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USED CDS ON THE HIT LIST

The mother of all paranoias is whispering in the ears of MDRVfourMDNM 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 MDRVrecord 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, MDRVfourMDNM 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.

MDRVThe labels have been provoked by MDNM several large music chains, most notably Hastings Books, Music & Video and Wherehouse, MDRVthat MDNMhave 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 farMDRV, the distribution arms ofMDNM the MDRVfourMDNM majors involved, Warner-Elektra-Atlantic (WEA), Capitol-EMI (CEMA)MDRV UNI/MCAMDNM 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 CDsMDRV--that it hampers the sale of new product--is undoubtedly true. But how much is debatable.MDNM First, MDRVsome people won't buy MDNMused 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.

Independent record stores are caught in the middle. Until Wherehouse jumped in, everything was fine for the indies. They developed the used business and had it all to themselves. Most, like Zia Record Exchange, stocked both used and new product on the shelf.

Attacking indies along with chains opens another Pandora's box, and this time, it's the artists who get hurt. Indies are the only outlets willing to advertise and support developing acts, more commonly known as "baby bands." While a chain like Tower Records, for example, is currently advertising a million-selling mainstream act like Janet Jackson, an indie like Zia is working a promising but less profitable alternative band like the Posies.

MDRVAnother argument record companies use against what CEMA's Russ Bach calls "the cancer of used CDs" is that resales rob the artists. It's true that no royalties are paid to artists from the sale of used product. But ifMDNM the labels are so concerned about artists, why hurt their young talent? And if they stop promoting baby bands, what's going to happen a few years down the road, when they realize their farm team has no players?

"Here we are, at the height of alternative music. Alternative bands, which need time to develop and build a following, are making labels rich," Singer says. "The labels can't afford to cut off their nose to spite retailers that sell used product. They'll have to reinvent ways to get dollars to stores that break developing acts. You can't go to Tower or Sam Goody's with a band like Paw, for example. That's a Zia act . . . and no amount of displays in Musicland is going to change that."
Why should CD buyers care if the retailers lose this battle? New CDs are certain to become more expensive, and cheaper, used CDs will disappear.

To Don Kulak, director of Independent Music Retailers Association (IMRA), an organization that has sprung to life because of this crisis, the issue is an impending increase in the price of CDs.

"Manufacturing costs are going down. CD prices are going up. Retail profits are going down. Something is wrong with this picture," Kulak says.

"From the consumer perspective, if used CDs were to go away, there would be less selection and a lot fewer new artists to choose from. It will also be a lot harder for young artists. Frankly, a lot of stores won't order marginal artists if they can't return them. And a lot of consumers won't buy them if they know there's no hope of trading them in."
What do the labels have to say for themselves on this issue? Nothing. Repeated telephone calls to three of the MDRVfourMDNM majors in question over the past month went unreturned. The waters were further muddied recently when PolyGram, another major, bought ads in Billboard magazine stating that while it doesn't like the used-CD business, it refuses to join WEA, CEMAMDRV, UNIMDNM and Sony. One thing's for sure: The labels never dreamed this issue would spill over into the mainstream press.

Who will win? So far,MDRV there is serious legal saber rattling going on in both camps.MDNM Wherehouse has aggressively advertised used CDs and shows no signs of backing down. If Wherehouse can make it go, other chains, like Tower Records, will jump in, and the label's worst nightmare will become a reality: Used CDs will be everywhere. But that's the future. Right now it's still anybody's game.

"We're going to see who blinks first," Singer says.


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