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Wednesday, October 13, 2004

Wal-Mart Rocks Music Industry

In what some may see as a form of just desserts, Wal-Mart is pressuring the music industry to allow it to sell CDs for under $10, according to an article in Rolling Stone. The labels don't appear to have much choice but to cave in, as Wal-Mart is the 800-point gorilla of retailers (no, wait... make that 8,000 pound gorilla). If you don't play by their rules, you don't play... and you lose your shot to be in front of the 138 million consumers who visit Wal-Marts every week.

But wouldn't Wal-Mart lose money on this deal? Yes, but it doesn't really matter. Wal-Mart and the other "big box" discounters treat CDs as loss leaders in order to sell more profitable electronic gear. If Wal-Mart gets its way, rest assured that Target, K-Mart and other "big boxes" will follow suit. They'll have to if they want to stay competitive.

This sounds like great news for consumers, and terrible news for specialty retailers like Tower Records and Sam Goody, who have to sell CDs at close to list price to make a profit. But not quite. Wal-Mart keeps a very limited inventory of CDs -- 5,000 versus 30,000 carried by Tower -- focusing only on the bestsellers. Plus, Wal-Mart is notoriously squeamish about selling CDs from controversial artists. So there's still room for niche players, as consumers with eclectic or unusual tastes will still need to shop elsewhere.

Exactly who benefits (and suffers) from this remains to be seen. Smaller music stores may remain the go-to places for hard-to-find titles. Yet they will have an increasingly tough time competing with online retailers, who can offer more titles with less overhead. The ultimate "category killers" here may be music enthusiasts who buy and sell on eBay. Consumers may also continue to migrate to online music stores like iTunes and download singles (especially as more of them get iPods and other MP3 players), but even those will be forced to lower their prices if the hit CDs are going for under $10. In the end, Wal-Mart may do what peer-to-peer file sharing could not: force the music industry to lower its markups and radically restructure itself. Unlike with Napster, the RIAA can't haul Wal-Mart into court. The industry may even decide that the costs associated with manufacturing, packaging and distributing CDs aren't worth the trouble, and finally embrace online music wholeheartedly. Crow, anyone?

Source: Techdirt