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Why is the retail price of a new music CD $15.98? Where does this price come from and how is it set? Is it fair? For a long time, I’ve wondered about the high price of music, especially when bought in physical form as a compact disc. As longtime music buyers, we have a certain mindset about the CDs we buy: We have always bought new CDs for around $12 to $15 or more, and that’s the way it is.

That money goes to music production, music packaging, distribution, marketing, and maybe a little bit to the artist. But the disruption of digital technology couldn’t have come at a more perfect time for the music business, right when it was fat on corporate profits and had even colluded on setting artificially high CD prices in the ’90s.

“We as an industry have had it too good for too long,” Warner Music exec Alex Zubillaga told the AP recently in a story about the rise of digital music sales. Globally, downloadable digital music sales doubled in 2006 to $2 billion, making up 10% of all music sales, according to the International Federation of the Phonographic Industry (IFPI). However, overall music sales dropped by 3% globally.

But an interesting phenomenon is happening in the U.S., according to Nielsen SoundScan: Album sales were down nearly 5% for 2006, but digital downloads helped push up all music sales — online and offline — by 19% for the year. People are not as enamored with the CD (and its high price) and are more interested in paying just for the tracks that they want. Apple’s iTunes has helped set another artificial price for downloaded single music tracks at 99 cents, which has helped bring down the price of physical or downloaded albums to around $10.

As music lovers, we now have many more choices for how we can get our music fix. We can listen to the radio, to satellite radio, to Internet radio, or hear new music on TV shows like “American Idol” or on commercials. We can download free music from file-sharing networks, though we pay a price in the time it takes to get a good file (and the tiny risk of being prosecuted for it). We can hear music straight from the websites of artists, and even get their tracks from MySpace pages. We can buy physical albums from the dwindling number of retail music stores or Wal-Mart and Target, or buy digital tracks or albums from iTunes or other online outlets.

More up-and-coming artists realize that they’re going to have to give away their music online to get noticed, and then will make money from live shows or merchandise such as T-shirts and other gear. That brings down the retail and digital cost of music even more. When I spoke to Avi Ehrlich, who runs independent record label Springman Records, he didn’t mince words about how digital disruption was changing the music business.

“I think record labels as we know them today will be completely obsolete in two to five years, there’s no question about it,” he said. “I’ve worked in the music industry at various places such as radio, magazines, and record labels and it just can’t sustain itself the way it is right now. I think it’s a good thing as [digital technology] levels the playing field for everyone… It’s making the industry less top heavy.”

And you can see the parallels between the digital disruption of the music business and other media businesses. Music labels have lost power in the hierarchy of the music business, just as Hollywood studios have lost power with the rise of user-generated video online, and just as newspaper chains have lost power with the rise of Craigslist, Google and Yahoo.

There is no god-given right to selling a high-priced CD (or DVD or newspaper), and it’s no wonder that so many people turned to file-sharing networks and digital downloads because of those high prices. There is no good reason why the record labels — infamous for ripping off artists for so many years — should remain in control of the price of retail music. We now have the power to shift that business model and decide how we get our music, whether it’s directly from the artist or through new online shops or social networks. And you can bet your bottom dollar we’re not going to pay $15.98 for a CD anymore.

What do you think? Is digital disruption in the music business a good thing for music lovers? Does it give us access to more genres of music? How do you think artists and music producers should shift their thinking in how they sell music and make money? Share your thoughts in the comments below.

[Photo of CD pile by Frederik Vandaele.]