Musicland slashes prices to stay alive - Computer Product Retailing - Editorial

Discount Store News, Jan 2, 1995 by Peter Hisey

Musicland's pre-Christmas announcement that it will cut prices on its compact discs by as much as $5 each (that's nearly 33%) may impact the computer software market ... and soon. The nation's leading music retailer cut prices in its 1,400 or so mall stores in response to unrelenting pressure from Best Buy and, to a much lesser extent, Circuit City. The new price will be from $10.99 to $11.99, the company said, and the policy is permanent, not holiday hype.

The dynamics of the move should interest anyone in the software industry. Over the past three years, mass merchants like Best Buy in music and Wal-Mart in video have aggressively pushed the price down on just the sort of hit products retailers used to sell at full list price. Best Buy's Top 10 is merchandised at under $10, sometimes as low as $8.99, and everyday, most titles cost $11.99.

Wal-Mart recently introduced two slam-dunk hits, "Tim Burton's The Nightmare Before Christmas" and "Jurassic Park," at $12.75 each, while competitors tried to sell them at $15 to $17.99. A year ago, those would have been $25 titles before rebate.

Best Buy now controls as much as 25% of the sales of a new hit title in its first week of release ... and its store count continues to soar, which will lead to even greater market share.

How long before this trend jumps to software? Best Buy is already beating even Wal-Mart by $5 or more on many game titles, and Wal-Mart, in turn, often undersells even its Sam's Club division on such products.

Where does that leave the high-margin software specialist? Roughly the same place Best Buy left Musicland: Meet the price, or bye-bye.

With two of the nation's top three music retailers now committed to ultra-low prices, pressure will be intense on record companies to lower their wholesale prices. Best Buy has pretty much proven that its aggressive pricing actually improves overall sales in its markets, generating interest and add-on sales. Record manufacturers who resist lower prices might find themselves at a severe disadvantage, as Neil Diamond's Christmas album at $9.99 blows away Barbra Streisand's at $13.99.

Looking a few months down the road, computer software distributors and publishers are going to have to make some hard choices. The average A-title game now costs $45 (with some ultra-hot titles getting $55). But the consumer has time and again said that $20 or so sounds right. With millions of computers moving into the home each quarter, the market is shifting away from hardcore gamers who will pay nearly anything for the latest and hottest, to the family consumer who's on a budget. Those shoppers will judge software as just another entertainment purchase, and while a $10 CD and The Lion King for $13 might offer compelling value, a $50 computer game might not.