Small record shops take on big chains over discounts.

Ask Rand Foster why independent music retailers are struggling and he'll tell you it has as much to do with Best Buy Inc. as free music downloads.

Foster, owner of Fingerprints Records in Long Beach's Belmont Shore, doesn't have time to chat up customers about new albums or lure up-and-coming acts to perform at his store. He's too busy explaining why his CD prices are higher than those of the Eden Prairie, Minn.-based consumer electronics retailer, which along with Wal-Mart Stores Inc. and Target Corp. has run roughshod over the music retailing landscape.

The price differences are especially pronounced in the first two weeks of a new album's release, when the bulk of music sales are generated. In July, when Fingerprints peddled the latest album from indie-rock staple Radiohead for $15, the Best Buy in Torrance offered it for $10.

I have customers who say they'd love to support my store, but they feel I'm cheating them because they see Best Buy's price, said Foster. [Best Buy's] put a lot of stores out of business because they're distorting the true cost of music. It's unfair.

Last month, Foster and four other independent retailers filed suit in U.S. District Court against Best Buy demanding that it halt its strategy of below-cost selling of compact discs.

The plaintiffs, including Claremont-based Mad Rhino Inc. (no relation to L.A.'s Rhino Records) and Sacramento's Dimple Records chain, accuse Best Buy of selling music at artificially low prices for the purpose of destroying competition, in violation of the California Business and Professional's Code.

They claim that Best Buy, which sold off its own music retailer Musicland in June, uses record sales as a loss leader to lure customers in to buy televisions and other consumer products.

Best Buy officials did not return calls for comment.

Special deals

Billboard magazine estimates that Best Buy, Wal-Mart and Target now account for 55 percent of all record sales in the U.S. Meanwhile chains such as Torrance-based Wherehouse Entertainment, Value Music Concepts and Music Network have filed for bankruptcy, either to reorganize under Chapter 11 protection or to liquidate their operations. Sacramento-based MTS Inc., parent of Tower Records, has put its business up for sale.

Their plight mirrors that of small bookstore chains in the 1990s that were driven out of business by Barnes & Noble Inc. and Borders Group Inc. through discounting and promotional efforts. That fight culminated in the American Booksellers Association's 1998 suit against the two companies that was sealed two years ago.

The suit against Best Buy accuses it of extracting an additional 10 percent discount from the music divisions of companies such as AOL Time Warner Inc. and EMI Plc. Best Buy also allegedly secured advertising and other allowances that smaller retailers wouldn't be able to get as well.

These favorable prices, terms and conditions afforded only to Best Buy allows Best Buy to sell newly released CDs as loss leaders at below cost prices, the suit said.

Pricing pressure

The music industry has struggled against eroding prices for a decade.

To stop a previous price war among music chains in the early 1990s, the major music giants began matching retailers advertising costs usually in the form of a discount on orders in exchange for maintaining a set price.

That system fell by the wayside with the advent of Napster and other peer-to-peer downloading systems. Just last week, Universal Music announced it would cut its suggested retail prices on CDs to $13 from as high as $19. This move will likely lead to a reduction in the wholesale prices retailers actually pay when ordering a CD.

The hand of discount retailers was strengthened further last year when the major labels settled a price-fixing lawsuit brought by 28 states. With such a large market share, Best Buy can play a major role in breaking a new release.

Artists and music companies have now made Best Buy a priority. In July, the 70s rock act the Eagles released its latest single exclusively through the chain. This follows a series of exclusive deals made by the Irish rock band U2 and Universal's Interscope Records for some of its acts.

Without good pricing and positioning, an album might be dead in the water, said John Rose, the head of sales at DreamWorks SKG's Nashville record division.

This has forced independent music retailers to pull together. Foster and 10 other independent retailers have formed a group to do joint advertising for new releases. They have garnered some discounts from music companies, along with advertising dollars, but Foster admits it's not enough.

I don't fault my customers for wanting a $10 CD. It's not their fault for thinking they should cost that much, said Foster.