The shit hit the fan this week, and it wasn’t like a fat kid
doing a cannonball into the deep end of the pool but rather like a gale-force
hurricane smashing into the state of ship of the recording industry. A
front-page Wall Street Journal story by Ethan Smith reported that CD sales have dropped 20% this year-to-date
compared with 2006. Smith considers this “the latest sign of the seismic shift
in the way consumers acquire music.”
Uh, maybe....
Let’s break down the points covered by the WSJ article and
commentary offered by other pundits on a point-by-point basis and the Reverend
will offer his own commentary.
Music Retailers
Smith points out the shuttering of almost 800 music stores
in 2006, including the much-documented 89 units lost when Tower Records went
belly up. Musicland cut loose 500 of its 900 total Sam Goody’s and Media Play
stores. Smith doesn’t connect the logical dots, however – most of the
traditional music stores that closed during the year were poorly-managed chain
stores struggling to find their place in the modern world. The lack of CD sales
only added to these store’s management problems, they weren’t the cause for bad
business decisions.
There’s no question, though, that the overall loss of 800
retail stores will impact the recording industry negatively. The loss of Tower
alone will severely cut much-needed cash flow to the many indie labels the
chain supported while the loss of hundreds of mainstream chain stores will
certainly flare up as more than a mere blip on the major label radar.
Truth is, however, the “Four Families” of the recording
industry brought a lot of their retail woes upon themselves. In order to
artificially pump up CD sales at the end of the ‘90s (and thus inflate
executive bonuses as well), the labels went to big box and chain giants like
Wal-Mart and Best Buy with special deals, CD exclusives and lower wholesale prices,
moving truckloads of merchandise along the way. Smith points out that these
“megaretailers” represented 20% of the retail market a decade ago; today they
hold a whopping 65% of the total sales market – a piece of the pie taken
directly from traditional music stores.
When Best Buy puts the new Albert Hammond Jr CD on sale for
$7.99 during its first week of release, nobody really benefits but the record
label, and even they enjoy diminished returns. The megaretailer uses the disc
as a “loss leader” to attract consumers to the store to hopefully buy more
profitable electronics, and other (smaller) retailers get the shaft as they
can’t buy the CD wholesale at what the megaretailer is selling it for retail.
The artist gets squat because royalties aren’t paid on special offers made to
retailers, and the consumer, although getting a cheaper disc, gets screwed in
the long run when there are fewer record stores, labels and musicians.
Honestly, brick-and-mortar retailing is taking a hit across
the board, and not just in music. High-end electronics merchant Tweeter
announced this week that it will be closing a bunch of stores, following hot on
the heels of Circuit City’s similar recent
decision. Computer retailer Comp U.S.A. is shuttering locations as
well, and several restaurant, bookstore and furniture store chains are dropping
individual stores due to flagging sales and consumer interest.
What can be done about this loss of sales from traditional
music retailers? The labels need to spread the wealth and provide independent
retailers with more frequent exclusive recordings and competitive pricing. They
need to pull back on their reliance on big box stores for sales and work on
developing better relationships with traditional music stores. To some extent
this is being done for them as megaretailers like Wal-Mart, Best Buy and even
Borders are cutting floor space once provided music in favor of better-selling
products like DVDs and video games. Labels, it’s time to remember who brought
you to the dance....
Digital Music Sales
Smith correctly points out that “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.” To some extent
this is true, but only to some extent. Digital sales are still growing, with
the sale of individual songs up 54% over the same period last year. Sales of
digital “albums” have slowed down noticeably, however, and after several years
of triple-digit growth, I think that the consumer is beginning to show digital music
fatigue.
Smith goes on to parrot the industry party line, blaming
shrinking CD sales, indirectly, on Internet piracy. “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.”
Notice how Smith specifically mentions MP3 blogs, which many
informed observers believe will be the next recording industry killing field.
The industry is gearing up to scapegoat MP3 blogs during its next round of
finger-pointing, ‘cause those shifty bloggers are surely stealing sales away
from legitimate digital retailers by giving the juice away for free. Never mind
the fact that most MP3 bloggers only post “hot links” to digital music files
for a short time (a couple of days to a couple of weeks, tops) and that music
blogs are one of the best and most efficient ways to promote both new and back catalog artists. If anything,
the labels should be flooding the top 200 or so music blogs with a slew of free
music and promotional materials (starting with the Reverend’s “Trademark of
Quality” blog). I would suggest that in this day and age, music blogs are
better at promoting new music than rags like Spin or Rolling Stone.
But yes, there are a lot of sources for the consumer to
choose from when they go looking for digital music. They can pay .99¢ per song
to iTunes, knowing full well that the bulk of the money goes into the major
label’s pockets (and not the artist’s). They also know that their iTunes songs
won’t play on other portable players. They can buy DRM-free music from eMusic
or go with indie artists distributed through the Weed network. P2P is the primary source for free music, though,
and according to some estimates, one billion songs are swapped online each
month through peer-to-peer networks.
Label lawsuits against 18,000+ consumers have done little to
stop the flow of music through the P2P nets and, in spite of the industry’s
efforts to cripple sites like Kazaa and Grokster with expensive legal actions,
a hundred decentralized Bit Torrent trackers have popped up to take their
place. The labels would do well to raid their vaults and flood legitimate
digital retailers with music, throwing a few choice song tracks and albums into
the P2P and Torrent streams while they’re at it. Imagine, if you will, a single
music fan discovering and downloading the first album by a previously unknown
artist on a Torrent and liking what they hear. Will they be more or less likely
to buy and try subsequent albums from the same artist?
Ken Fisher, in an excellent Ars Technica article, writes “all the while, legal downloads continued to
grow, but so far the focus from analysts and the press has been on how legal
downloads have failed to ‘fill the revenue gap’ created by the shortfall in
traditional CD sales. What deserves further examination, however, is whether
legal downloads are causing that
shortfall. We do believe that they play a significant role in the music
industry's current situation.” Fisher has a valuable point, and one that
deserves an in-depth investigation by the labels.
Personally, I believe that it’s six of one, half dozen of
the other. Yes, digital sales are probably cannibalizing the sales of physical
product to a point, as does the availability of free (ostensibly illegal) music
on Torrents and P2P. However, at least one study concludes that P2P may not be
affecting CD sales at all. I personally believe that the labels have caused
much of the freefall in sales, which brings us to our final point....
Compact Disc Sales
Fisher’s Ars Technica article brings up several
thought-provoking and incredibly valid points, presented with a much better
understanding of the industry than the WSJ’s Smith. Fisher ponders “the question is: how often does a consumer
opt to buy just one or two songs off an album rather than buy the whole thing?
This phenomenon must affect the top of the music charts quite viciously.”
Fisher points out that at one time, you were forced to buy a $15 CD just to get
the one song that you wanted. Today, you can buy it for .99¢ or less from a
digital retailer.
This, too, is the fault of the major labels. During the
mid-90s, when CD sales first started showing signs of stagnation – widely
believed to be the result of music fans finally completing the costly changeover
from vinyl to CD – the labels put their marketing arms into high gear. You have
to understand that there has always been an uneasy balance in the music industry
between “art” and “commerce.” Sometimes you get lucky, and a band like R.E.M.
that is universally admired for its “art” will crossover into “commercial”
territory and move a bunch of units. But usually one side (commerce) funds the
other (art) and the labels managed to have their cake and eat it, too….
However, from around 1996 or so, when the labels first
crammed the Backstreet Boys and NSYNC down the throats of teenage music buyers,
the fragile balance between art and commerce was skewed the wrong way. Smelling
major money to be had, the labels went overboard in pushing studio-created
“frankenbands,” pop tarts like Christina and Britney and pushing vacuous
outfits like Creed and Third Eye Blind to the top of the charts. With
predictable results, the labels taught a generation of music buyers to value
the hit single above all else, and that you had to buy the album to get the one
song you want. This was profitable, also, because the constant
churning-and-turning of performers meant that you never had to pay higher
royalties or reduce recoupable expenses for some prissy “veteran” musician.
Under the late-90s business plan, the artist was irrelevant.
Boy band members were mere stereotyped caricatures, easily interchangeable;
worse yet, pop tarts like Britney were sold entirely on teen dreams and sex
appeal. There was always another O-Town or Mandy Moore around the corner to be
exploited, and the good times would roll forever…or, at least, until 1999, when
the industry would have you believe that it was Napster that killed the golden
goose. Only we know better. With the exception of Justin Timberlake, how many
of the boy band guys from the ‘90s have a career today? Yet people still buy
Led Zeppelin and Jimi Hendrix and Black Sabbath and Pink Floyd albums year
after year.
Napster merely tilted the playing field in favor of the
consumer, teaching people that they didn’t have to buy what was being crammed
down their throats by the labels. It opened music lover’s eyes to a world of
possibility and it comes as no surprise that the year that Napster reared its
ugly head (1999), the industry enjoyed its highest sales in history ($14+
billion). Napster allowed consumers to “try before they buy,” and people
discovered music that they didn’t know existed. Napster supported overall CD
sales even as it killed the “hit single.” As for all those people that “stole”
music from Lars Ulrich and the major labels, it never happened. No matter what
the label bean counters believe, music is a luxury for most people, and there
is always going to be a large number of people that you will never sell music to,
regardless of price or format. Some of these people are going to grab free
music…but you can’t lose sales that you never had in the first place.
The WSJ’s Smith writes that “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.”
Well, the chickens have come home to roost. By creating
allegiance to the “blockbuster” hit single rather than trying to develop life-long
music fans, the labels have all but destroyed the notion of the “catalog
artist,” that long-term moneymaker that pays the bills. As a result, today you
have a generation of music buyers that refuses to buy the album when they can
get the song cheap (or free). That’s why artists like Norah Jones have
experienced diminishing returns and why albums are topping the charts with
fewer than 100,000 copies sold.
The Big Fix
It may be too damn late to fix the problem of shrinking CD
sales. Contrary to what they would have you believe, the “Four Families” are still
bringing in lots of money, and at least two of ‘em are showing a profit on
paper. The industry still chalks up better than $10 billion in U.S. sales
annually, and that’s not chicken feed. However, I think that over the next five
years or so you’re going to see a massive restructuring of the recording
industry. Believe the Reverend when I tell you that it won’t be pretty. I’ve
offered the industry too damn many ways to solve their problems in the past.
Now it’s time for them to pull their heads out of the sand, pay notice to the
industry’s many critics, and take the steps necessary to change their wicked
ways.
Tips For The Recording
Industry (Courtesy of the Reverend):
• Lower your wholesale CD prices, which will result in lower
retail prices;
• Level the playing field between the megaretailers and
traditional music stores;
• Stop suing your consumers and anybody else that you think
is “ripping you off;”
• Develop serious long-term catalog artists to balance fast-selling
short-term “commercial” releases;
• Stop looking at P2P and Torrents as the enemy and use them
as a promotional tool;
• Launch your own online digital retailer and open the
vaults;
• Start paying your artists fairly, on both sales royalties
and licensing;
• Diversify: you have the distribution system in place, why
not sell t-shirts, posters and other musical paraphernalia while you’re at it?
