcomes for the various participants in this whole scheme:

Retail: Gets screwed, because they'll be making less per CD and losing coop advertising (which seems to be confirmed now), a big part of how they operate. The wholesale drops from $12 to $9 but MSRP drops from $18 to $13, with an implicit assumption that they'll be selling at $10 as new releases. This means that instead of making about $4 per cd, they'll be making $1 or $2. Clearly this is not better, and it means they'll have to roughly double sales to make up this margin, to say nothing of the problems with losing coop. Despite what Pitchfork says (who seem to know about as much about the biz end of the biz as my dad--no offense, pop), this will most assuredly not provide much of a boost for the holiday season, since that was the one time of year when some kids would ever get a non-burned CD, usually as a present from their relatives. The effect will mainly be seen later in the year, so give it until March, if UMG actually holds out that long.

Relatively speaking, this is worse for bigger retailers (especially Best Buy) who lose the price-drop advantage they had and are more effected by the loss of coop. But smaller chains and one-stops would be far more effected if UMG decided to implement one-way (i.e., no-return) sales.

Other major labels: Unclear. Personally, I would use this as an opportunity to paint UMG as a "discount" label while keeping my margins high and maintaining good relationships with retail, where I bet Sony and Warners et al can cut some pretty sweet deals now. And I don't buy the argument that they'll have to lower prices too right away: music is not like detergent, where the lowest price wins. People buy specific "brands" (er, artists) because they like them. It would be good to compare a top-line UMG holiday release with a top-line Sony one, say, and see if there's a discernable sales difference. So.

Indie labels: Probably not much effect, I would think. Many of them (think Merge, Touch and Go, Matador's Interpol release) already have lower wholesale and way lower MSRP, so I don't think there'll be too much pressure exerted there. And if the biz as a whole gets more healthy, then it's probably good for them.

Artists: Unclear. Many will legitimately be pissed, even if this makes them look bad, and I'd expect a lawsuit or two. The suggestion on the VR thread that UMG would simply reclassify top-line as mid-price was thoroughly debunked, and I don't buy that either. But since the wholesale dropped less than the MSRP, they're losing less on margin than the retailers, so if sales do indeed increase, it might be OK.

At any rate, "Recoupment? Ha!" Most UMG artists are never going to be recouped, and the ones that are we don't need to have much pity for. As long as they're still making their money on publishing (which is taken according to a federally fixed statutory or contractual controlled composition rate), they'll be OK. So I think I'm giving them a "no change" on this one.

UMG: I'd guess about 75% of their product in the field is going to be returned, so the distributor's going to take a hit on that, and since I'm pretty sure UMG has its own distributor, this'll be an in-house cut. But they can make this look way better on paper, so it'll be a good stock market move, which is where UMG has its attentions primarily focused right now. So maybe this is all it is. That or a move to save face, or to be able to say "we told you so" when it doesn't work...? The actual effect on UMG is the big thing up in the air right now, of course, otherwise it wouldn't be a gamble. So we shall see.

So in sum:
Retailers - bad.
Majors - unclear.
Indies - neutral.
Artists - neutral.
UMG - good?

Oh yeah, and then there's consumers. It's definitely good for them.