Readers of this blog know that, for years, I have insisted that music is elastic. That is, price affects sales. Higher prices produce lower sales, lower prices produce higher sales. There are outlier examples (Eric Clapton Rarities box set?) where the title appeals to die-hards who will pay nearly anything for it. But for the most part, lower prices spur higher sales. At eMusic, we knew this quantitatively and based our value proposition on it.

At eMusic, we met with the majors repeatedly to discuss this. With the exception of Sony (and later Sony BMG), all disagreed. Warner was the most vehemently against the notion. They hired a consultant named Frank Luby from Simon-Kucher who produced a report affirming Warner’s belief that music was not elastic, and in fact encouraging Warner to RAISE prices in 2008. Their work may have been high quality (and I admit I never saw it first hand), but our data at eMusic suggested a different conclusion.

As further evidence that music was mis-priced (too high), first in 2004 (click through to see Rolling Stone article) and then again in early 2008, Walmart began pressing the majors to lower their wholesale prices. They insisted their sales data showed that they could sell far more units if music was priced around $5 – $7 (with occassional high-demand titles at $10). They contrasted this with DVDs which Walmart was selling at $7 – $15. The industry resisted, and Walmart responded by reducing the amount of shelf space they dedicated to CDs, contributing further to the dramatic sales decline of CDs.

I applaud Jim Urie at Universal for responding to the demands of the market and altering CD pricing. The industry will be rewarded with increased sales. This move could have occurred years ago and brought further relief to a declining market. None of these steps will save recorded music, and the adjustments will continue to put pressure on the cost structure of the labels, but they will come closer to finding the optimal market price for CDs and thus help to maximize profit. The same must happen for digital tracks, something eMusic has demonstrated for more than six years now.