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What's Happening to the Record Industry?
Copyright January 2007 by Keith Holzman,
Keith Holzman
Solutions Unlimited.
All rights reserved.

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During the past few weeks I've been reflecting on what's happening to the record industry. It's obvious that we've been in a transitional state for the last few years. The question is -- what are we transitioning to? And how long will it be until we reach a more stable, defined state? By way of illustration is a fascinating set of statistics released early last week by Business Wire.

The report shows a loss of almost 5 percent in CD sales last year. That means we've experienced six years of declining CD sales --from a high of 942 million in 2000 to a low of 588 in 2006. That's a scary situation indeed. And this loss is only mitigated in part by increases of paid downloaded music in 2006. Sales of digital tracks increased 65 percent, from 353 to almost 582 million, while digital albums doubled from 16.2 to 32.6 million.

Market shares remained pretty much the same from the previous year, with UMG leading, followed by SonyBMG, then WMG, then Independent labels as a group, with EMI in last place.

Sales by genre also showed some interesting, but curious, data. Alternative music declined 9.2 percent, R&B was off 18.4 percent, Rap was down over 20, and Jazz was down 8.3 percent. Meanwhile Classical increased by 22.5 and Soundtracks by almost 19 percent! (There were no 2005 numbers or percentages listed for Rock.)

Consumers Buying Less Music
What this information indicates is that consumers are buying less music each year. Many of the younger set are grabbing, stealing, or trading great amounts of music for free without compensating lyricists, composers, publishers, or labels. But it also means that people are spending more time at other pursuits -- watching television, playing videogames, visiting Internet sites such as MySpace and Facebook, text messaging, etc. They're certainly not spending more time at the movies, because box office dollars were essentially flat last year.

Just Like the Film Business...
This leads me to muse on some parallels with the film business, another industry in transition, brought about as a result of reading a fascinating article by David Denby in the January 8th issue of The New Yorker. It's titled "Big Pictures, Hollywood Looks for a Future."

Denby "wondered about where movies were going" and "were they going any place good?" He compares the experience of watching a film on a large screen with quality surround sound in a properly equipped theatre to viewing one on a small iPod screen while listening to its soundtrack through tiny earbuds. This is a great concern to movie theatre owners because, although the actual number of admissions declined, the stability was due to an increase in ticket prices.

More and more homes are now equipped with big wide-screen televisions and surround sound, and the public has increasingly turned to watching movies at home on DVDs either purchased or via rental from Netflix. This represents a major change in the movie-viewing experience.

The parallel to our industry is that many people have gone from listening to music primarily via CDs on quality high fidelity amps and speakers, to listening on the ubiquitous iPods and other MP3 players.
Other parallels are that the movie industry is predominantly in the hands of six major studios -- all owned by conglomerates -- and the music industry is now down to four major groups, owned by some of those same conglomerates.

Per Denby "the current studio model is not aesthetically depressing but financially bizarre. The business model now swallows the studio, which, obliged to supply its conglomerate outlets and subsidiaries, cannot prevent itself from repeating a failure." That model (keeping revenue flowing to buoy parent company's stock price) is swallowing the studios and they're choking on their extreme size.

The same is happening to the big four (soon to be three?) label groups. (EMI Music last Friday, January 12, fired its chairman and vice-chairman and, as a result, there's much speculation that this may be a prelude to its merger with another group, most likely Warner Music.)

Then there's distribution, controlled in both industries by those same majors. The film and music businesses were in pretty good shape until the Internet came along and changed the way people deal with entertainment. This could end up being a plus for the film industry. As more and more theatres transition to digital projection, studios will no longer have to ship movies in 50 to 80 pound film cans that have to be individually delivered to theatres. They can instead download their films from the Internet or receive them on compact media such as small hard drives or HD DVDs.

Will the record industry in time eliminate hard goods such as CDs in favor of downloaded music? By the way, Apple just announced that consumers have bought more than 2 billion tracks from the iTunes Music Store!

Where expensive marketing and advertising campaigns have long promoted movie-going and music purchases, the film industry is seeing a decline in DVD sales after double-digit growth, perhaps in favor of more video-on-demand over cable, and downloading via iTunes. Where radio was once the primary stimulant to music sales, it's now the Internet.

Most of the major film studios own specialized "indie-style" smaller divisions, and it's these smaller companies, along with true independents, that produced some of the best movies made during the last five years. These are specialty films made for an extremely diverse and discerning public.

A music industry parallel is that the major record groups own or control smaller labels that are used like farm teams to help develop artists that can be "upstreamed" to the parent when they become sufficiently successful.

Truly independent film companies operate much like truly independent record labels. Many are quietly successful, providing movies or music to their specialized, niche, audiences. Lots of successful filmmakers work with small highly portable video cameras, and they can edit their movies in their homes or offices on off-the-rack computers using relatively inexpensive software.

Independent musicians can record in their own home or garage studios using similar computer systems and appropriate music software -- all at moderate expense. As this low cost of entry widens the field for musicians and filmmakers, the public will be the beneficiary.

Where is All of This Heading?
I think we'll see a continuing surge of the indie movement in both industries. And although the cost of entry is considerably less, marketing will be increasingly expensive. This will require greater utilization of the Internet and necessitate exploring other means of getting word out to the public. But the result is likely to be more exciting and inventive music, readily available to an eager public.

I like the convenience of owning and listening to CDs when I want, but I suspect it's inevitable that CD manufacturing and sales will continue to decline, yet not fade completely. Until another listening medium is developed to replace the CD, we'll be downloading more and more music for a fee, and we may likely end up with a form of music on demand, much like viewing movies on demand from cable TV systems.

The beneficiary of a resulting requirement for greater bandwidth will be the Internet, phone, and cable carriers, not the creators, artists, and entrepreneurs. But hasn't that always been the case?

Until next month,

Keith Holzman -- Solutions Unlimited Helping Record Labels Manage for Success.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Copyright 2007 by Keith Holzman, Solutions Unlimited. All rights reserved. Adapted from "Manage for Success," Newsletter #67, January 2007. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Keith Holzman is the principal of Solutions Unlimited, a management consultant specializing in the recording industry. A trusted advisor and troubleshooter, he is a seasoned music business senior executive with extensive experience in all aspects of running a label. He was President of ROM Records, Managing Director of Discovery Records, Senior Vice President of Elektra, and Director of Nonesuch Records. He publishes "Manage for Success," a free monthly email newsletter devoted to solving problems of the record industry. You can subscribe at his website <
http://www.holzmansolutions.com>. Keith is a member of the Institute of Management Consultants and has served as a panelist for the National Endowment for the Arts, and as a board member of many arts organizations. He can be reached at mailto:keith@holzmansolutions.com. Keith is also the author of the recently published "The Complete Guide to Starting a Record Company" available both as a 235-page, printed spiral-bound book, as well as a downloadable E-Book.

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