Manage for Success: The Perils of the Record Business Today, Newsletter #22, February 2003

"Manage for Success" is a free monthly newsletter for record label
executives who want to operate their companies efficiently and
successfully.

It's published by Keith Holzman of Solutions Unlimited, a management
consultant, troubleshooter, and trusted advisor, and is based on his many
years as a senior executive in the music industry.

Copyright 2003 by Keith Holzman, Solutions Unlimited. All rights reserved.

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It's clear from even a most casual reading of the recent press that the music industry is in a terrible state these days. And it’s not going to get better for awhile -- at least not for the five majors, Universal Music Group, Warner Music Group, Sony Music Entertainment, BMG, and EMI Recorded Music. They lost a significant amount of money last year, except for Warner which showed a small profit in the fourth quarter.

Industry album sales for all of 2002 were off 11 percent in units, 16 percent in dollars. Total music sales were off 13 percent. Sales for this January were reportedly off 16 percent from last year's low.

CD sales were off 9 percent, with cassette sales off a huge 40 percent! By genre, only country showed a significant increase -- almost 13 percent! Sales of the Top 10 titles continue to decline.

There are a number of reasons for this:

Free (pirated) downloading of music via Kazaa and their ilk,
Public perception that CDs are too expensive,
Too many records being released,
The poor economy
Too few releases of noteworthy good music.

I think the last is a very key factor. From my own experience, I bought a lot fewer CDs last year because there wasn't much that I deemed worth spending my hard-earned money on. And I'm hearing the same from music business colleagues, and friends in general.

There's no doubt that free, illegal downloads have made a significant dent in the majors' income. Sales of blank CD-Rs are reported to have risen 40 percent last year. They're not all being used for storing photographs and computer back-up files!

The majors were asleep when Napster first surfaced a few years back. At the same time they were spending far too much time, money, and effort trying to keep consumers from copying purchased CDs through the aborted development of such copy protection schemes as the Secure Digital Music Initiative (SDMI.)

Then they took too long developing their own proprietary on-line services such as Full Audio and Pressplay. These and others failed to interest the public because one had to subscribe for a period of time and also had to know which service to access for the desired song. Interested music lovers then had to commit to spending a certain minimum per month -- about ten dollars, even if they only wanted to purchase a single track! And then the downloads carried a number of restrictions such as not being able to transfer purchased tracks to another computer, or offload them to such devices as iPods and other MP3 players. Further, their software was inaccessible to owners of certain platforms such as Linux and Macintosh.

When the majors eventually recognized the public's indifference, they started to cross-license their music so that people could buy from most any service they chose. And although legitimate download sales increased late in 2002, it's not been anywhere near enough to compensate for illegal downloads.

As to the matter of price, last May the RIAA commissioned a report which shows that, even though the public perceives CDs as being too expensive, in fact CD prices fell 32 percent between their emergence in 1983 and the end of 2001. During the same period the Consumer Price Index rose almost 78 percent. If CD prices had risen in the same proportion, the average price in 2002 would have been over $38 dollars. Other forms of entertainment rose even more, so that the average price of admissions to entertainment and sport events increased by 142 percent!

In fact, CDs may be even more of a bargain. In 1983 the average length of a CD was less than 42 minutes, whereas in 2001 the average length was 55 minutes -- a 30 percent increase.

Notwithstanding these surprising numbers, one does have to deal with the public perception that the music industry is charging too much for its music.

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How can you deal with these and all the other problems that beset the industry?

Simply, phone me to take advantage of my many years of record industry management experience. I'm an expert at devising procedures that can be tailored to your specific needs, and at showing you and your staff how to implement new solutions.

Don't hesitate to call to discuss your particular situation and to see how I may be able to assist you to more effectively manage your label for success.

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There were approximately 35,000 new CDs released in 2001, and slightly fewer in 2002. That's an awful lot of titles to record and market. How can the public possibly be aware of what's come out, and more important, what's worth paying for!

The majors pretty much have a "lock" on what gets advertised and played on commercial radio. Add the fact that just two radio networks own or control a substantial part of the airwaves and what music gets broadcast. Clear Channel, which is the target of an investigation in the Senate by Russell Feingold (Democrat of Wisconsin) for "anti-competitive business practices," owns more than 1200 stations.

Infinity Broadcasting (which is a division of Viacom) is the other large chain. It controls about 185 stations in 40 markets.

An interesting aspect of the problems the majors are having is the reality that they're retaining fewer and fewer previously successful artists. For example, a front-page article in the Billboard issue of February 8 addresses the fact that such former leading country artists as Clint Black, Billy Ray Cyrus, Randy Travis, Chely Wright, Suzy Bogguss, and many others have been dropped by their labels and are now free agents. Most of them were gold or platinum selling artists just a short while ago!

So why were they dropped?

For a few reasons. They probably became too expensive due to the higher royalty rates that successful artists were able to attain, and because of the extremely high costs of marketing. Promoting to radio, particularly country radio, has become prohibitive and cut-throat. Another reason is the belief that the majors are always looking to sign, in the words of a new Vince Gill single, the " Next Big Thing."

And if a former multi-platinum artist now sells "only" between 500,00 to a million units, the majors just can't be bothered.

Of particular interest to readers of this newsletter is the fact that sales by independent labels -- as a group -- continued a five-year increase of market share, contrary to the majors who experienced a decline in 2002. While younger people -- those under 25 -- are buying fewer CDs, those over 50 are actually buying more music.

The younger buyers have probably cut back due to illegal downloading and fewer worth-while releases, whereas the ability to sample short snippets and buy directly from a label or from such on-line sellers as Amazon.com, has made it easier for more mature music lovers. It's also due to there being more good music that appeals to the older group, than what the majors are pitching to the younger crowd.

So, as owners of predominantly independent labels, how can you go about dealing with these industry problems? Well, you'll either have to call me, or wait until next month's Newsletter.

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Copyright 2003 by Keith Holzman, Solutions Unlimited. All rights reserved.