Resnikoff’s Parting Shot: The Wal-Mart Experiment

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Wal-Mart has never been a heavy-hitter in the paid download arena, despite the presence of industry-low pricing.

The retailer grabbed attention by offering price-busting, 88-cent downloads in 2003, but little else has happened since then.  Over the past four years, iTunes has only cemented its dominance, despite more expensive pricing.

The lesson has been unmistakable.  Price is nice, but compatibility and convenience are more important.  Most are stealing MP3s from Limewire, but those playing by the rules are mostly siding with Apple.  And that placed Wal-Mart and its restrictive, protected WMAs in a digital wasteland.

Perhaps a shift towards DRM-free formats could alter that profile.  Wal-Mart is not only offering MP3s from EMI, but it is also carrying DRM-free tracks from heavyweight Universal Music Group.  Additionally, the retailing giant is leveraging MP3s from an Eagles album exclusive, something we will see more of in the future.

The question is how many consumers will care.  The Eagles have a lot of fans, and have sold more than 120 million albums.  And the exclusive is already drawing more music energy and attention to Wal-Mart.  But after the dust settles on that promotion, will crowds rally around 94-cent,  DRM-free tracks?  Is the overpriced Evian really better than the not-so-dirty tap water?

The bottled water analogy has been bandied about for years.  And of course, the comparison glosses over some important market nuances.   But the paid download market remains a fraction of its hyped potential, and is offering too little oxygen to sustain record label balance sheets.  Free alternatives are just far simpler, despite the dirty moral aftertaste.

That we know.  But does the recent shift at Wal-Mart alter that dynamic?  Few can predict the outcome in such a volatile business, though the Wal-Mart bet is a speculative one.   Perhaps iTunes finally gets a real competitive nudge.  But even if it does, it remains unclear if a rising tide will lift all boats – much less major label yachts.

But the Wal-Mart foray in MP3s could trigger another interesting market dynamic.  Remember, this mega-retailer is an incredibly important seller of CDs, and one that becomes increasingly powerful as outlets like Tower disintegrate.

Say what you will about CDs, but shiny discs still generate billions in recorded music revenues, despite continuous declines.  And shelf-space decisions and sales results at Wal-Mart send ripples into major label boardrooms, especially in genres like country.

So how will MP3s affect CD sales at Wal-Mart?  The question is more than academic.  The issue was raised Tuesday by influential analyst Richard Greenfield, a critical but fair voice on the condition of the recorded music industry.

Greenfield placed the pricing on MP3s – and more specifically, MP3 albums – alongside their physical equivalents, and noted that digital versions are vastly cheaper.  For example, a Norah Jones, MP3-based digital album can be purchased for a specially-discounted $7.88 on walmart.com, while the CD is $9.72 at Wal-Mart physical retail outlets.  The $7.88 price easily beats CD stickers at other retailers as well.

The result?  Greenfield anticipates a squeeze on CD floorspace at Wal-Mart going forward.  “Wal-Mart’s entry into the sale of DRM-free music could signal a more rapid decline in album pricing, with CDs likely to lose even more shelf space at physical retail as a result,” Greenfield asserted.  “As DRM fades away, the near-intermediate-term industry risk is that MP3-album discounting makes it even harder for physical retail to compete for consumer spending on music with either wholesale pricing coming down, floor space reductions or at worst, both.”

Perhaps Greenfield is giving too much attention to the paid digital market.  In reality, paid transactions are a minor fraction of total music downloads, despite industry efforts to sue file-swappers and shutter P2P applications.  In that light, a move towards MP3s could stop the severity of the bleeding by making paid channels more attractive.  Less stealing, at least online.

Either way, the pressure on CDs – at Wal-Mart and elsewhere – remains downward.  This particular chapter needs to play out, though even Wal-Mart may be too rich for the blood of the average music fan.  Sure, 94-cents undercuts 99-cents, but a Maserati is also cheaper than a Bentley.  For most buyers, paid downloads remain a luxury, just like CDs.  Sure, they can afford it in measured doses.  But without controlled digital distribution, most music fans will continue to enjoy massive levels of free consumption.

Will MP3s – at Wal-Mart and other retailers – change that?  The answer is probably not, at least without major changes in digital (and physical) pricing.  Sure, Wal-Mart is renowned for cost-cutting.  But far deeper cuts may be needed to revitalize paid digital prospects, despite increased content flexibility.

Paul Resnikoff, Editor