The Demise of CD Music
- From: PaPaPeng <PaPaPeng@xxxxxxxxx>
- Date: Fri, 11 Jan 2008 08:40:23 GMT
Whenever China bashers complain about rampant IP priracy in China they
usually refer to music and movie CDs. There are few if any complaints
these days about pirated videogames software, probably because these
require special player platforms at a price out of reach of Chinese
kids who play video games. The story below details how the music CD
industry is dying in the West. If this is so one of the consequences
will be that those China bashers will find it difficult to complain
about pirate CDs in China. I don't know how to describe the technical
part at this point of time. But time will tell and provide a
clearer picture how it will affect China bashing on IP piracy. My
feeling is that such people know very little about technical and
engineering details of more complex products to be able to make a
convincing case and will have to shut up. This includes Congressmen.
The music industry
From major to minorJan 10th 2008
From The Economist print edition
Last year was terrible for the recorded-music majors. The next few
years are likely to be even worse
Illustration by Claudio Munoz
IN 2006 EMI, the world's fourth-biggest recorded-music company,
invited some teenagers into its headquarters in London to talk to its
top managers about their listening habits. At the end of the session
the EMI bosses thanked them for their comments and told them to help
themselves to a big pile of CDs sitting on a table. But none of the
teens took any of the CDs, even though they were free. “That was the
moment we realised the game was completely up,” says a person who was
In public, of course, music executives continued to talk a good game:
recovery was just around the corner, they argued, and digital
downloads would rescue the music business. But the results from 2007
confirm what EMI's focus group showed: that the record industry's main
product, the CD, which in 2006 accounted for over 80% of total global
sales, is rapidly fading away. In America, according to Nielsen
SoundScan, the volume of physical albums sold dropped by 19% in 2007
from the year before—faster than anyone had expected. For the first
half of 2007, sales of music on CD and other physical formats fell by
6% in Britain, by 9% in Japan, France and Spain, by 12% in Italy, 14%
in Australia and 21% in Canada. (Sales were flat in Germany.) Paid
digital downloads grew rapidly, but did not begin to make up for the
loss of revenue from CDs. More worryingly for the industry, the growth
of digital downloads appears to be slowing.
“In 2007 it became clear that the recorded-music industry is
contracting and that it will be a very different beast from what it
was in the 20th century,” says Mark Mulligan, an analyst at
JupiterResearch. Last year several big-name artists bypassed the
record labels altogether. Madonna left Warner Music to strike a deal
with Live Nation, a concert promoter, and the Eagles distributed a
bestselling album in America without any help from a record label.
Radiohead, a British band, deserted EMI to release an album over the
internet. These were isolated, unusual deals, by artists whose careers
had already brought years of profits to the big music companies. But
they made the labels look irrelevant and will no doubt prompt other
artists to think about leaving them too.
The smallest major labels, EMI and Warner Music, are struggling most
visibly. Warner Music's share price has fallen to $4.75, 72% lower
than its IPO price in 2005, and it is weighed down by debt. EMI's new
private-equity owner, Terra Firma, paid a high price for the business
in August 2007. Now, having got rid of most of EMI's senior managers
and revealed embarrassing details of their spending habits (£200,000 a
year went on sundries euphemistically referred to in the music
business as “fruit and flowers”), Terra Firma is due to produce a new
strategy later this month. But many observers reckon the
private-equity men are out of their depth.
The two biggest majors—Universal, which is owned by Vivendi, a French
conglomerate, and Sony BMG, a joint venture between Sony and
Bertelsmann, a German media firm—derive some protection from their
parent companies. Universal is the strongest and is gaining market
share. But people speculate that Bertelsmann may want to sell out to
Sony next year.
Three vicious circles have now set in for the recorded-music firms.
First, because sales of CDs are tumbling, big retailers such as
Wal-Mart are cutting the amount of shelf-space they give to music,
which in turn accelerates the decline. Richard Greenfield of Pali
Research, an independent research firm, reckons that retail
floor-space devoted to CDs in America will be cut by 30% or more in
2008. The pattern is likely to repeat itself elsewhere as sales fall.
Second, because the majors are cutting costs severely, particularly at
EMI and Warner Music, artists are receiving far less marketing and
promotional support than before, which could prompt them to seek
alternatives. “They've cut out the guts of middle managers and there
are fewer people on the ground to promote records,” says Peter Mensch,
manager of the Red Hot Chili Peppers and Shania Twain.
Third, record companies face such hostile conditions that their
backers, whether private equity or corporations, are loth to spend the
sums required to move into the bits of the music industry that are
thriving, such as touring and merchandising. The majors are trying to
strike “360-degree” deals with artists that grant them a share of
these earnings. But even if artists agree to such deals, they will not
hand over new rights unless they get better terms on recorded music,
so the majors may not see much benefit overall. Tim Renner, a former
boss of Universal Music in Germany, says the majors should have acted
years ago. “Then they had the money and could have built the
competence by buying concert agencies and merchandise companies,” he
says. Now it may be too late.
By mid-2007, when the majors realised that digital downloads were not
growing as quickly as they had hoped, they landed on a more
adventurous digital strategy. They now want to move beyond Apple's
iTunes and its paid-for downloads. The direction of most of their
recent digital deals, such as with Imeem, a social network that offers
advertising-supported streamed music, is to offer music free at the
point of delivery to consumers. Perhaps the most important experiment
of all is a deal Universal struck in December with Nokia, the biggest
mobile-phone maker, to supply its music for new handsets that will go
on sale later this year. These “Comes With Music” phones will allow
customers to download all the music they want to their phones and PCs
and keep it—even if they change handsets when their year's
subscription ends. Instead of charging consumers directly, Universal
will take a cut of the price of each phone. The other majors are
expected to strike similar deals.
“‘Comes with Music' is a recognition that music has to be given away
for free, or close to free, on the internet,” says Mr Mulligan.
Paid-for download services will continue and ad-supported music will
become more widespread, but subsidised services where people do not
pay directly for music will become by far the most popular, he says.
For the recorded-music industry this is a leap into the unknown.
Universal and its fellow majors may never earn anything like as much
from partnership with device-makers as they did from physical formats.
Some among their number, indeed, may not survive.
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