Larry LeBlanc, the longtime Canadian music reporter, recently left Billboard Magazine and has begun to publish a regular email newsletter on Canadian music developments.  LeBlanc's latest edition includes some pointed comments on the coverage of HMV's retail price reductions and CRIA's attempts to link them to P2P downloading.  LeBlanc has kindly granted me permission to repost his comments on this issue, which he titles HMV's Price Cuts and Why CRIA's Stats Don't Add Up:

As you probably have heard HMV Canada recently cut its pricing on thousands of back catalog titles, an average of 20% with some titles reduced as much as 33%. For the past year, HMV Canada has been vigorously looking to improve sales and to raise the profile of music products. In its first quarter, the UK-based retail giant reported sales for the 18 weeks ending Sept. 1. Its international business, which includes HMV Canada and its 117 stores nationally, and 7 stores in Hong Kong and Singapore, reported a 1.6% decline in like-for-like sales over the 18-week period.

HMV Canada has, in fact, been discounting at its stores in Edmonton for the past six months. The move was so well received by customers there that the chain decided to roll out the pricing cuts nationally. While HMV did not indicate that the reduced prices had to do with the impact of on-line P2P downloading, there was considerable industry speculation and widespread media claims that the chain’s move was, as one report indicated, “An effort to stem the tide of illegal downloading that threatens music retailers, and everyone else in the recording industry.”

In fact, Graham Henderson, pres. of the Canadian Recording Industry Association told CBC News that HMV’s move was to stem the number of baby boomers from turning to file-sharing, and keep them buying CDs. "Canada has the highest rate of illegal downloading in the world," explained Henderson. "It's affecting our ability to build a digital industry."

However, Humphrey Kadaner, president of HMV Canada indicates that there were other reasons for why the retail chain reduced its prices on back catalog titles. He says that:

“Consumer research confirmed that many of our HMV customers believed we offered competitive pricing on our new release CDs, as well as our promotional CD offers (e.g. 2/$25). However, while our customers loved our broad selection of catalog CD's, about half of our customers were of the belief that our catalog pricing was too high.

“Given one of our key areas of focus is to offer consumers good value for money, we decided to reduce thousands of our higher priced catalog CD's by an average of 20% per CD. We tested this in Edmonton for 6 months with favourable results, and then decided to roll out this initiative nationally.

“In addition to offering better value to our customers for many of our catalog CD's, we also were of the belief that if we didn't find a way to improve our back catalog stock-turns, we might find ourselves in the unenviable position of having to reduce the breadth of catalog CDs we carry. As our breadth of music catalog is very near and dear to our hearts at HMV, we decided to proactively pursue a way of growing our back catalog sales and stock turns…via reduced pricing on much of our catalog.”

In its reporting of HMV’s catalog shift, Canada’s media mostly used CRIA’S recent industry statistics that state that the net value of wholesale music sales fell 35% in the first quarter of 2007. That unit sales of CDs and music DVDs dropped 30% during the quarter. However, CRIA’s stats are based on ship-out figures by its own members. They are not, as stated in numerous articles, based on actual overall store sales. CRIA, which was founded in 1963, operates with an upper tier of four "Class A" (voting) members: Universal Music Canada, EMI Music Canada, Sony BMG Music Canada and Warner Music Canada. The second tier—"Class B" (not-voting) members, includes 22 independent labels and domestic manufacturers.

Most labels and retailers in Canada exclusively use AC Nielsen Soundscan data as their source of industry performance, as this reflects sell through data from all of the major retailers in Canada. AC Nielsen Soundscan measures CDs sold at retail by reading the information from electronic cash registers that reads bar codes on records of reporting stores. According to the data from AC Nielsen Soundscan, year to date (Jan. to end of August), CD unit sales are down 11% vs. prior year, and total music sales are down 9%.

At the forefront of pushing the Conservative government to introduce copyright reform legislation, CRIA has long pin-pointed on-line P2P downloading as the prime source of music industry woes. Its own figures better underscores its viewpoint than the lessened AC Nielsen Soundscan figures. According to CRIA, the Canadian government's long delay in enacting the two World Intellectual Property Organization (WIPO) treaties, in particular, has left Canada’s record industry weakened on the digital frontier. Now, any call by Prime Minister Stephen Harper for a federal election will sideline his government's updating of Canada's Copyright Act.

Many contend that on-line P2P downloading has become a scapegoat for the problems of the music industry. They argue that the continual drops in music sales have also been due to industry turmoil over the past few years. Labels have merged, folded or both. As a result, less effort has been put into developing new artists. As well, they point out, radio and television aren’t in tandem with the music industry as they traditionally had been.

Industry figures indicate that CRIA’s statistics may be significantly down for reasons other than the impact of online P2P downloading. These include: lack of quality and star product; retail chains exercising extreme caution with their buys; inventory cutbacks at some accounts; diminished exporting due to a rising Canadian dollar; and restructuring and extensive layoffs at labels.

Leading music retailers in Canada have traditionally argued that their business model drives a higher price for catalog product. That there’s a cost associated with tying up product that doesn’t quickly turn. Unlike many smaller independent retailers, they face significant higher operating costs for staff, rent, inventory investment, advertising, and store design and fixtures. But aggressive inventory mark-ups, in general, have come about with the rise of big-box stores –Wal-Mart, Best Buy, Costco. These megastores regularly price CDs cheaper to get consumers into their stores. Getting prices down means HMV Canada may get more velocity on some titles and have more people in its stores. What HMV has to see is if it can get enough unit uplift to compensate for its lower prices.