Royalties proposed for booming used market as new-CD sales stagnate

By Frank Green

UNION-TRIBUNE STAFF WRITER

June 14, 2002

What's the difference between a shiny new compact disc and one that's been unwrapped and played a few times?

To Lucy Estrella's ear, none. To her pocketbook, a lot.

"It's cheap to buy used discs. . . . They sound just the same as new ones," said Estrella, who browsed through the stacks at Off the Record in Hillcrest earlier this week. "I can buy two used ones for less than the price of a new one."

Such sentiments have struck sour notes in the recording industry, which is concerned about the growing retail presence of used-CD stores and Internet businesses such as Amazon.com, which sell both new and used recordings.

The industry worries that the expanding used market is cannibalizing new-CD sales, as well as promoting piracy by allowing consumers to buy, record and sell back discs while retaining their own digitally pristine copies.

One proposed remedy being debated by record label executives is federal legislation requiring used-CD retailers to pay royalties on secondary sales of albums.

A cover story in last week's issue of the music trade publication Billboard quoted several executives who said they favor the establishment of an agency that would exert a flat royalty rate – say, 6 percent or so – on retailers' sales of CDs sold over and over again.

The Recording Industry Association of America has not taken an official position on the issue.

You can see the boom in less-than-mint-condition merchandise in at least 40 record stores in San Diego County, including 17 Wherehouse Music outlets and 13 Music Trader shops. That's more than double the number of used-CD stores in the area in 1992.

Even music retail giant Tower Records has begun test-marketing the sale of used discs in Seattle, Berkeley and 11 other markets where it operates, although not here.

"We're responding to the competition in college towns," said Stan Gorman, Tower's chief operating officer.

Used-CD shops typically pay customers between $3 and $5 for their old discs, then sell them for $8 to $10. New CDs can be priced as high as $18 apiece.

The focus on the used-CD market comes at a time when new-CD sales continue to stagnate in the United States. Total sales last year were about $13 billion, unchanged from 2000.

Sales have been hurt largely by a surge in piracy, which the National Federation of the Phonographic Industry estimates has cost the music business $4.2 billion in lost revenue last year.

It is unclear how big the used-CD market is because many retailers are mom-and-pop entrepreneurs who do not report sales. There also is a large market in used product at swap meets.

A spokesman for the Recording Industry Association of America, which represents the major record labels, said it is especially concerned that many used CDs are being bought by people who "rip" the music using widely available CD-burner devices, then sell the used CDs back to the secondhand stores where they were originally purchased.

"That's an example of why labels are experimenting with copy-protection technology" that blocks duplication, said RIAA spokesman Jonathan Lamy.

But the idea of labels assessing part of the proceeds of used-CD sales is already drawing the wrath of independent record shop owners.

Phil Galloway, co-owner of Off the Record, said the proposal is another example of the record industry "shaking down" consumers for all it can get during a time of decline.

"On the first-time purchase, the label and the musician made their profit," noted Galloway, who with his business partner opened the first used-CD stores in San Diego County at the advent of the CD format in the mid-1980s. "You don't see royalties collected on used cars."

Galloway said royalty payments would force store owners to pass on the costs to customers.

Likewise, an executive at CD Warehouse Inc. – the Oklahoma City-based owner of the Music Trader chain – said the used-CD market helps to spur consumers' interest in artists' new releases.

"When Alanis Morissette's new album was released, we had a lot of customers in our stores looking for her (catalog album) 'Jagged Little Pill,' " said Matt Allen, the company's vice president.

CD Warehouse franchises and operates 289 used-CD shops in 35 states under the names Disc Go Round and CD Exchange, among other brands.

Allen said the industry's target audience has changed in recent years from college students trying to build inexpensive record collections to mostly male music fans between the ages of 18 and 34 looking for out-of-print and hard-to-find copies.

"We largely carry niche music that the Best Buys of the world don't have on their shelves anymore," Allen said.

Several customers shopping at the Music Trader on University Avenue this week said that although the prices for discs may be good, there are drawbacks to rummaging through the bins.

For one thing, the stores don't stock many new titles. And some major artists aren't represented at all.

"The program booklets are worn and torn a lot of times from overuse," said one shopper.

Frank Green: (619) 293-1233; frank.green@uniontrib.com