Industry information that you can actually use

September 2003

Universal slashes CD prices in half in hopes of boosting holiday 
sales.  Will artists be effected?
Webcaster's Alliance sues RIAA for price fixing Internet music rates.
GE to buy Universal. It's official.
Too cool for school?  A message from Moses regarding recent events with 
a certain CD e-tailer.

MAJOR LABEL SLASH N' BURNS CD PRICES & CANCEL POPs

With an eye towards tilting Christmas sales figures, Universal Music is
planning on announcing this week that they are reducing the sticker price
of CDs to about $10. And the price will likely go down from there,
depending on where you buy the CD. Naturally, the wholesale price would
have to come down as well or retailers would simply go out of business.

But there's a good chance that retail stores will be adversely effected
anyway, as UNI is claiming that they are discontinuing the policy known as
MAPS (see Moses Supposes - January 2003) and aborting the use of POPs:
(Point of Purchase advertising.) This would cut off music retailers at the
knees and leave them starving for revenue at the most important time of the
year.

To summarize MAPS and POPs for those new to the game: Whenever you see
big, life-sized cardboard cut-outs of your favorite pop-stars at the front
of the record store, that likeness did not get there because the store
clerk thinks that artist is cool. The record labels pay big bucks for that
placement. About $50,000 per chain. The cardboard cut outs are called
POPs (point of purchase materials).

It's been argued that record stores make more money renting floor space for
POP displays than they do on the sales of CDs. The big question is, if
UNI's plan of slashing prices in hopes that buyers bypass the POPs and
bee-line for the cheap CDs succeeds, will the other four of the Big Five
follow suit, drop prices and also discontinue POPs? If they do, we could
see the brick and mortar "record store" as we know it, vanish, literally
over night.

RESISTANCE IS FUTILE

Major retail chains will have the initial urge to ignore the new price
point and keep CD prices artificially high, to make up the revenue lost
from discontinued POPs sales. But this will likely be short lived, as
smaller Mom and Pop stores (who don't have POPs as a profit center) will
certainly take advantage of the new vig, keep prices low and a price war
will ensue.

Or, this Big Five could turn out to be the genius of retail, causing so
many units to move through stores that it restores faith in the industry
AND creates huge profits for everyone. Any way you look at it, it's going
to be an interesting season as the love/hate relationship labels have with
brick-and-motor retailers enters a new (and potentially final) chapter.

ARTISTS ROYALTIES - GOOD NEWS, PERHAPS

There is another issue related to this that I will be keeping my eye
on. If full price for a CD is now $10, artists might find themselves
earning more money than ever from CD sales. How, you ask?

Virtually all major label contracts have royalty plateaus, whereby, if the
record sells for full price (normally $17) the artist gets the full
royalty. (This is called a "top line sale" in most major label
contracts.) If it sells at below $12 the artist gets a three-quarter
royalty. (This is called a "mid-priced sale.") And if it is sold for below
$10 they get a half royalty (called a "budget sale").

Whereas before the artist only got a half royalty on a CD that sold for
$10, because the price was more than 40% lower than the "top line" price of
$17, now $10 would become the new "top line" rate and the artist could get
a full royalty. Universal definitely has the "top line/mid-price/budget"
structure in their contracts, and it represents the largest number of
artists in the US market place.

By way of an example, an artist who might have earned a $.90 royalty on an
album sale would now earn about $1.20 on that same sale.

Call your lawyer or manager and ask him how the "top line records" clause
reads in your contract. Ask him if this change of "top line" pricing will
make an impact on your royalty statements. I think you'll see his eyes
light up a bit at the question.

I have little doubt that this label will try to assert that their artists
should be paid the "budget rate" for these sales. But contractually the
artist may have some leverage here.

INDIES BEWARE

While artists signed to majors may get a windfall from this development,
this move could have negative rippling effects for those selling their CDs
off the side of the stage and through indie distributors. Y'see, the
perceived value of a CD is largely based on the retail value set by the
major chains. People will pay $12 for an Indie CD because it "feels" like
a bargain, when they consider that CDs from major artists sell for $15 to
$17 in stores.

But if suddenly those same top 40 artists' CDs are only $10, my guess is
that indies will have to lower their price to stay competitive. Will their
distributors do the same, and lower their distribution fees to keep
pace? If not, indie artists will find themselves squeezed by this price
compression.

And speaking of Universal, General Electric (maker of light bulbs, warheads
and owner of TV Network NBC) has been given permission by the FCC to enter
into exclusive merger talks to buy out 80% of Vevendi Universal owners of
Universal Music. Word is the music division is NOT part of the deal.

Keep an eye on this one.

I admit, it's not as sexy a story as others, but this very important
lawsuit's outcome will effect the future of Internet radio, which in turn
will greatly effect the future of the indie artist's ability to market
themselves. So it's worth some virtual ink. Read on.

Last year the RIAA entered into private negotiations with several agencies
to set rates for Internet radio. If you recall, the rates were so high that
small webcasters would be instantly bankrupt if they were called to pay
them. It took an act of Congress to create a provision to be written into
the Copyright Act that allowed for a special reduced rate among small
webcasters. This rate would be paid directly to the RIAA's Internet
collection agency, SoundExchange. Many thought the rate was affordable and
that everyone was happy.

But this month a splinter group among small webcasters, called the
Webcaster's Alliance filed a suit to get the rates reduced even
further. They claim in their brief filed in a California Court, that the
RIAA engaged in "unlawful restraint of trade" and "maintaining of a
monopoly," when it came to setting licensing rates and collection terms for
streaming music through the internet.

Aside from the claims made, the brief gives an excellent history of the
subject of Internet royalty rates, with virtually no legalese (rare for a
court document) and is a very good historical read, for those unclear on
the issues of this
subject. (http://www.webcasteralliance.com/docs/WA_complaint.pdf)

The Webcaster Alliance's goal would be for a more "free trade" approach to
the setting of rates for internet music streaming.

Ann Gabriel, president of Webcaster Alliance, stated: "It is time for the
RIAA to be held accountable for years of manipulating an entire industry in
order to stifle the growth of independent music and control internet
content and distribution channels."

Admittedly, my loyalties are divided here. I want to see cheap internet
radio prosper, because it means emerging artists will have a chance to
compete. On the other hand if this suit succeeds, then established artists
may be adversely effected by rates so low that the money they earn off
internet streaming will be too minuscule to bother auditing or collecting.

Although my sensibilities generally lean towards free trade, I think the
Webcaster's Alliance is going to need more than a well drafted brief to get
them to the finish line. They will need a lot of public support.
Historical precedent favors established trade groups "price fixing" rates
as well as blanket licensing as matter of economic convenience. Especially
in the area of music. But that doesn't mean that it's right. Just
traditional.

Those in favor of a free market economy and who feel that revenue from
" non-interactive" internet streaming is meaningless to the artist when
balanced against the opportunity for cheap promotion, should support the
Webcaster's Alliance's initiative. Those who believe in things like
" trickle down economy" or that Internet revenue is vital to the future of
an artist's income, might want to side with the RIAA, hoping that they will
be fair to everyone.

Tough choices.

Dear Everyone,

When acting in the capacity as an advocate sometimes one has to make tough
choices. If a company is doing something dodgy, but has good intentions,
or the owner is a "nice guy," should we lay off vetting his activities?

Recently, our motives have come under some fire, prompted by CD Baby, a
company I reported on in the last Moses Supposes (August 2003). I
apologize for not having a response sooner, but I was out of the country,
keynote speaking at the AustralAsian Music Conference in Sydney, Australia.
This trip was booked many months ago and the timing of it was rather poor
in light of recent events.

To summarize, CD Baby's lawyers thought we (that is, me and the advisors
that compose Moses Avalon opinions) were creating a false panic in the last
Moses Supposes, by telling people that there were issues of concern in
their Digital Distribution contract. And I'm guessing that CD Baby's CEO,
Derek Sivers, was probably operating off this advice, because he proceeded
to post some horrendous and spiteful allegations about me in a few chat
rooms. Well, in my experience, some lawyers would rather stick needles in
their eyes than admit that a non-lawyer like me has a valid point. As it
turned out, there are real issues with their contract.

A report published by attorney, Suzette Becker (who agreed with many of my
theories) the five lawyers on my website who contributed to the article,
and vindicating rebuttals in chat rooms, independently suggest that the
contract should undergo further review. According to a Billboard article
(August 25th) written in response to Derek's allegations, he is now
rethinking the deal and showing it to new attorneys. Which is all I really
wanted in the first place.

The moral: never be too cool for school. No matter how much we think we
know, we can still all learn from each other.

We hope that Derek can respect what we needed to say and stay focused on
resolving the issues in his contract. I would even welcome the opportunity
to work together with his new lawyers and hope someday that Derek and I can
hang out again and drive around LA in his Copper Mini, as we have done
before this whole mess.

A CHANCE TO HEAL

It's been said that what doesn't kill us makes us stronger. This episode
will certainly not kill me or Derek. But constant focus on the gossipy
elements of this story could kill our spirit as people who strive for a
better industry. And that would be the real tragedy.

The Moses Avalon Company would like to propose a mending fences approach.
Let's bury the hatchet, and work together. We have a great community here.
It's worth preserving. And so, I present the following as a peace offering:

I had several people edit the Moses Supposes CD Baby piece before it was
published. Everyone seemed to think it was professional and very fair.
Including the editors of MusicDish, who published it. However, if the
blunt tone in my article offended any CD Baby fans, I hope you will accept
this as an apology. It is simply my standard style and probably am
occupational hazzard of how aggressive one has to sometimes be, to be
effective. I hope it is not confused with my Company's intention-which is
protecting artists' rights.

I know this is taking all the hot air out of the balloon. I know many
readers out there are hoping for a good fight. But you'll have to wait
till another day for that. I won't participate. I'd rather make peace.

We are stronger as a unit than divided. Let's focus on the issues, not the
personalities and make this business work for everyone.

Peace,

Moses Avalon

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