Shiny, Aluminum, Plastic, and Digital


Reproduction of this essay is strongly encouraged.

So, why is that new "Oasis" CD so expensive?

In the early eighties, sales of vinyl, cassettes, turntables and cassette players were "flat". This means that sales were stable, not rising or falling. For the makers of all this hardware and software, that wasn't quite good enough. They needed a new angle. A new way to sell music and the stuff you play it on. Luckily, someone at the Phillips Corporation (owner of PolyGram Music and Island Records and one of the worlds top defense contractors) had the bright idea that it would be good for their stockholders and investors if they could get the music consuming public excited about buying music again by introducing a new format and a new machine to play it on (i.e. how can you convince that aging baby boomer to buy yet another copy of DEJA VU by Crosby, Stills, Nash and Young when they already have one?)

Thus was born THE COMPACT DISC in all its shiny, aluminum, plastic and digital glory. Its maximum playing time, about 75 minutes, was chosen because the president of the company wanted something that could play his favorite piece of music, Beethoven's 9th Symphony, all the way through without stopping.

Well, compact discs weren't as successful as they had hoped. For one thing, their price was too high. The higher price was blamed both on the fact that they were mostly being made in Japan and that they had a high defect rate, with approximately one out of every three discs being tossed out before even leaving the CD factory. Early on, the economics of this led to an industry wide decision to continue paying recording artists a royalty rate based on the sale price of vinyl instead of the higher sale price of compact discs. And nobody was buying those new CD players either, because they were just too darned expensive.

But then, in the spring of 1989, something wonderful happened for the music industry. Everything changed! Almost overnight, CD's were everywhere! Suddenly they were a huge success and suddenly it became almost impossible to get anything on vinyl at all.

This change must have occurred because it was what the consumer wanted... right? We live in a market-driven economy and the market was demanding more compact discs... right?

Wrong. What actually happened was this - a flexible return policy had always existed between record stores and the seven major distributors, i.e. stores could "buy" something from a distributor, and if it didn't sell, they could return it. This allowed stores to take more chances on new releases or on things they were not so familiar with, because if it didn't sell, they could always send it back. Well, in the spring of 1989 all seven major label distributors announced that they would no longer accept "returns" on vinyl and they also began deleting much of the vinyl versions of their back catalog. These actions literally forced record stores to stop carrying vinyl. They could not afford the financial risk of carrying those releases that were on vinyl because if they didn't sell they would be stuck with them. Very quickly almost all record stores had to convert to CD's. The net effect of this was that the consumer no longer had a choice because the choice had been made for us. High priced compact discs were being shoved down our throats, whether we knew it or liked it or not.

As we mentioned earlier, record labels were paying artists a royalty rate on sales of CD's based upon the $8.98 or $9.98 list price of vinyl (or achieved the same end result by using contractual tricks like "packaging deductions"). As CD's took over and the majors all acquired their own domestic CD pressing plants and the defect rate dropped to almost zero, the cost of manufacturing compact discs dropped dramatically as well. One would have expected the price of CD's to also drop and for the profits to now be split evenly and fairly with the musicians who were making all the music.

This, of course, never happened. CD prices have continued to rise to a now unbelievable $16.98 list price (soon to be $17.98!) while manufacturing costs have now dropped to less than it costs to manufacture a $9.98 vinyl release. A CD, with its plastic jewel box, printed booklet and tray card now costs a major label about 80 cents each to make (or less) and a small independent label between $1.50 and $2.50. Meaning that CD's should now cost the consumer less than their original prices over a decade ago, not more. But the music business got consumers used to the idea of paying the higher price and the labels got used to the idea of their higher profit margin, and record labels continue to this day to pay almost all artists a royalty rate as if they're selling CD's for the list price of vinyl. That extra 4 or 5 or 6 bucks goes right into the pockets of the record labels. It is not shared with musicians. And of course, we all had to go out and buy a CD player (which had mysteriously dropped to a more reasonable price) if we wanted to hear any of the music on this "popular" new format. So, all in all, it's no wonder that the record industry and stereo manufacturers loved the compact disc. In fact the following year (when our economy was in a recession) the music industry had its biggest profits, ever!

If any of this bothers you as much as it does us, then you might be wondering why you've never heard about any of this or why no anti-trust action was ever taken against major labels and distributors. The answer to this is quite simple. Most of the reporting on the inner workings of the record business comes from the music press and the music press is almost totally reliant on the advertising dollars and good will of the business that they're writing about. So, in the interest of not wanting to "rock the boat" or anger the folks who essentially bankroll their publishing ventures, this story would, and will continue to remain, unreported. And with the coming "popularity" of DVD, the music industry looks like it is ready to try the same tricks all over again.


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