CD-R media prices to triple

This summer, discs are expected to cost 30 to 35 cents on average, after being "down as low as 10 cents a disc" on a spindle, says Peter Brown, removable-storage analyst at International Data Corp.

While that percentage increase seems like a lot, it's still less than last year's average cost for CD-R media, pegged by IDC at 47 cents per disc.

However, the increase in CD-R media prices lowers pressure on CD-Rewritable media, which should stay around current prices (about 70 cents per disc) instead of dropping. The reason is that CD-RW media is less affected by market fluctuations; the formulation of rewritable discs is a costlier process. Plus, adds Brown, "the volumes are still not going to be quite as much as you're seeing with CD-R media."

Announcements of price hikes are pending from CD media sellers Memorex, TDK, and Verbatim, a subsidiary of Japanese giant Mitsubishi Chemical Corp. A TDK spokesperson declines to say how soon consumers will notice the hike, but says it will be substantial in relation to where the prices are now.

Why is CD media bucking the downward pricing trend? Blame it on a complex mix of consolidation among manufacturers, high patent royalties, and recent soaring demand.

Groundwork Laid Three Years Ago

The seeds for the CD market's current volatility were sown back in 1998, when CD-RW drives were a novelty first catching on. Despite the drives' newness, in 1998 and 1999 a number of Taiwanese manufacturers ramped up media production capacity.

"There were 60 to 80 companies opening factories in 1998 and 1999, when CD-RW drive prices started to fall," Brown says. Manufacturing capacities were at 100 million discs per month per company, creating a huge CD-R and CD-RW media supply.

Those companies drastically overestimated worldwide demand at the time, however.

"They were just producing CD-Rs, with no firm purchase orders from anybody," says Brad Yeager, national marketing manager for blank media at Memorex.

In 2000 demand started catching up, thanks to the surging popularity of cheaper, faster, and easier-to-use CD-RW drives. According to the Japan Recording Media Industries Association, the demand for blank CD-R media grew 84 percent to 3.27 billion units in 2000, and global sales for 2001 will reach 4.5 billion, with no slowdown in sight.

But the damage was already done: The industry had a surplus of some 1 billion CD-R discs. The small and medium-size Taiwanese (and Hong Kong) manufacturers had to sell media at below-market prices to try to achieve the high sales volumes necessary to recoup their operating costs. Many of those manufacturers have gone out of business in the last year, either because they were losing money or were purchased by larger businesses, Brown says. Approximately 75 percent of CD-R and CD-RW media is made in Taiwan.

In addition, the cutthroat pricing and overstock made surviving companies operate beneath full capacity. So this year we have an ironic reversal: a CD-R and CD-RW media shortage, which also leads to higher prices.

Patent Royalties Add Pain

Fixed patent royalties added to pricing pressures. In a market with sinking prices due to overproduction, companies still had to pay Philips, Sony, and Taiyo Yuden for every disc manufactured, at a fixed rate of 8.3 cents per disc--which accounts for 32 to 41 percent of a CD-R disc's production costs.

Under that royalty rate, a CD-R disc should have cost more than 50 cents at retail, not the 25 cents or less many discs sold for last year, says Robert Tsai, marketing and sales manager at Hotan, the U.S. subsidiary of Taiwan's CMC Inc. CMC manufactures CD media.

"A lot of manufacturers decided not to pay, because the royalties were too high," he says. Those who didn't pay could lower their CD prices even more; many of those companies were not in Taiwan, and little could be done to enforce the patent royalties.

Law-abiding Taiwanese manufacturers, frustrated by the royalty rates, earlier this year brought an unfair trade practice complaint to Taiwan's Fair Trade Commission. They claim Philips had charged royalties as if it were the sole patent holder. In fact, it collected royalties for itself as well as Sony and Taiyo Yuden. The Commission ruled that the three companies illegally colluded by jointly enacting CD-R patent licensing agreements, and fined Philips.

That ruling touched off tension between the manufacturers and the patent holders--but eventually led to renegotiated royalty fees. It prompted a restructuring of the CD-R Disc Patent License Agreement that Koninklijke Philips Electronics NV handles for itself, Sony, and Taiyo Yuden Co. Ltd. Philips also began offering a way for manufacturers to strike separate deals with each of the patent holders. CMC is the first company to sign on to Philips's new royalty structure, and has negotiated a fee of 4.5 cents per disc. (Separate deals will be negotiated with Sony and Taiyo Yuden.) And consumers, Tsai says, can expect discs to sell for about 35 to 40 cents at retail.

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