Following on from a previous court decision, the online retailer CD-Wow have been told how much they will have to pay the British Phonographic Industry (BPI). CD-Wow will have to pay the staggering sum of €60 million. And all because they were found to be selling perfectly legal copies of CD’s and DVD’s destined for the Hong Kong market to UK customers.
The BPI are obviously delighted with the size of the fine, arguing that CD-Wow’s actions were hurting the British music industry. You may ask how? These disks were bought from the labels, at a price set by the label. A price that the labels believed would cover their manufacturing costs, cover the recording artists royalties, and provide a reasonable amount of profit. The labels were happy to sell their wares at this price to customers in Hong Kong.
But this price was not good enough for the UK market. Customers in the UK would have to pay more for the exact same disk. Why? I am not an expert in the field of economics, but it seems to me that there are 3 main reasons why a price difference would apply in this case:
- Higher costs.
- Higher demand pushes up prices.
- The market can support a higher price.
Higher Costs
Looking at the higher costs aspect, the only significant difference that I can see is that the CD’s have to be transported to the UK. However, CD-Wow sold all their products with postage included and still made a profit. The BPI might argue that the costs of pressing the disks were higher in the UK, in which case because they would have as far to travel, the transportation costs would be lower, off-setting the manufacturing costs. If the disks were pressed abroad, the case for doing so would be because it’s cheaper, off setting the transportation costs. No matter what way you look at it, CD-Wow still bought the Hong Kong disks at the price the labels were willing to sell them, which would be a higher price than cost of manufacture. The labels were still making their profit from the sale.
Higher Demand
The law of supply and demand – a product in low supply and with a high demand can demand a higher price on the open market. A basic law of economics. However, it doesn’t apply in this case. The labels have been spending a lot of time telling us that CD sales are falling. They have blamed piracy and peer to peer online sharing networks. They will not admit that the vast majority of music released is pure and utter dross that the ordinary consumer does not want. They have not looked inward and seen that the old music industry is dying on it’s feet and that they need to change with the times. There is no high demand for CD’s. There is no short supply. According to the law of supply and demand, the cost to the consumer should fall. But it hasn’t. If anything it has increased. So anyone that can supply the end product at a cheaper price will succeed. CD-Wow saw this opportunity and took it. Customers flocked to them, and you can’t blame them.
The Market Can Support A Higher Price
The BPI are under the impression that UK customers are willing to pay more for their music than people in other countries. There are two basic reasons:
- Maybe it’s because they have a greater appreciation of the music and feel that the price they pay is reasonable for the enjoyment they receive.
- Or maybe it’s because they have more disposable income and the labels feel they can get away with charging more.
The first argument is a basically a moral one. If someone believes that they are gaining something beneficial from an arrangement, they they will generally pay over the odds. They will be happy to do so, and will continue to do so until such a time that the arrangement is no longer beneficial to them. If this was the case, customers would have ignored CD-Wow and continued to buy their music from their local record store. It’s basic brand loyalty.
The second argument is a pure financial one made by the record companies. They want to make as much money as possible. They have a right, and a duty to their shareholders, to do so. But if they charge too much, sales slip and they end up making less money rather than more. Along come CD-Wow and they charge less for the end product than the manufacturer of the product does. Customers flock to them in droves. Yet the original manufacturer persists in the belief that the price that they charge is the highest price that the market can sustain. It’s patently not, and in order to force the market to accept this inflated price, the BPI took CD-Wow to court.
Unfortunately for the consumer, the BPI won and now CD-Wow have to pay the BPI €60 million just because the BPI want to fleece their own customers. So what does this mean for CD-Wow? Obviously, the size of the fine could potentially but CD-Wow out of business. CD-Wow have said that they will continue to trade, and they do have the right of appeal. But with their accounts and assets frozen, this decision must be causing them untold problems.
It may be just a matter of time, but if they do close their virtual doors, what effect will this have? First off, it will affect you, the consumer. You will be forced to pay a highly inflated price for music. Secondly, it could affect other online retailers. If the BPI feels that a retailer is hurting their bottom line in the same manner, they can bring them to court and have them fined until they are out of business. In the end it comes down to the same thing: the consumer gets screwed, music sales fall, and nobody benefits.