Manage for Success: More Recent Developments, Newsletter #63, July 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.
There have been a lot of interesting items in the news recently that effect the recording industry.
Probably the most important is a decision announced on Thursday, July 13 by the European Court of First Instance in Luxembourg -- Europe's second highest court -- invalidating a previous regulator's approval of the 2004 merger of the music divisions of Sony and Bertelsmann. The subsequent SonyBMG merger made it the world’s second largest music company, after Universal as the largest. The court belatedly ruled on an appeal by Impala, an umbrella group of independent labels and publishers, and the European Commission.
Although it's considered unlikely that the merger will be dissolved, the decision could result in a sale of certain assets. It's certainly an inconvenience to the labels, and casts fear, uncertainty, and doubt among its employees. It may also add fuel to the fire that has been inflamed by heavy infighting in the upper management ranks of the combined labels.
But the decision will also make it much more difficult for a merger to occur between EMI and Warner Music, who have been courting each other for six years and who appeared just a week or so ago to be at a stalemate as to who would acquire whom, and for how much money. European regulators had previously opposed such a merger, shortly after originally permitting Sony and Bertelsmann to combine their music divisions.
What the decision makes clear is how effective the little guys can be when they work together, and is a great credit to Impala and it’s English counterpart, the Association for Independent Music (AIM). Impala president, Patrick Zelnik is quoted by Reuters as saying “We have proved that, by acting collectively, we can challenge the unchallengeable.”
Alison Wenham, CEO of the Association of Independent Music (AIM) said "It's a landmark victory for the small players in the industry who together amount to the largest constituency. I think inevitably it's going to put severe pressure on any other majors' attempts to merge in order to increase their market power."
It might make many American labels consider the positive effects that could result from joining the American Association of Independent Music (A2IM), the U.S. counterpart of AIM. A2IM has already achieved some level of success by encouraging Apple to increase the amount it pays indie labels for iTunes downloads, placing them on a par with the majors.
Once again I'm teaching "The Independent Record Label" course this Fall at UCLA. Those interested should get the Fall Extension catalog or contact me (see email address below) for more information. The text book, not surprisingly is my own "The Complete Guide To Starting A Record Company" available as an eBook in PDF form, and as a printed, spiral-bound volume. Read the complete Table of Contents and download the Introduction at <http://www.recordcompanystartup.com/>. You can obtain your very own copy at the same site.
There's been a slightly more positive feeling in the record business of late due to some encouraging sales statistics from the first half of this year.
While compact disc sales for the four major label groups — Universal, SonyBMG, Warner Music, and EMI — have steadily declined for the last few years, aggressive, creative independent labels have tended to sustain level, and frequently increasing, sales of CDs. Meanwhile, paid digital downloads have mushroomed with a 126% increase in digital album sales during the first six months of 2006 compared with the same period in 2005, and a 77% increase in online sales of digital tracks.
In fact, Pricewaterhouse Coopers projects an over-all 5.2% compound annual growth rate of sales of recorded music through 2010, and predicted that the newer technologies will offset declining sales of physical product.
According to IFPI (International Federation of the Phonographic Industry,) 2005 global retail sales of recorded music totaled US$33 billion, the U.S. representing about a third of that figure. Recorded music is becoming the engine that’s helping to drive a much broader sector that includes subscription radio, ringtones, live performance, music publishing, and performance rights collections, and which IFPI estimates to be a US$100 billion business. For example, live performance alone was worth US$14 billion in 2005.
The Hollywood Reporter (7/6/06) notes that Universal had the largest market share during the first six months of 2006 with 31.6 percent of overall album sales (which includes sales from Fontana Distribution, UMG's independent arm. SonyBMG was second with 23.9 percent of the market. The independent sector -- which includes indie distributors operated by SonyBMG (Red), Warner Music (Alternative Distribution Alliance and Ryko) and EMI (Caroline) as well as many smaller indie distributors -- accounted for 19.3 percent of all albums sold. Bringing up the rear are WMG with nearly 15.9 percent of the market, and EMI, with a slim 9 percent.
This appears to be good news for indie labels.
For many years I've tried to stay on top of events affecting the music industry. As a result I've gained vast experience that many clients have found useful. Enlist my assistance if you need help starting a label or solving business or administrative problems that your label may be experiencing. As a trusted advisor to many record companies over the years, I treat all clients and all assignments confidentially. I look forward to hearing from you.
Chris Anderson's just published book "The Long Tail: Why the Future of Business is Selling Less of More" is based on a piece he wrote for Wired magazine in December of 2004. It's been receiving a tremendous amount of coverage both online and in print media with feature articles or reviews in The New York Times, The Wall Street Journal, The New Yorker, and Newsweek, among many others. You may recall I wrote about this theory in my Newsletter of March 2006.
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, and resembles a hockey stick with hits represented by the sharp upward portion of the stick that makes contact with the puck, and the long tail being the shaft.
Anderson says that mass culture isn't mass anymore, but rather is evolving into a "mass of niches." He goes on to write "We're leaving the water cooler era, when most of us listened, watched and read from the same relatively small pool of mostly hit content. And we're entering the microculture era, when we are all into different things....The Long Tail is nothing more than infinite choice. Abundant, cheap distribution means abundant and unlimited variety."
Anderson publishes a blog, not surprisingly titled "The Long Tail" which you might find valuable.
John Cassidy in the July 10-17 issue of The New Yorker writes "Anderson argues that we are witnessing the decline of the blockbuster. The 'emerging digital entertainment economy is going to be radically different from today's mass market. If the twentieth-century entertainment industry was about hits, the twenty-first will be equally about niches.'"
If you subscribe to Anderson's theory, and I certainly do, then labels with reasonably-sized catalogs should be able to derive substantial sales for many years to come. That's one of the reasons I believe in building a catalog that becomes a label's bread and butter, keeping it thriving and healthy between releases of "hit" product.
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.