Manage for Success: Recent Developments, Newsletter #59, March 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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This month's newsletter is about many recent developments that concern our industry.


First, Billboard has recently published a number of articles of particular interest to independent labels. In the March 4 issue Ed Christman wrote a piece titled "Grabbing Sales by the Long Tail." The Long Tail theory was coined by Chris Anderson and appeared in the December 2004 issue of Wired Magazine <
http://www.wired.com/wired/archive/12.10/tail_pr.html .> The theory describes certain business practices and economic models commonly used in statistics. Products that are in low demand or have low sales volume can collectively, over a period of time, make up a market share that rivals or exceeds current bestsellers. The long tail is a description of what the pattern might look like on a graph.


Christman writes "As it applies to the music industry... in a marketplace featuring low-cost virtual shelf space and superb search technology, such slower-moving albums as deep catalog, niche genres and independent releases can collectively equal or outsell the best-selling titles." And he continues by explaining the benefits of making available as downloads older titles that haven't been recently re-issued. There's lots to gain by doing this and nothing to lose except time and effort.


By way of confirmation, Christman wrote a special report in the March 18th issue titled "2005 Sales Data: Long Tail is Wagging" and he cites lots of fascinating SoundScan statistics. Last year a total of 60,331 albums were released, an increase of almost 36% over the 44,476 titles in 2004, which itself was up of 16% from the 38,269 albums released in 2003. "Imagine all sales plotted on a graph," Christman writes, "with huge spikes for platinum sellers and tiny markers for records that sell in fits. But those tiny markers keep extending, seemingly forever -- hence, the Long Tail."


"Last year's increase in releases is driven by an influx of digital-only, indie-released product....Last year, SoundScan counted 16,580 such titles, of which 2,935 were from major labels and 13,645 were from independents."


"All told, digital-only releases sold a combined 865,424 units, an average that slightly exceeds 52 sales per release. The majors' 2,935 releases averaged almost 155 copies per album, while the independents' 13,645 releases produced total sales of 410,863, about 30 sales per title."


From 1995 through 2003 the majors generally released between 6500 and 7500 titles per year, but in 2004 they released 9404, and 11,070 in 2005 -- a huge increase in two years. In 1995 indie labels released about 22,000 titles, but this more than doubled in 2005 to 49,261, accounting for about 81% of all releases for the year.


Christman breaks the numbers down further. "In 2005, 32 new titles generated sales of more than 1 million units, and collectively, those sold about 57.2 million copies.... Another 62 titles achieved sales of 500,000 units or greater.... Also, 103 titles each sold in the 250,000-499,999 range, while another 213 achieved scans between 100,000 and 249,999 units."


"Added together, that is 410 albums that achieved sales of more than 100,000, for a combined total of 169.2 million units. In other words, last year, less than 1% of all releases... generated 70% of all sales of new releases."


"In total, the new releases issued by the majors accounted for 204.3 million units, or nearly one third of the 618 million albums sold in the United States last year. The majors issued 11,070 albums last year yielding an average of 18,454 sales per release. Independent labels and artists last year issued 49,261 albums, which collectively sold 38.8 million, or an average of 787 copies per album. But if releases that sold less than 100 are excluded -- largely comprising albums distributed by the artists that made them -- then independent labels averaged almost 2880 units per release."


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As a matter of routine, label executives and managers have to deal with a great many crises. Contact me if you're one of those having trouble coping with running your company. I've had many years of record industry experience at labels large and small, and can solve many problems. Let me help you as I've helped so many other labels "manage for success." Email me at <mailto:keith@holzmansolutions.com> so we can discuss how I can improve your business.


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The news continues with a recent Billboard symposium held in New York, Robert Sillerman, president/chairman of CKX Inc., a company that engages in the ownership, development, and commercial utilization of entertainment content, said "The myth of major distribution muscle is going to end. The people who are the true muscle in music -- the creators of it -- will assume their logical position in the economic food chain. They create it. They deserve the lion's share of the wealth from it." That's a statement I heartily agree with, and have written about a number of times in these messages.


At the same conference there was another in the many continuing discussions about Digital Rights Management. Many consumers would prefer that DRM just disappear, but there is a legitimate and reasonable need that authors of music be protected from illegal copying and downloading. The problem is that each download service uses a different DRM technology. Apple's FairPlay, for example is incompatible with MP3 players other than Apple's own iPod. On the other hand, music encoded with Microsoft's Windows Media DRM can't be loaded onto an iPod.


It's apparent that the industry should agree on interoperability, using a single DRM technology that would work on all hardware. But with competition between the major record labels and hardware and software giants, such an agreement is unlikely to happen in the near future -- another cross to bear for legitimate buyers of downloaded music.


And now we have another new wrinkle to contend with. A new company, Lala.com (currently in beta testing), has come up with a web site that allows consumers to swap CDs. Per their site "Lala.com works like an online music co-op where members trade-in CDs they have for CDs they want from other members. CDs are sent through the mail in pre-paid envelopes provided by Lala. "Trading CDs is an affordable way to experiment and try new music," said Bill Nguyen, a co-founder of the firm. Another quote: "Trading CDs has always been legal under the first sale doctrine codified in the U.S. Copyright Act. The doctrine allows the owner of a lawfully made CD to dispose of the possession of that copy without permission or payment of additional royalties to the copyright holder. As a result, musicians are not compensated from the sale of used CDs. Until now. While there is no obligation to do so, Lala is setting aside 20% of trading revenues for musicians." The cost is $1.49 per trade. Although this appears to be legal, it's yet another deterrent to sales of CD.


More news deals with what's called a "broadcast flag." Such a flag would be broadcast with music or video that would keep anyone from copying the file. An RIAA-sponsored bill is currently before Congress that would require hardware manufacturers to build copy protection mechanisms into their products. Among the targets are devices from satellite broadcasters XM and Sirius, as well as HD radio services, all of which can store pristine copies of downloaded music on hard drives for future listening. The flag would mark copyrighted works as copy-protected, and therefore not be storable for later playback.


The manufacturers are fighting this, calling it a "fundamental attack on traditional home taping practices that consumers have engaged in since the first analog cassette recorder." Interestingly, just a few days ago, Sirius agreed to compensate Universal and Warner Music Group for songs that may have been illegally copied.


I'm a fence-sitter on this matter. On the one hand I gain great delight in being able to record movies on my Replay DVR for viewing later at my convenience -- which is completely legal. On the other hand I'm a believer in paying for the music I want to listen to, whether from purchased CDs or paid downloads.


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If you're considering starting your own label, take a look at my book "The Complete Guide To Starting A Record Company" which can be ordered as an eBook in PDF form, or as a printed, spiral-bound volume. Download the Introduction and read the complete Table of Contents at <http://www.recordcompanystartup.com/>.


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Another news item concerns distributors of physical product that want the exclusive rights to administer downloading distribution for the labels for whom they distribute CDs. Many indie labels, not unreasonably, prefer to keep this under their own control, not wanting to give up a percentage of download income. Frequently, distributors will offer more favorable terms to indie labels that grant exclusive online distribution rights. In the case of a savvy label that has the knowledge and staff to administer and track such licenses, there's a lot to gain by holding on to download rights. On the other hand, a small indie might get bogged down making deals and trying to keep track of details. This is a matter each label must determine on its own.


Now about retail. According to the Almighty Institute of Music Retail (yes, that's really their name) almost 650 independent stores and about 1200 chain outlets have gone out of business in the last two and a half years. This should greatly concern indies as well as major labels. Since same-store sales have not generally increased, how will labels get their music to a CD-buying public and improve sales?


On a more positive note, the Los Angeles Times reported last week that the Los Angeles Philharmonic is going to make available for sale on iTunes and other sites concerts of contemporary music programs otherwise unavailable. The Phil will issue these concerts within a week of performance, and have received cooperation from Deutsche Gramophone, conductor Esa-Pekka Salonen's label, from soloists, the musicians and their union, and music publishers.


The same article notes that Naxos of America, a label specializing in budget classical music, has seen an increase in paid digital downloading from 3 percent to 8 percent of total revenue in the last year. Their recordings are currently being downloaded at a rate of 200,000 a month, almost double that of a year ago. Good news indeed!


I've discussed a lot of matters in this message and wonder what you, my readers, think. Feel free to email your comments. If I receive enough interesting ones, I’ll compile them and make them available on my website, or may email them as a follow-up.


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.