Manage for Success: Declining Trends, Newsletter 55, November 2005


"Manage for Success" is a free monthly newsletter for record label executives who want to operate their companies efficiently and successfully, and who have indicated their desire to receive it. 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 2005 by Keith Holzman, Solutions Unlimited. All rights reserved.


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The incredible sales success of Apple's iPod, accompanied by the growth of its online iTunes Music Store, the remarkable surge of music-based activity on MySpace, the "death" of Grokster, and an increased interest in making music by individuals, would incline one to think that there should be a continuing significant growth in legal sales of downloadable music.


However, this appears not to be the case.


Although by nature I'm a positive, upbeat guy, I have considerable concern that online music sales may see a leveling off, or even a slowdown, during the next many months. Yes, the first six months of 2005 saw a worldwide tripling of paid downloads from the same period of 2004, according to IFPI (the International Federation of Phonographic Industries,) and the RIAA has published information that increases in the U.S. were comparably significant.


But Digital Music News recently reported that paid downloads appear to have leveled out during the third quarter, with sales only about 12 percent greater than the first quarter of the year, and only three percent above the second quarter. This has concerned analysts at research-driven securities firm Fulcrum Global Partners. It should concern all of us as well.


A recent report from Bloomberg, based on numbers from SoundScan, indicates that there's been little CD sales improvement during the current quarter, with sales in late October about on a par with figures from late May. The Bloomberg report goes on to suggest that the incredible number of iPod purchasers are not buying as many tracks as the record industry and Apple might have wished. Instead they are copying music from CDs they already own, and are loading it on to their iPods.


In fact, many of us iPod owners have never bought a single tune from Apple. This, despite its considerable catalog of two million titles available from all the majors and an increasing number of independent labels. The aforementioned Fulcrum Global Partners reported U.S. annual downloads dropped from 25 to 15 tracks per year per individual iPod.


Although the iPod appears to be addictive, paid downloads are not. Additionally, while Apple's stock is near an all-time high, those of the major labels or their owners have declined. EMI stock dropped 20 percent this year, Warner Music Group is a few points below that of its stock offering, and Sony BMG, although not publicly traded, is having a very poor year.


No one knows how successful the renting of downloaded music may turn out to be, or what income this will create for the music industry, but early results from Napster and Real Music are not encouraging.


Amid this disheartening news a looming fight is possible between Apple and the industry because Apple would prefer to sell all of its tracks at 99 cents each, whereas the four majors would prefer variable pricing based on demand for a song, but with generally trending higher prices.


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Income from mobile phones is mostly for ringtones, and that craze is expected to abate in the near future, while sales of music for Motorola's recently introduced ROKR are apparently minimal.


And though Grokster may now be defunct, there's still a huge amount of illegal activity on the download scene, with pirated downloading not declining. While file sharing was steady during October, year to year increases remain substantial. Average simultaneous P2P usage in the U.S. in September was 6.7 million, worldwide was over 9 million. That's a lot of illegal trading happening at the same time.


It appears that many people still don't realize that unpaid downloads are illegal, or they just don't care. Meanwhile, those who are willing to pay for their music, seem to prefer to download just one or two songs from a new album. That's great for the consumer, but it has cannibalized potential album sales, hitting the industry still further.


How can we as an industry deal with this?


I believe the most effective way to stem the decrease in overall sales is to improve the quality of what we release. Too much of the music that's issued each year is mediocre. New albums from quality artists are often of uneven quality, with only one or two respectable tracks. Labels should have the courage not to ship inferior music, even from otherwise very good artists. Instead, improve a project, or don't ship it at all.

Therefore, it makes the utmost sense that labels sign only genuinely remarkable artists, and then release nothing but the most interesting and sales-worthy music -- in other words, truly good songs performed with truth, energy, and spirit.


Until next month,

Keith Holzman -- Solutions Unlimited

Helping Record Labels Manage for Success.

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Copyright 2005 by Keith Holzman, Solutions Unlimited. All rights reserved.