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Why do CDs cost so much?

Record companies say they lose money on all but the hottest-selling discs because of the high cost of promoting new releases.

A rock band can make a bunch of CDs for around $4 each, so why do the record companies charge $18 or $19 for a new release?

Because it costs a whale of a lot more than $4 to get you to buy it.

The price of CDs has become a hot-button issue for consumers now that online music-copying services such as Napster and Gnutella make songs available for free. Devotees of those services often argue that the record companies are ripping off the public and their artists, so they have no qualms about downloading songs without paying for them.

Spokesmen for four of the five major labels that dominate the sales charts wouldn't talk about their costs or the rationale behind the list price of CDs. But a group of industry insiders offered some ballpark figures for the cost of making and selling a CD, showing how the labels spend lavishly to build the next superstar.

The hidden cost of compact discs, these insiders say, is the hundreds of thousands of dollars the major labels spend to get a new release played on the radio, celebrated on MTV and displayed prominently in the local CD store. Added to that are massive overhead costs for the five giant record companies, which can account for $2 per release.

The high costs mean that more than nine out of 10 releases from the five major labels lose money. The labels are sustained by the handful of blockbusters generated each year by the latest teen fad band or superstars in peak form.

In other words, the $17 you just spent on Britney Spears' latest LP helped pay not only for her personal trainer, but also for the music videos of dozens of artists who will never make it onto MTV's Total Request Live.

"One Backstreet Boys covers a year's worth of stupidity," said Ron Stone, president and CEO of Gold Mountain Entertainment, which manages such recording artists as Bonnie Raitt and Los Lobos.

The Internet promises a better deal for consumers and artists by eliminating many of the costs and inefficiencies in today's system. But the major labels may not be the ones delivering on that promise _ instead, that role may be played by upstart Web companies and established artists ready to quit the starmaking machine.

Stone warned that the Internet won't be attractive to artists, however, until they can get paid for their work and limit piracy.

The list price of a new release ranges from about $13 for an artist on an independent label _ say, Cat Power on Matador Records _ to between $17 and $19 for a major-label act, someone like Eminem or Don Henley. The big labels collect about two-thirds of that amount, with wholesale prices typically running between $10.50 and $11.50.

Retailers collect $3 to $5 above wholesale per release, but some industry observers say that virtually all of the mark-up is needed to cover rent, payroll and advertising costs. Still, savvy shoppers can usually find CDs for $1 to $2 above wholesale at online retailers, which have less overhead than the CD shop in the local mall.

The labels' share covers not only the cost of recording the CD, but also promoting and delivering it, displaying it prominently in the store, and paying royalties to the songwriters and recording artists. What's left goes to overhead, including the cost of finding and signing artists, and profit. Here's how the costs break down, according to Stone and other industry observers interviewed on and off the record:

Recording: You can make a record for a lot less, but the typical major-label artist spends $100,000 to $200,000 on studios, session musicians and other production costs, said Kevin Nakao, founder and CEO of Musicblitz, a Web-based record company and radio programer. These costs generally are covered by the advance the artist or band receives from the label.

A big-name pop producer can add considerably to the recording cost _ as much as $75,000 to $100,000 per song, Nakao said. Producers also may claim a cut of the royalties paid to the artist.

Once the studio work is done, the results have to be encased in plastic. The raw materials cost about 60 cents per CD, with inserts and artwork adding roughly 40 cents to the total.

Marketing, promotion and tour support: A prime factor in a CD's sales is whether its songs get played on the radio. The labels can spend $10,000 to $100,000 per song on independent promoters, who lobby the stations for spots on the playlist. Nakao said the expense is particularly high for new artists with no track record of hits.

The emergence of MTV as a major tastemaking force has led the labels and artists to spend heavily on music videos. The average video budget is $50,000 to $75,000, Nakao said, with the band covering up to half of those costs.

Another important promotional tool is for the band to go on tour. While concerts can sustain an established band with a fervid national following, new artists generally don't make money when they venture away from home. So the label may have to pony up a few thousand dollars per city to pay for transportation, equipment, hotel rooms and minibar fees.

The total for marketing, promotion and tour support ranges from roughly $140,000 to $350,000 per release, Nakao estimated. Another source said the labels "like to keep marketing to $2 per unit," but if the record doesn't sell well, that figure can balloon to $50 or $200 per CD.

"It's a tremendous amount of labor-intensive work" to promote records, Stone said. "There's a lot of heavy lifting involved."

Distribution and sales: The labels don't just dump boxes of new releases at the Tower Records loading dock. They pay retailers to advertise in the local papers, display a new release prominently in the store and even, in some cases, to offer discounts.

These efforts cost about $2 per release, Nakao estimated.

This summer, several of the major labels have begun delivering songs digitally through the Internet. While this approach eliminates costs associated with the physical CD, it creates a new set of expenses: the cost of encoding the songs into digital format, encrypting them to deter copying and delivering them electronically to retailers.

Some executives at the major labels contend that those costs are higher than the ones they replace. With that in mind, the labels have been asking artists to surrender 10 to 15 percent of their royalties on songs delivered digitally, Stone said.

Royalties: For each CD sold, the labels pay royalties to two distinct but sometimes overlapping groups: the songwriters and the recording artists. The former's royalties are fixed at 7.55 cents per song, with a maximum per CD typically of 10 songs. The latter are negotiated between the label and the artist, with 14 percent of the wholesale price being a common starting point.

Given all its costs, Nakao estimated that a major label must sell 90,000 to 200,000 copies of a release just to break even. But the average release sells far less than that _ well under 25,000 per CD, by the industry's numbers.

As a result, the average recording artist never sees any royalties. But the odds of new artists making a living off their music are pretty slim without the support of a label, leaving them with little leverage when dealing with the record companies.

Even at $18, the Recording Industry Association of America argues that CDs are a bargain in comparison with other forms of entertainment. While the cost of tickets to movies or ballgames has climbed faster than inflation, the price of CDs has gone in the other direction, the RIAA claims.

Still, the message delivered by the stunning rise of Napster is that at least 21-million consumers are looking for ways to acquire music for less than the price of a full CD. And the Internet could make that possible, particularly if the free copying gives way to paid downloading.