USED CDS ON THE HIT LIST

MAJOR LABELS THREATEN RETAILERS WHO SELL SECONDHAND DISCS

The mother of all paranoias is whispering in the ears of ®MDRV¯four®MDNM¯ of the six major record labels. With sirenlike tones, it's convinced them that the used-CD market is killing sales of new CDs. It's convinced them that a major chain like Wherehouse selling used CDs is a personal affront to their power. Most of all, it's made them realize that if the used-CD business thrives, it will become increasingly difficult to jack up the already steep price of new CDs.

The ®MDRV¯record goliaths'®MDNM¯ desire for a bogeyman (so they can raise prices) is not new. The first evil wretch was blank audio tape. But after much wringing of corporate hands, it became clear that home taping was not stamping out new product sales. An even bigger flap occurred when video rentals and blank videotape were introduced. The motion-picture industry went ballistic, screaming that Hollywood was doomed. It wasn't.

In recent years, record labels have spent considerable time and energy convulsing, whining and lobbying to kill digital audio tape (DAT). Again, their fears were completely unfounded. The recording industry has embraced DAT technology, but its cost--and the immutable fact that it's still just tape--has prevented it from making an impact among consumers.

As music-biz paranoia goes, the used-CD scare has grown into an intensely bitter struggle. In April, nearly ten years after the CD was introduced, ®MDRV¯four®MDNM¯ of the world's six major record labels have declared war on the used-CD business. Keep in mind that everyone, particularly the record labels hat developed CDs, knew from the beginning that unless they were drastically abused, used CDs would sound as good as new ones. Common sense says that a market in "used" product was bound to spring up.

®MDRV¯The labels have been provoked by ®MDNM¯ several large music chains, most notably Hastings Books, Music & Video and Wherehouse, ®MDRV¯that ®MDNM¯have begun dealing in used CDs. This means that used CDs, once the exclusive province of indie retailers, are now a part of mainstream. Average Joes who stroll into a Wherehouse looking for the latest video are now going to be confronted by used CDs. Considering that most new CDs sell for between $13 and $18, while used CDs cost between $4 and $8, it doesn't take much to see that the used-CD business is about to bloom.

So far®MDRV¯, the distribution arms of®MDNM¯ the ®MDRV¯four®MDNM¯ majors involved, Warner-Elektra-Atlantic (WEA), Capitol-EMI (CEMA)®MDRV¯ UNI/MCA®MDNM¯ and Sony, have instituted a similar, three-point attack. First, they've reduced opportunities for discounts to retailers. The second step--the one that really inflamed this conflict--was the end of cooperative advertising money to stores selling used CDs. The Valley's Zia Record Exchange estimates this move cost it $120,000 in lost ad dollars. Although it won't give an exact figure, Wherehouse estimates its losses to be "in the millions."

The final remedy is harsh. The labels maintain that if the first two punishments don't bring results, and if retailers persist in selling used CDs, they will cease doing business with the offenders altogether. This is Armageddon for both retailers and labels. Although the labels have for years dreamed aloud about cutting out the middleman (the retailer) and selling directly to the customer, no one is ready for that yet.

For Wherehouse--the chain whose if-you-don't-like-it-bring-it-back guarantee policy touched off the last label-retailer war--the gamble is simple. Wherehouse execs are betting they can make more money by selling used CDs than they ever received in advertising support. They're also convinced that as the fifth-largest music chain in the U.S., the labels cannot stop doing business with them. "We've crystallized the issue," says Wherehouse marketing and communications vice president Bruce Jesse. "But the fact is that there's already a huge existing market in used CDs.

"Can they stop selling to us? Yes. Is their future dependent on us? No. But this is not the showdown at the O.K. Corral. We hope to resolve our differences.

"We feel the used business is keeping people actively consuming. It's keeping them energized about the product. And there are other spin-offs, as well. CD-player penetration is stalled at 40 percent. Is part of the problem that the software is too expensive?"
Brad Singer, owner of Zia Record Exchange and Impact Distributing, echoes Jesse's last point.

"When the price of records was $6, there was a healthy used market at $2 and $3. But when the price of CDs went to $15, it opened up a much bigger niche for used product."
The labels' argument against used CDs®MDRV¯--that it hampers the sale of new product--is undoubtedly true. But how much is debatable.®MDNM¯ First, ®MDRV¯some people won't buy ®MDNM¯used CDs. For whatever reason--probably too much disposable income--they'll only buy new product. On the other end of the spectrum are music fanatics who buy both new and used. In that case, used-CD sales actually stimulate new sales: a browser finds a used CD by an act he's heard about but never listened to--for $7, half the normal price. Willing to take a chance at that price, he buys it, takes it home and likes what he hears. He goes back to the store looking for other old albums. When the act's next CD comes out, he buys it new.

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