Manage for Success: Concerned, Newsletter #97, May 2009


"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 2009 by Keith Holzman, Solutions Unlimited. All rights reserved.


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I've always thought of myself as a pretty positive person, but I'm currently very concerned about the future of the recording industry. I gave up on the four major labels some years ago, and this has been born out by their financial reports during the last couple of years. None of them are doing particularly well, and at least two have had a string of negative quarters.


For example, last week Warner Music announced a net loss of $68 million for the quarter with revenue falling 17%. And although digital sales improved by 7% year-over-year, this was far lower than the gain of 48% between 2007 and 2008. Meanwhile physical sales were down 25%. Paid digital downloads are not making up for the loss of CD sales. In addition -- or is it subtraction!?! -- WMG wrote off a $16 million investment in Imeem, and a $20 million investment in Lala.


EMI didn't fare quite so poorly. Their net sales dropped only 10% for the year and their cash flow improved, but much of this was due to heavy reductions of staff and other overhead.


But it's the independent label sector that most concerns me, not just because my clients are predominantly indies, but because I see more of them struggling to stay profitable in this era of indiscriminate, illegal downloading of copyrighted music.


Fewer people seem to be motivated to buy CDs, and this is exacerbated by the decline and disappearance of numerous retail bricks-and-mortar record stores, particularly full-line stores such as the old and (originally) much-loved Tower Records.


Yes, digital sales are still going up, but at a slower rate. They're not the huge incremental increases we formerly enjoyed. So it looks as if it's becoming a mature market, but not a particularly healthy one.


So what can Independent labels do to stay healthy in a declining environment?


First -- be sure they're releasing good, provocative music by artists who are establishing solid recording and live-performance careers.


Second, they may need to reduce their staff to only the most effective and essential members, as hard and emotionally difficult as that may be.


Third, eliminate all unnecessary expenses. Don't spend money for marketing where it won't have a reasonably good chance of selling more music, or at least selling enough to cover its cost.


They should make maximum use of social media networks and targeted emails, plus street teams where appropriate, to market their releases. These require a minimal outlay of funds.


In short, they should think and be frugal!


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As you can see from these newsletters, I endeavor to keep current on all matters affecting our industry. So if you need advice on how to make your label successful, let me help you as I've helped so many others "manage for success." Email me at <mailto:keith@holzmansolutions.com> so we can discuss how I can improve your business.


If you're considering forming your own label, I recommend my book "The Complete Guide To Starting A Record Company," The Second Edition can be ordered as a downloadable eBook in PDF form, or as a printed, spiral-bound volume. Read the complete Table of Contents and download the Introduction at <http://www.recordcompanystartup.com/>.


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NEWS NOTES


Glenn Peoples in a May 9th article in Billboard wrote "The continued decline in physical unit sales is being accompanied by downward pressure on retail and wholesale prices for physical product as consumers continue to migrate from higher-margin CDs to digital downloads, according to an analysis of recently released sales data from the IFPI and RIAA. The numbers also reflect slowing digital growth as markets mature and mixed success in mobile music.


"Fueled by a large drop in CD sales and lower wholesale values, the U.S. market posted a steeper decline in total revenue during 2008 than the global market, according to IFPI. U.S. recorded music trade revenue dropped 18.6% in 2008 to $5 billion, while physical revenue plunged 31.2% to $3.1 billion and digital revenue jumped 16.5% to $1.8 billion. By contrast, global recorded music trade revenue fell 8.3% to $13.8 billion, physical revenue declined 15.4% to $13.8 billion and digital revenue surged 24.1% to $3.8 billion.


"The sharp drop in U.S. physical trade revenue in 2008 far outpaced corresponding declines in Europe (11.3%), Asia (4.9%) and Latin America (10.3%)....U.S. CD unit shipments dropped 24.7% in 2008 while the retail value of those shipments tumbled 26.6%."


In addition, the average suggested list price of a CD in the U.S. fell 6% during the last two years, further impacting net income for all labels.


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As a clear sign of the decline of CD sales, Cinram, manufacturer of CDs and DVDs for major and indie labels, posted sizable losses for the most recent quarter, and is laying off workers and shutting some of their plants.


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Another problem for marketers of larger volume artists is the advanced leaking onto the internet of new tracks from artists well before their releases' established street dates. This makes it difficult to stage effective, coordinated marketing campaigns and reduces potential sales of digital downloads because of the many who prefer to get their music by stealing it.


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The Future of Music Coalition recently released the results of a survey of four years of radio airplay -- from 2005 to 2008. The analysis was done to see the result of an agreement from April of 2007 between the F.C.C. and the nation's four largest radio station group owners -- Clear Channel, CBS Radio, Citadel, and Entercom. The purpose was the elimination of payola-like practices and to guarantee a larger percentage of airtime to independent labels.


The data in their report "indicates almost no measurable change in station playlist composition over the four years" and no significant gain in airtime for indies. The press release about the report can be seen at

<http://www.futureofmusic.org/news/PRplaylisttrackingstudy.cfm> as well as PDFs of both the Excutive Summary and the complete report.


I'm still hopeful for the future, but you can see why I'm concerned.


Until next month,

Keith Holzman -- Solutions Unlimited

Helping Record Labels Manage for Success.

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Copyright 2009 by Keith Holzman, Solutions Unlimited. All rights reserved.