How Lady Gaga's 99-cent 'Born This Way' Sale Hurt Interscope, Distributors

Lady Gaga - Born This Way Album Cover - 2011

"This was a really bad move," the head of an independent distributor says. "Ninety-nine cents is almost free."

NEW YORK -- Let's get one thing straight. The Lady Gaga 99 cent sale for Born This Way was a great thing for the artist, and for Amazon. On a short-term basis, you could even make the case that it was great for the industry.

The 99 cent sale was big mainstream-media news, and that certainly benefited everyone, including other retailers. The album sold 1.1 million units-662,000 digital, 449,000 physical-in its debut week ending May 29, according to Nielsen SoundScan.

The story lasted all week in the press. It worked the same way that Target and Best Buy circulars work: driving traffic to everyone's stores, not just those two big-box chains, or, in this case, Amazon's site. I'd argue that the glitch arising when Amazon's overwhelmed servers couldn't satisfy customer demand was a good thing, too, since it made the sale even bigger news. Given Amazon's impeccable service reputation, that blip won't hurt it long term.

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For the cost of $3.3 million-that is, $8.40 wholesale minus 99 cents retail times 443,000 scans during the two-day sale-Amazon put itself on the map as a digital music merchant, in a way that the same amount of money spent on traditional advertising could never have bought.

But whether the sale helps Interscope remains to be seen. First, Interscope and Universal Music Group Distribution (UMGD) shipped 2.1 million album units before street date. If they knew in advance of Amazon's sale, you can bet they would've cut back on the initial CD allotment.

As is, Interscope has an inventory liability, with some merchants saying they need to return product. And if some of that talk comes from a few retail accounts being miffed over the Amazon deal, some is also due to simple math. The CD album sold 449,000 units of the 2.1 million shipped, for a 21.4 percent sell-through. Second-week sales are at 174,000 units (136,000 CDs), or 27.8 percent sell-through.

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A decade ago, major-label shipment formulas called for shipping three units for everyone expected to be scanned in the first week. Nowadays, with a more efficient inventory replenishment, the ratio has dipped under 2-to-1. But in Lady Gaga's case, UMGD shipped 4.7 units for each first-week scan. Even another big hit single, which would ensure a sooner sell-through of all 2.1 million units, won't stop merchants now from returning the album to improve their cash position. Interscope is probably looking at a few hundred thousand returns, depending on whether the label comes up with a sweetener to keep inventory in stores.

Competing labels and distributors may be even angrier than merchants about the sale. "This was a really bad move," the head of an independent distributor says. "Ninety-nine cents is almost free."

"If this happened in the 1990s, there would have been a big hue and cry from retail, even bigger than what it was this time," the head of sales at a major label says.

But these are different times. And in the digital world, "there are going to be times when music is the toy in the Happy Meal," a UMG executive says. Another Universal exec adds, "If Amazon tries to turn 99 cent superstar albums into a regular thing, I would be outraged."

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Yet, some suggest that a few label marketers themselves may now start pushing such a pricing strategy to break an artist, or get an album into the No. 1 spot. Others say that, in the '90s, that inevitably would've followed-but not in today's market, when profit trumps chart success.

For all the talk about how the industry has evolved, though, former distribution executive Jim Caparro says, "It is shocking how consistent the industry is with the past. Today, it is almost parallel to how traditional music retail acted back then, with big accounts looking to steal market share by pricing."

But one executive familiar with Amazon's thinking says the Gaga pricing won't hurt the industry.

"Of course Born This Way is worth more than 99 cents," the executive says. "That's why it created such retail excitement and buzz, when it was offered for 99 cents ... If it wasn't actually worth more, no one would have cared."