Are Discounters & Big Box Chains Hurting the Music Industry?

Two interesting articles worth discussing:

Kevin Laws, a former music biz consultant and now VC, is guest blogging at Tim Oren’s Due Diligence. We first met Kevin in a discussion of Oligopolies last month.

This time out, in a piece titled “RIAA Enemy #1: Wal-Mart, Not Kazaa,” Kevin analyzes the retailing giant’s impact on the recording industry. While I mostly agree with Kevin, there are a few issues worth exploring further (which I will address shortly). Kevin observes that:

” . . . music distributors are actually using their contracts with big stars to develop new acts that they’ve signed to long term contracts. They do this primarily through their control over the channels of promotion and distribution – basically, carry my new artist and you’ll get a discount on the Rolling Stones. We’ll get the Rolling Stones to use them as an opening act to get some publicity, we’ve got contacts and deals with MTV because of our big name acts, etc.

The dynamics of a new act are particularly important. Often, a great new act goes undiscovered for a long period of time, then starts to generate buzz in a few markets. Given how social a phenomena hits are, this buzz has to be nurtured and exploited by having enough product on the shelves. Only a big music distributor can guarantee that.

Wal-Mart is destroying that capability.”

The model of subsidizing new acts with established stars has been in danger for quite some time, and for a variety of reasons. I wonder if bands like the Stones know that their labels are using them to market newer acts. Perhaps they are already clued in:

The Rolling Stones are “further punishing” the smaller chains and independent retailers “snubbing U.S. record stores late last week by anointing mass market electronics chain Best Buy Co. Inc. as the only seller of its new DVD, “Four Flicks,” for four months, and independent record store owners are seething. From Nov. 11, through the holiday rush, traditional music retailers will be forced to watch as potential customers flock to Best Buy to snap up the 4-disc package being sold for $29.99.”

A 4 DVD disc for $29.99? Sign me up! That’s an outrageous price; Would someone please explain to me how 4 DVDs are cheaper than 2 new CDs? If you needed additional proof that the industry’s price fixing would eventually come back to bite them on the ass, this is it.

The Reuters article, U.S. Record Stores Get No Satisfaction from Stones, reveals how completely clueless the modern music retailer actually is:

NO SYMPATHY FOR DEVILS: Some retailers are not only angry, but are plotting revenge. “The mistake some of these guys may be making is that a lot of retailers are like elephants that don’t forget,” said Mike Dreese, co-founder of Boston-based chain, Newbury Comics.

Best Buy’s two-week exclusive in 2001 for a U2 concert DVD caused Newbury to retaliate by doubling the fee it charged U2’s record label for marketing any of its acts. Newbury ended up with about $15,000 in extra income. “In essence we issued a speeding ticket to them and they paid it,” Dreese said.

With the Rolling Stones, Dreese expects he will mark up the band’s extensive CD catalog by a few dollars. He expected to lose some customers but said, “we’re basically not going to make it easy for them (the Stones) to easily profit off their brand if they’re favoring a competitor in a permanent way.”

A spokeswoman for the Rolling Stones said the members and their advisors were traveling and unavailable for comment.

Retailers kicked up a fuss earlier this year after the Eagles released a DVD single exclusively through Best Buy for one month, but received no sympathy from the band’s manager, Irving Azoff.

More as this develops . . .

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