CDs as loss leaders

An increasing percentage of compact discs are sold in mega-chains, such as Best Buy or Wal-Mart, as loss leaders. Offer the CD at a very cheap price, and hope that the buyers also take home a television set. This practice is the central reason why Tower Records recently went bankrupt.

Loss leader CDs push music in a more mainstream direction. The impulse buy is for the TV, the musical purchase is planned, which favors established stars with new releases. Sudden impulse buys of unknown musical products, by definition, do not bring people into the store. In essence consumers have decided they would rather bundle hit musical releases with TV sets and computers (the Best Buy model), than with more obscure musical releases (the Tower model).

Consumers with mainstream musical tastes are better off, but how about consumers who prefer the niche products? On the downside, hit CDs are cross-subsidizing obscure CDs to a lesser degree than before.

Nonetheless not all hope is lost for buyers with indie tastes. and other Internet services offer a wide variety of releases and lessen the need for such a cross-subsidy. And keep in mind that the cross-subsidy went two ways. The customers who prefer music from Madagascar no longer have to cross-subsidize the Eminem displays in Tower. The CDs are held in Amazon-linked warehouses, which is cheaper, even once you take shipping into account. Furthermore the desire to build up the Amazon brand name cross-subsidizes obscure products of all kinds, many of which Amazon makes little or no money from.

The other key musical trend of our time is illegal downloading, which hurts the top artists most of all. Indie releases use the Internet for publicity, and world music artists learned to live without copyright protection a long time ago. Legal downloading, through iPod, subsidizes music of all kinds. None of the iTunes songs make money for Apple, rather music of your choice (if they can get the rights) is a loss leader for hardware. Most people buy iTunes, not for the latest hits, but to hold a diverse mix of their past and yet-to-be-known future favorites. And most satellite radio channels do not play hits but rather serve niche tastes. XM offers a wide variety of channels, in part to make its brand name well-known and focal.

The bottom line: Don’t worry about music as a loss leader. Cross-subsidies all over the place, and point in many differing directions. But at the end of the day, both the demand and supply for musical diversity are alive and well.


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