It seems like the MP3 revolution will make CDs go the way of the 8-track eventually, and people have already questioned why it hasn’t happened already. A quick glance at the economics reveals that the major label system aren’t about to abandon the CD format any time soon.
iTunes business model is pretty easy to evaluate. Albums cost $9.99; iTunes takes a chunk (probably safe to assume around 50 percent); the rest goes to the label. It’s possible there could be some kind of middle man between the label and iTunes as well, but let’s assume the most a label will get will be around five dollars.
Compare this to a CD. At the store, they cost around $14-$20; once again, 50 percent of that will go to the distributor ($7-$10). Half of that will go to the labels ($3.50-$5). On top of that, you have to take out manufacturing costs, which are less than a dollar per CD when you produce enough units, but still lowers profits to between $2.50 and $4.50.
I’m sure we can all tell which number is bigger than the other. Aside from the fact that digital sales account for only around 20 percent of major label’s profits, why haven’t labels pushed for 100 percent digital sales to eliminate that cost of manufacturing and that annoying distributor middle man?
Well, major labels ARE the middle man. Each one controls their own distribution, and even if the individual labels may suffer, the company as a whole can still profit. The cost of manufacturing then becomes almost irrelevant until such a time when sales hit so low that it increases the per CD manufacturing cost.
TOPICS: poingly