Wednesday, March 21, 2007

Creative Destruction in the Music Business

Speaking of creative destruction...

Sales of Music, Long in Decline, Plunge Sharply
Rise in Downloading Fails to Boost Industry;
A Retailing Shakeout
By ETHAN SMITH
March 21, 2007

In a dramatic acceleration of the seven-year sales decline that has battered the music industry, compact-disc sales for the first three months of this year plunged 20% from a year earlier, the latest sign of the seismic shift in the way consumers acquire music.

The sharp slide in sales of CDs, which still account for more than 85% of music sold, has far eclipsed the growth in sales of digital downloads, which were supposed to have been the industry's salvation.


The slide stems from the confluence of long-simmering factors that are now feeding off each other, including the demise of specialty music retailers like longtime music mecca Tower Records. About 800 music stores, including Tower's 89 locations, closed in 2006 alone.

Apple Inc.'s sale of around 100 million iPods shows that music remains a powerful force in the lives of consumers. But because of the Internet, those consumers have more ways to obtain music now than they did a decade ago, when walking into a store and buying it was the only option.

Today, popular songs and albums -- and countless lesser-known works -- can be easily found online, in either legal or pirated forms. While the music industry hopes that those songs will be purchased through legal services like Apple's iTunes Store, consumers can often listen to them on MySpace pages or download them free from other sources, such as so-called MP3 blogs.

Jeff Rabhan, who manages artists and music producers including Jermaine Dupri, Kelis and Elliott Yamin, says CDs have become little more than advertisements for more-lucrative goods like concert tickets and T-shirts. "Sales are so down and so off that, as a manager, I look at a CD as part of the marketing of an artist, more than as an income stream," says Mr. Rabhan. "It's the vehicle that drives the tour, the merchandise, building the brand, and that's it. There's no money."

The music industry has found itself almost powerless in the face of this shift. Its struggles are hardly unique in the media world. The film, TV and publishing industries are also finding it hard to adapt to the digital age. Though consumers are exposed to more media in more ways than ever before, the challenge for media companies is finding a way to make money from all that exposure. Newspaper publishers, for example, are finding that their Internet advertising isn't growing fast enough to replace the loss of traditional print ads.

In recent weeks, the music industry has posted some of the weakest sales it has ever recorded. This year has already seen the two lowest-selling No. 1 albums since Nielsen SoundScan, which tracks music sales, was launched in 1991.

One week, "American Idol" runner-up Chris Daughtry's rock band sold just 65,000 copies of its chart-topping album; another week, the "Dreamgirls" movie soundtrack sold a mere 60,000. As recently as 2005, there were many weeks when such tallies wouldn't have been enough to crack the top 30 sellers. In prior years, it wasn't uncommon for a No. 1 record to sell 500,000 or 600,000 copies a week.

In general, even today's big titles are stalling out far earlier than they did a few years ago.

The music industry has been banking on the rise of digital music to compensate for inevitable drops in sales of CDs. Apple's 2003 launch of its iTunes Store was greeted as a new day in music retailing, one that would allow fans to conveniently and quickly snap up large amounts of music from limitless virtual shelves.

It hasn't worked out that way -- at least so far. Digital sales of individual songs this year have risen 54% from a year earlier to 173.4 million, according to Nielsen SoundScan. But that's nowhere near enough to offset the 20% decline from a year ago in CD sales to 81.5 million units. Overall, sales of all music -- digital and physical -- are down 10% this year. And even including sales of ringtones, subscription services and other "ancillary" goods, sales are still down 9%, according to one estimate; some recording executives have privately questioned that figure, which was included in a recent report by Pali Research.

Meanwhile, one billion songs a month are traded on illegal file-sharing networks, according to BigChampagne LLC.

Adding to the music industry's misery, CD prices have fallen amid pressure for cheaper prices from big-box retailers like Wal-Mart and others. That pressure is feeding through to record labels' bottom lines. As the market has deteriorated, Warner Music Group Corp., which reported a 74% drop in profits for the fourth quarter of 2006, is expected to report little relief in the first quarter of this year.

Looking at unit sales alone "flatters the situation," says Simon Wright, chief executive of Virgin Entertainment Group International, which runs 14 Virgin Megastores locations in North America and 250 world-wide. "In value terms, the market's down 25%, probably." Virgin's music sales have increased slightly this year, he says, thanks to the demise of chief competitor Tower, and to a mix of fashion and "lifestyle" products designed to attract customers.

Perhaps the biggest factor in the latest chapter of the music industry's struggle is the shakeout among music retailers. As recently as a decade ago, specialty stores like Tower Records were must-shop destinations for fans looking for both big hits and older catalog titles. But retailers like Wal-Mart Stores Inc. and Best Buy Co. took away the hits business by undercutting the chains on price. Today such megaretailers represent about 65% of the retail market, up from 20% a decade ago, music-distribution executives estimate. And digital-music piracy, which has been rife since the rise of the original Napster file-sharing service, has allowed many would-be music buyers to fill their CD racks or digital-music players without ever venturing into a store.

Late last year, Tower Records closed its doors, after filing for bankruptcy-court protection in August. Earlier in 2006, following a bankruptcy filing, Musicland Holding Corp., which owned the Sam Goody chain, closed 500 of its 900 locations. And recently, Trans World Entertainment Corp., which operates the FYE and Coconuts chains, among others, began closing 134 of its 1,087 locations.

But even at the outlets that are still open, business has suffered. Executives at Trans World, based in Albany, N.Y., told analysts earlier this month that sales of music at its stores declined 14% in the last quarter of 2006. For the year, music represented just 44% of the company's sales, down from 54% in 2005. For the final quarter of the year, music represented just 38% of its sales.

Joe Nardone Jr., who owns the independent 10-store Gallery of Sound chain in Pennsylvania, says he is trying to make up for declining sales of new music by emphasizing used CDs, which he calls "a more consistent business." For now, though, he says used discs represent less than 10% of his business -- not nearly enough to offset the declines.

Retailers and others say record labels have failed to deliver big sellers. And even the hits aren't what they used to be. Norah Jones's "Not Too Late" has sold just shy of 1.1 million copies since it was released six weeks ago. Her previous album, "Feels Like Home," sold more than 2.2. million copies in the same period after its 2004 release.

"Even when you have a good release like Norah Jones, maybe the environment is so bad you can't turn it around," says Richard Greenfield, an analyst at Pali Research.

Meanwhile, with music sales sliding for the first time even at some big-box chains, Best Buy has been quietly reducing the floor space it dedicates to music, according to music-distribution executives.

Whether Wal-Mart and others will follow suit isn't clear, but if they do it could spell more trouble for the record companies. The big-box chains already stocked far fewer titles than did the fading specialty retailers. As a result, it is harder for consumers to find and purchase older titles in stores.

Write to Ethan Smith at ethan.smith@wsj.com

12 Comments:

Blogger darmik said...

Why do we need the labels ? Why don’t the artist sell their music on their own and keep all of the revenue from their music along with the rights to distribute and sell it where and at whatever price they want (This can be done using Darmik as well as many other places on the internet). DRM is not the issue; control of distribution channels and revenue from holding the intellectual property of artist is the issue. For many major labels it seems that their strategy is to own or shut down any and all independent avenues to sells and distribution for the artist. In my opinon the major labels want to make sure that the artist has no choice in who sells and distributes their content; and that the fans have no choice in price and format. The Majors want to be the only game in town.

I think that we should no longer look to labels for the solution to freeing music from its old world model. We should look to the artist and to the fans that purchase the music. The artist should be the group that charts their own destiny as far as price, format, and distribution point. The fans that purchase the music should be allowed to purchase the music in a format that works uniformly on the devices that they use to play the music. If the artist gives their permission fans should also have the ability to resell the artist content for them, and in exchange receive a portion of the revenue. Neither the artist or the fans needs a label or a technology company to force a model or a format on them. I think that if we asked the artist and their fans what they wanted as far as music formats, pricing, distribution and ownership that we would more than likely already know the answer.

Artist should control pricing of their content as well as the format (drm or no drm) and distribution points. There are DRM formats available to content owners, so the issue of drm or not is one that is up to the content owner not one that should be made by any technology that is used to distribute the content. The decision to use drm is one that the content owners must make based on many factors. The key point here is that there are choices available and that the content owner should and can make this decsion.

I think that we should write off any current music that the major labels own as content that will never be in an open format playable on any device. We should also understand that more than likely this content will only be available at distribution points and at prices that the label; not the artist or their fans have anything to do with. We must accept this and move on to the next phase of digital content distribution that will give artist and content owners the freedom to decide their own destiny.

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Blogger Greg Vendetti said...

Dear Listener,
I am writing you today to extend a notification of opportunities at hand for everyone who cares about music and the artists who bleed on the microphones that share the common vulnerability we can all relate to. My slogan, “Join the Revolution,” can be mistaken for many things, including a meaningless way to draw in certain crowds and attract new potential audiences. But I wanted to share with you the reason behind such a statement and give you a chance to diminish any negative opinions pertaining to such an open ended idea.
The music business is on the verge of change and it has been for quite some time. As we all know, the industry has recently gone through many stages of retraction from its usual methods and processes which have generated much discussion amongst the music and business communities. Since the digital platform has become the prominent medium for artists to connect to their fans, new ways of distribution, communication, advertising, and self-management have left the record companies in a query as to what happens next. Such services, up until now, have been the purpose of the major label and thus the motivation for “making it” as an artist. But because of the possibilities created by the internet and other digital mediums, artists can now accomplish their goals of spreading their music to the public on their own, thus leaving the major label useless. This new wave of modern music business is a great step in the industry. For so long, it has been inundated with poor business ethics and “sleaze-ball” tactics that give the business a bad name.
Although it is an exciting time for everyone, it brings about new problems as well. Because of the increased accessibility of music, the market has become saturated with mediocrity and low standards. This has caused a problem for the artists who have genuine talent and are lost within the crowds of off-key performers with over-achieving tenacity. This brings us up to speed as to why you, the audience is so important in this new stage of the industry’s evolution.
As the growing concerns amount to monumental levels, it is now known that the music community wants change to occur. You, the listener, knows that there is something wrong with the way music has been presented to the public and have the power to change it. “Join the Revolution” was thought up as a way to reach out to my fans and show them that they are unique and possess the intelligence to know what is moral and good. That they are not blinded by the light being shined in their eyes by large corporations and standard ways of practice. That they are the ones that hold the fate of the music industry in their hands. We alone have the power to change the way music is displayed and communicated to the public. Now it is the time to stand up and express your opinions on what you believe is worth knowing, worth listening to, worth playing, and most importantly, worth changing.
I invite you to conjure any opinions for or against my own. These words are merely an expression of myself both as an artist and music lover. I do not intend you to follow any protocol but to make your own. I also encourage you to research this movement in greater detail and discuss it with as many people as you can. Revolutions are hard to come by, they are far and few between. But circumstances as these are grounds for new ideas, new leaders, and new practices. Be apart of what is to come and know that you are what drive the artist and music to live. My thanks to all of you that listen to my music and support my movement and career. I hope to see all of you at the next show with a new head on your shoulders. Think. Love. Listen.

Sincerely,
Greg Vendetti

Join the Revolution.

www.myspace.com/gregvendetti

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