Manage for Success: The Crystal Ball, Newsletter #57, January 2006


"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 2006 by Keith Holzman, Solutions Unlimited. All rights reserved.

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A great deal has happened during the first five years of this decade that has had an impact on the music business. So I thought I’d take this opportunity to look into my somewhat hazy crystal ball and attempt to predict the future and how it may have an effect on our industry.


Sales of physical product -- basically CDs -- has continued to decline. After a slight up-tick toward the end of 2004, CD sales fell seven percent in 2005 to a total of 619 million units. This makes four out of five years of weakening sales. That's a trend that's unlikely to change, and may in fact, accelerate for the remainder of the decade when CDs are likely to have become a commodity only for specialized markets and customers of niche product.


The number of multi-platinum albums also declined -- 19 percent, from 240 to 194 -- another downward movement that's likely to continue.


In contrast, simultaneous P2P file sharing levels increased more than 23 percent globally, and 42 percent in the U.S. from 2004 to 2005, according to information gathered by Big Champagne. This is a trend that will increase markedly, despite attempts by the industry and many governments to put a damper on it. It seems that for every site that gets shut down, one or two new ones pop up, a cancer that's spreading way too fast to be easily controlled.


The one piece of good news is that legal sales of individual tracks steadily increased during the last year, especially in the final months. Paid sales amounted to 352 million tracks, which is more than twice the number in 2004. In fact one song, Gwen Stefani's "Hollaback Girl," was the first single ever to sell a million downloads.


The question is whether legal downloads will ever outstrip illegal ones, and this is something I don't think will happen until every major nation puts teeth into its laws and stamps out the illegal trading of music and other intellectual property. And that's not something that will not happen easily or quickly, if at all.


Complicating the legal download situation is the proliferation of music subscription sites. These allow users to download an enormous quantity of music -- all of which will remain on their hard drives so long as they continue to pay the monthly subscription fee. However, if a user misses a single payment, none of the music will be accessible and would have to be downloaded again if the subscriber wishes to continue. It's hard to know what this will mean to record labels, but I suspect that royalty paying will be fraught with problems, and that indie labels will receive little compensation for use of their intellectual property.


On the other hand, per-song downloads, such as from Apple's iTunes Music Store, provide an audit trail that should enable property owners to be appropriately compensated.


The majors have placed a great deal of pressure on Apple to allow for variable (read increased) pricing per download. I suspect this is something that will happen eventually, not just at Apple, but at all the legal download stores. Another suggestion floating through the ether is that downloads may eventually be priced based on their demand -- the higher the demand, the lower the price. Wouldn't that be a nightmare for the online stores, but also for label accountants and auditors! In any event, New York State Attorney General Eliot Spitzer is looking into the legality of the most favored nations clauses in current agreements between the majors and the online sellers. What is most likely to happen, and not very far in the future, will be that prices of some tracks will be reduced, while other will rise.


A concomitant of the decline of CD sales is that distributors will find it more difficult to be profitable, resulting in the demise of the weakest ones. This will, have an effect on all labels, but especially independents, who are always last in line to get paid.


Paralleling distributor problems is the recent closing of quite a few influential independent record retailers throughout the country, especially in New York and Los Angeles. This will put additional pressure on indie labels to get their music to their fans. I suspect that music retailers -- both chain and independent -- will continue to suffer sales declines, and will be forced to sell more non-music commodities, or cease operation.


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Technology will continue to have a great impact on music listening and purchases. Many distractions impinge upon people's leisure time -- video games, television, and movies, for example. Time-shifting via DVRs (digital video recorders such as Tivo and Replay) has enabled us to watch what we want, when we want, whether on a huge 60-inch flat panel TV, or a 2.5-inch, 320 x 240 pixel iPod.


While technology is always progressing, we're in a transitional period at the moment. So here, then, are a few technology-related predictions.


Digital Radio over satellite -- Sirius and XM -- will continue to find new subscribers, but it will be a long time before it finds a significantly large audience to sustain profitability.


HD (High Definition) Radio will replace most conventional "terrestrial" listening during the next five years. Conventional -- analog -- listening will decrease, once there are a significant number of HD receivers and radios in use. In fact many stations you probably listen to regularly in analog are already transmitting high fidelity digital transmissions, piggy-backing on the same frequency as the analog signal. Audio quality is much superior, particularly for FM, and there will no longer be the problems with multipath that we have now.


Quality of audio will both increase and decrease at the extreme ends. In other words there will be substantially improved sound for the "golden ears" set due to high definition DVDs, with their enhanced audio, frequently including surround sound capability, as well as HD Radio as discussed above. And don't count out DVD-Audio or SACD as excellent carriers of quality audio. They may yet find their audience.


On the other hand, many people have become inured to the poorer quality of MP3 downloads which use compression to save space and transmission time, as well as satellite radio which also transmits a compressed signal. These people are likely to become accustomed to an inferior quality of sound.


Many younger people will experience hearing problems as they age because they spend so much time listening to music at extremely loud levels at concerts, and also because they listen to their MP3 players at too loud a volume using poor-quality earbuds or earphones.


There will, in the next two to five years, be an agreement to end disparity and agree on standardization of DRM (Digital Rights Management) replacing the many competing and non-complimentary versions currently in use.


I see a further consolidation of the majors until such time as they implode because of generally poor quality of releases, enormous size, inefficiency, and lack of artist development.


However, I predict a bright future for adventurous independent labels. These are labels who release quality music for their specific constituencies or niches, and who make increasing use of new technologies and inventive use of the internet in marketing to their audiences, while traditional avenues for marketing and retail decline.


Bold indie labels will make album graphics, lyrics and notes downloadable with purchase of music from their own websites.


Finally, aging Baby Boomers are particularly likely customers because they'll have more time and disposable income, and they don't think of music as being "disposable," as do way too many of the younger set who think music is theirs for the grabbing. The Baby Boomer generation is more accustomed to buying CDs to keep in their collections, than they're used to downloading.


Do you agree with my predictions? If not, feel free to submit your own thoughts and I'll consider publishing them in a future newsletter.


Until next month,

Keith Holzman -- Solutions Unlimited

Helping Record Labels Manage for Success.


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Copyright 2006 by Keith Holzman, Solutions Unlimited. All rights reserved.