Billboard's Ed Christman recently wrote about Wal-Mart's push for lower CD prices and a tiered pricing plan. In a nutsell, hits would be $12 and different levels of catalog at $9, $7 and $5. A proposed promotional program would put the top ten or 15 titles at $10.

We've heard of this sort of thing in the past (though not with these specifics). In October 2004, Rolling Stone had an article about Wal-Mart's push for $10 CDs (retail, not wholesale). The situation was described as tense...and this was three and a half years ago.

In Christman's article, a quote by a Wal-Mart merchandise manager stuck out:

When you look at sales declines with physical product, and you have a category declining like it is, you have to make decisions about what the future looks like," he said. "If you have a business that is declining and you want to turn it around, it really takes looking at it from all angles."

The decline of the CD gives Wal-Mart greater leverage to make a serious push for the sort of lower prices it has publicly wanted for years. But does anybody really think lower CD prices will turn around the format? I don't. While I have no evidence to offer, I'd wager CD purchasers are less price sensitive than those who have moved on to downloads. (They're certainly older, and older consumers tend to have higher incomes.) In dropping prices, consumers save a few bucks while labels give away margin to consumers who are more likely -- because of their price sensitivity -- to have bought the CD anyway.

What's so wrong with lowering prices? Nothing, if you're a consumer. But if you're a label, you have to understand the margin you're going to need to make up with increased volume. Here's an example, with totally hypothetical numbers. Let's say a CD's wholesale price is going to be dropped from $8 to $6. To maintain the same level of revenue, a label needs to increase sales volume by 33% (($8-$6)/$6). And let's say the gross margin on that CD is $4. To maintain the same level of contributed margin, sales volume needs to increase by 100% (($4-$2)/$2).

Let's be honest...sales aren't likely to double under the new pricing and promotion scheme. So labels are looking at the two options faced by so many of Wal-Mart's vendors: Find cost efficiencies or lose Wal-Mart's business. Said one executive, "The decision might come down to: Do we give up 20 percent of our business in order to not lose the entire business?" Yes, that's exactly what you do. Look at Rubbermaid's rare defiance of Wal-Mart demands as a good example of what happen if labels lose Wal-Mart's business. Wal-Mart dropped Rubbermaid products when it passed along cost increases. A few years later, Rubbermaid was acquired by a competitor.