In the new movie "High Fidelity," John Cusack plays a music romantic who runs a barely profitable, time-warped record store -- the sort of place where the employees love music and delight in stocking obscure releases. Odds are that, in the real world, his music shop would have gone bust five years ago if the major record companies hadn't stepped in and clamped down on megastores that were selling records at below-wholesale cost.
Now comes word the labels may be giving up the battle, leaving retail record stores vulnerable again. And just as with so many recent developments in the record industry, the clues lead back to the Internet.
Here's what happened: In 1995 a new generation of "big box" retailers -- Best Buy and Circuit City among them -- was selling CDs for as little as $9.99, far below the wholesale price. Why? They were using the music as a loss leader to drive foot traffic into their stores. For the average mom-and-pop store, the development was a shock -- Circuit City was selling records for dollars less than the small store could buy them wholesale from a record distributor.
Even big chains like Tower Records said the practice threatened to drive them out of business, and indeed, the undercutting helped kill off a number of independent record stores and even some midsize chains.
Things were bad enough that there was open speculation that the retail music business' infrastructure could collapse. "The danger," explains the head of sales at one of the Big Five labels, "was if you had new players -- Blockbuster, Wal-Mart, Circuit City -- come in low on prices, build up their market share and drive traditional music retailers out of the business, what happens when they suddenly decide they're tired of losing money on music and walk away? There's no music retail business left."
To rein in the low-ballers, the labels instituted something called the "minimum advertising pricing" policy, otherwise known as MAP. The labels simply told retailers that if the stores sold CDs below a certain minimum price, they would no longer pony up for so-called co-op ad buys.
Retailers rarely advertise on their own. Virtually all of the business' marketing dollars come from the labels, which spend feverishly to make sure new releases aren't overlooked by fans. When Elliott Smith releases his new album, local record-store owners buy radio ad spots that hype the new record and steer consumers toward their outlets. The money the shop owners spend is then credited to their accounts for the next time they order records. The same is true for stores' ads in Sunday-newspaper circulars -- the titles in big type aren't picked at random. Instead, the labels credit the music chains for every new release of theirs that's included.
"They don't have money to advertise the Brian McKnight record, so I have to give them money for Brian McKnight," explains Pat Monaco, senior V.P. of sales for Universal/Motown Records.
"MAP returned some sanity to the market and returned stability to traditional music retailers," says Don Van Cleve, owner of the Magic Platter in Birmingham, Ala., and president of the Coalition of Independent Record Stores. "It was sort of like halting trading on Wall Street when things start to melt down."
Music-industry conspiracy theorists charge that price controls imposed by the major labels keep CD prices artificially high. But minimum advertised prices are a common practice in all sorts of retail businesses. And the minimum set for CDs is only a dollar or so above wholesale. So if the new Trisha Yearwood album has a list price of $17.98, that means a store probably purchased it for $11.40 and, according to MAP, has to sell it for at least $12.80 to qualify for co-op support. Record companies defend the program by noting that all retailers are free to sell CDs at whatever price they want; they just can't count on co-op dollars if they refuse to adhere to the pricing standards.
The MAP standards no doubt saved hundreds of smaller record stores from closing. But now Warner Music Group has decided it's time to shelve MAP, and industry executives are guessing the remaining four major labels will follow suit. (Spooked by past claims of collusion, the labels -- and even some retailers -- are officially mum on future pricing plans.)
So why did Warner Music suddenly change its tune? The Web, of course. In 1997 the Federal Trade Commission, which doesn't like it when the labels do anything in concert, started snooping around, asking label sales execs lots of questions about MAP. Then last year, when a deal was announced to merge online retailer CDNow with Columbia House (jointly owned by Time Warner and Sony Music), the FTC saw its opening. The commission told both labels that MAP had to go if they wanted the commission to sign off on the merger.
So on Jan. 19, five days before Time Warner announced its merger with EMI Music, and six weeks before the CDNow/Columbia House deal collapsed, Warner Music offered up a consent order to the FTC to do away with MAP. (The consent decree was just recently made public in a Securities and Exchange Commission filing.)
Another reason for MAP's demise is that it was designed for a bricks-and-mortar retail world. For instance, Buy.com, the Internet retailer, routinely sells its hottest titles as loss leaders for $9.99 (before shipping and handling), presumably losing in the neighborhood of $2 per order. But MAP means nothing to Buy.com; it doesn't receive, or need, a penny's worth of label co-op dollars. "You can't fight those companies," says one label's sales chief.
But even if all five majors drop MAP, consumers probably shouldn't expect a CD price war anytime soon; most mass merchants lost interest in losing money on music a long time ago.
As for the independent shops, "if MAP's eliminated, we'll just have to deal with it," says Van Cleve. "If competitors can sell CDs at below cost, we'll react. But it will hurt stores interested in breaking new bands. And ultimately it will create a retail business where you'll have to sell more stickers and soda and trinkets in order to make your margins."
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