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2006: The State of the Music Industry
Is Tower Record's Closing
the Beginning of the End for the Music Biz?

Commentary by Moses Avalon, December 2006.

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Jane is my twenty-one year old nanny and she is in a quandary.  She loves a good sale and Tower Records is practically giving away music as they get ready to close their doors forever. This holiday season people will be heading in droves to what was once the most successful music outlet in history to pick its bones. 

There’s just one problem.  Jane, like many her age, have never bought music in a brick & mortar store.  She has some anxiety about walking through aisles and aisles of product and then there’s the pressure of making decisions about what fits into her budget.  CDs are about $15 each, but she only wants one or two songs off any given album.  What to do? “I usually buy the single directly from the artist’s website.  I don’t like having to carry a bunch of stuff home and then there’s all the shrink wrap to deal with.” 

Question: Has Jane just about summed up the epitaph of the music business?  Many say yes.  But they would be wrong. 

I have grown ill listening to pessimists blabber on about the “dying industry.” What sales reports are they reading? The business has earned more new revenue in the past two years than ever before. Are these so-called experts saying that Tower’s closing is the death knell for the CD and the death of the CD, is the death knell for the music business?  Do they expect us to swallow that CDs will become roof-shingles; that copyrights will become an antiquated concept; one that will die a thousand deaths while taking with it the lively-hood of an entire industry?   

Let’s attack the Tower myth first. Sure, the Tower is gone. But so what?  Have you been to Amoeba Records on a Saturday night? Sunset and Vine in Los Angeles .  Packed with bargain-hunting hipsters who love music.  Check it out. It’s a friggen religion.  There you can get the same CD Tower once sold for $15 for about half price.  That’s about 50 cents a tune, if you do the math. It’s a used CD, sure.  But so what? CDs sound the same after a thousand plays and you can play/burn them on or to as many devices as you like. 

There are scores of used record stores popping up like zits on a thirteen year old all over the world.  These are the new “mom & pop” stores where we liked to shop in the old days; where the store clerk actually knows something about the records he’s selling.  This bunk about Tower signaling the end is just that.  It’s coupled with another rumor that I heard this year that Best Buy is phasing out its CD section.  Completely false. The CD as a loss leader is petrified into their business plan well into the middle of the century.  In fact Best Buy just made a deal to stock an unprecedented 80 weeks worth of physical product this month.  Don’t tell me they’re going to stop selling CDs. 

“But I don’t buy too many CDs,” says Jane, “I find I don’t listen to them and they take up space.  Instead my friends make me MP3 mixes.”

Yes, yes. We call that copyright infringement in the music business.  No one gets paid from copies your friend makes and gives out as holiday gifts and we have to listen to record companies whine that they’re losing money. But regardless, piracy is how many a music lover is introduced to new songs these days. It’s the radio of the new millennium.  This will never change. Is it hurting the music business at large?  

The trade organization for the major record labels has called the file-sharing of music, “a public rapping.” The RIAA is the group that certifies records as gold and platinum.  They are also the ones who sue 12 year old girls and grandmothers for downloading music and sharing it with peer-to-peer networks for free. It’s a tough job, but they say someone has to do it.  They claim that piracy has cut sales by almost 30% over the last few years, and yes, any fool can see that file-sharing has affected the business. But has it been in a negative way? Has it really cost the labels “big money” and is the business really suffering because of it? 

No. Quite the opposite.  I’ll tell you a secret.  Revenue is not really down at all.

In 2005, album sales up through the third quarter (Q3) were 414.5 million units. In 2006 that same benchmark is 393.1 million.  A 5% drop.  Not 30%.  Not even 10%.  Extremely negligible and better than other industries like computer and automobiles who have experienced an overall 12% reduction in gross revenue, this year alone.  News flash: the country is in a recession.  Sales are down everywhere. 

Okay.  I hear you out there reading this. You’re saying, “But Moses, 5% a year adds up. Doesn’t that mean they’ve lost money and isn’t that a bad thing.” 

No because that 5% is more than made up for. Let me tell you a few more secrets.

Aside from reduced overhead from massive firings at major labels and the huge dividends it brings, there’s this… 


-- They don’t include CD sales of independent artists, only a decline in sales of titles on major labels. Indie sales make up about as much market share as all of Warner Music Group, which is about 20%.  So they are not including album sales equivalent to all of WMG in their calculations of “lost sales.” (And by-the-way, indie music sales have not been effected that much by file-sharing.  Most theft is Top 40.)

-- They don’t include the approximately two billion legally paid for downloads from iTunes, Yahoo e-Music and many others. These are not CD’s, technically, so they don’t count them in “reduced sales” even though record companies are getting tens of millions in new revenue from these sales. Also worth noting is that there has been a 71% increase for these types of sales. (2005: 244.2 million, 2006: 418.6 million)

-- They don’t include used record sales from Amoeba and other such stores.  These sales (about 100,000 units a week) go unreported to SoundScan.  Record companies and artists also don’t get paid off the sale of used CDs.  So in the mind of the RIAA it’s not a real sale.

-- They don’t include the fact that the licensing fees for getting a hit song in a soundtrack has increased 1000% since 1995 (climbing from about $80,000 to about $1,000,000) with no additional hard costs to the label.

-- They ignore the 300,000,000 ringtones that have generated about .30 cents each in new revenue (about $90,000,000) for labels in the past three years and due to a new ruling in the copyright office, will increase to about .50 cents each in coming years.

-- They are omitting the fact that downloaded music (ringtones, iTunes and subscription-based services) don’t require manufacturing costs nor is there any returned or damaged merchandise (with rare exception) from digital sales. So, in essence, record companies make substantially higher profit margins on newer sales.

-- They are also hoping that you forget something very relevant about the future buying habits of today’s music lover; that twenty-one year old Jane, who buys her music on-line or gets it illegally, will, in 2016, be thirty year old Jane.  When she does she will tire of listening to her old 128 AAC files now that she has a house and her husband has bought a cool 10.1 home entertainment center and they both realize that MP3s sound like mud. They will also get real perturbed that iTunes keeps “upgrading” the bit rate and making them reburn their record collection over and over again every time they come out with a new version of the iPod; one that will NOT be downward compatible with 128 files. (Remember that the computer industry and the music business both make money off planned obsolescence). Now that she’s a bit more mature, has a bit more money, and—here’s the key part—her tastes have solidified, she’ll want to OWN her music instead of renting it from subscription services over and over again.  That way, whenever there is a new generation of Personal Listening Device, all her significant other has to do is re-burn their record collection for free. No DRM, no limitations, no fees. Total cost is about 50 cents a song and an afternoon of time.  But... they need an archive to do this.   Where-oh-where will they turn?  I’ve got an idea: a record store with its aisles and aisles of CDs.

And keep in mind a few stats from the US Census Bureau: "Roughly half of the nation's population will be 40 by the year 2010. Right now about 4 million people per year are turning 50.” That's over 10,000 people a day. And they don’t like MP3s. Although the buy downloads, by and large they still all tend to buy some sort of disk-based music product.(DVD, CD, Super CD, Dual Disk, etc.)

So, is the closing of a major CD chain, like Tower, really the end of the music business as we know it? And will downloads kill the radio star? 

I think not. Did the closing of Woolworths stop people from buying cheap junk?  No. Chains close all the time without it meaning Armageddon.  And I can assure you that the closing of Tower Records will have just about zero negative impact on Best Buy, K-Mart, Virgin and Wal-Mart—where about 95% of America buys its music; or iTunes, Yahoo, AOL, Napster, E-music and Rhapsody, where the other 5% buys their music. Transition and evolution is the name of the game.  They are as natural as a metamorphosed caterpillar.

So, when record executives give interviews that bemoan the pending death of the music business to me they just sound like old school farts, trying to crawl back into some decomposing chrysalis. 

Look carefully at their credentials.  Most of them were recently fired from their cushy, six-figure label jobs.

Labels are not into wholesale nepotism anymore. They are hiring from without, not within.  They are streamlining their staff because you no longer need a team of A&R executives making an average salary of $175,000 a year, with expense accounts for travel to hear a new act. Why bother when you can have three 20 year-olds for $30,000 a piece doing the same job by searching MySpace.

You don’t need Marketing VPs at $250,000 a year when you can outsource a viral marketing company for a tenth of that price.  Or how about lawyers at $500 an hour to negotiate the same deal over and over again?  (It couldn’t last for ever, fellas.  You had to know that.)  So just because record companies have wised up and trimmed the fat doesn’t mean that we’re all doomed.

Mass firings does NOT equal dying business.  It equals a changing business.

We don’t have cobblers anymore either, but we still have a shoe industry.

Jane looks at her toes. Her thrift-store bought sandals are a bit worn. “I love music but maybe today I’ll buy some new pumps instead.  I never have enough of those.”

That’s the spirit.

Happy New Year.  And it will be.

Moses Avalon


Moses Avalon is former record producer and recording engineer who has worked with Grammy winning artists and received RIAA platinum records. He is now the one of nation’s leading music business consultants and artist’s rights advocates and author of a top selling music business reference, Confessions of a Record Producer. More of his articles can be seen at www.MosesAvalon.com .

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