Music Sales Rise on Aggressive Discounting, Price Competition and an Improving Economy

In the most under-reported story this year, music sales rose this past quarter. For the first time in nearly 3 years, pre-recorded music sales saw a bump up in total units and revenues.

The Recording Industry Association of America (RIAA), the industry’s usually vocal mouthpiece, has been notably silent on this development. Given their typical penchant for publicity, one would have assumed the RIAA would be crowing about the sales improvement, claiming their much criticized litigation strategy was paying off in spades.

Their silence speaks volume.

I suspect the reason the RIAA has been so hushed on this issue is that the increase in sales has nothing to do with their aggressive litigation tactics. In fact, there are three unrelated and verifiable reasons why the industry is enjoying a strong sales uptick:

1) Lowered suggested retail prices, combined with aggressive discounting, has made CDs a reasonable value;
2) The improving U.S. economy is putting more discretionary money into consumers hands;
3) A slew of new legitimate on-line music services are attracting music fans.

This economic led revival is a good thing, too. The RIAA’s plan to sue as many of their customers as possible was dealt a fatal blow Friday (See “Court to RIAA: Drop Dead”). Specifically, the U.S. Court of Appeals for the District of Columbia said a lower court had “incorrectly approved enforcement of subpoenas under the Digital Millennium Copyright Act“.

This decision came at a rather inopportune moment for the RIAA, who just launched their latest litigation salvo. This time, however, the RIAA may have overplayed their hand.

Typically, the RIAA has been masters at garnering publicity for the slightest new development. Why the sudden radio silence? The answer may surprise you: The group does not want to publicize the recent upswing in music sales.

The convicted price fixers of the music industry have schemed long and hard to prevent market forces from bringing true competition to the retail market place. The major labels have illegally conspired to maintain prices far in excess of what market conditions would bear, to the tune of some half a trillion billion dollars over the past 5 years:

“Former FTC chairman Robert Pitofsky said at the time that consumers had been overcharged by $480 million since 1997 and that CD prices would soon drop by as much as $5 a CD as a result.”

The pre-holiday upswing in sales reveals what many critics have been saying all along: the main culprit behind slumping music sales has been the inexplicably inexcusably high prices of CDs.

Consider that the Big 5 Labels — the aforementioned price-fixing cartel — “have engaged in acts and practices that have unreasonably restrained competition in the market for prerecorded music in the United States through their adoption, implementation and enforcement of Minimum Advertised Price (‘MAP’) provisions of their Cooperative Advertising Programs “). That was the determination of an anti-trust case brought by several state governments (led by Eliot Spitzer of NY), as well as a successful civil class action suit.

But what broke the cartel’s price fixing scheme, however, was not litigation. Just as the members of that other price fixing cartel, OPEC defect (releasing more supply and thus effectively lowering prices), the music cartel was finally broken by the defection of the biggest label of them all: Universal. Since October 1, they announced a new program of lowering the suggested retail selling price of CDs by 30%” in attempt to win back customers downloading songs.”

This breakthrough led to the first genuine price competition in the retail music space in decades. On Black Friday (the day after Thanksgiving), adverts from Best Buy offered new releases for sale at $7.99. Note that these were not old titles or budget lines discs, but new releases from artists such as Sting and Mary J. Blige. This past weekend, I picked up recent releases by Jet (“Get Born”) and Kings of Leon (“Youth & Young Manhood”) on sale for $7.99 each at Best Buy.

With the Minimum Advertised Price restrictions removed, widespread sale prices (i.e., John Mayer’s new disc at $9.99) were very much in evidence at all the major retailers:= such as Best Buy, Target, Wal-Mart, and others. (Long live market forces).

Chart Courtesy of Professor Amy Macy

Indeed, many consumers have been astounded at how new DVDs of recent films sell for less than comparable CDs — sometimes even the film’s soundtracks on CD! Popular retailer J&R Music is advertising the DVDs of “Seabiscuit” and “Pirates of the Caribbean” for $17.99, while the soundtracks to those films go for similar prices. At Best Buy (both the store and the website), for example, the DVD the film “High Fidelity” (with of John Cusack) was $9.99; the CD soundtrack to the film is $15.99; At Amazon.com, both the DVD and the CD are the same $14.99. (Incidentally, the Jack Black cover of Marvin Gaye’s “Let’s Get It On” is much better on the DVD than the watered down, candy ass version released on the soundtrack CD).

How is it that a movie which costs $100 million to make sells for the same price — or less! — than the soundtrack of the same film. Which costs 1/1000th of the film to produce? Something is very wrong with the price mechanism. Its no wonder that sales have off.

These aren’t isolated instances, they are the norm. If you like James Taylor, you can get a DVD of his most recent tour, or a more intimate show at the Beacon Theatre. Either DVD is at Best Buy for $9.99. Both discs contain nearly 2 hours of music, plus audio commentary and other special features. Or you could buy “The Best of James Taylor” for 35% more, but why would you? It is completely irrational for a consumer to spend more money on the 45 minute, audio only CD, rather than purchase the less expensive, audio/video/special feature multi media 120 minute long DVD.

I’ve long believed that the entire P2P brouhaha, including the litigation and legislative initiative of the RIAA, was a red herring of sorts. These tactics are not about fighting sharing or downloading (RIAA newspeak: piracy); Rather, its all about maintaining monopoly/cartel pricing power. Downloading has been a direct response to price fixing.

But the labels should be — and are, to some degree — aware of two much greater threats: The first is illegal CD duplication; Its a real problem, and its a form of physical copyright theft that the industry must continue to confront. I see much of the Billboard 100 on my way to the office every day on the streets of New York for $5 apiece (3 for $10). Mass re-production is definitely eating into sales.

Fighting this form of theft is no fun. It requires close logistical coordination with local law enforcement. It is a time consuming, thankless task doesn’t generate big headlines. Indeed, like battling cockroaches, its a never ending task. This is, in my opinion, the most significant and costly form of piracy, but it doesn’t seem to recieve nearly the same focus from the RIAA as other, sexier issues.

Perhaps there’s a bit of ego involved in the choices made by the RIAA; (Ego? In the entertainment business? You must be kidding!) Otherwise, we’d be hearing more about the illegal physical disc knockoffs, and less about 12 year old girls and grandmothers without PCs getting sued for “Piracy.”

The more dangerous long term challenge facing the labels is “disintermediation.” The internet allows for the labels to be removed as the middle man between the consumer and the artist. Networked technology, not free MP3s, may very well be the meteor that eventually destroys the dinosaur (i.e., big 5 labels). That’s an entirely different discussion which we will save for a later date.

For now, it all comes back down to allowing the marketplace to set prices: By synthetically overpricing CDs, and then using illegal means to maintain those artificially high prices, the industry created a yawning void and unfulfilled demand. CD duplicators would not be able to fill the demand at that price point if the industry let the marketplace work to set prices. One even imagines the arguments made at some late night meeting at Universal HQ: “Hey, maybe this Capitalism thing works!”

Universal may have accidentally saved the music industry from its own worst enemy — itself — by breaking away from the price fixing cartel, and allowing the marketplace to function.

The uptick in sales is likely to get even better as the economy continues to strengthen, and price competition takes root in the retail space. Unless the industry and the RIAA manages to find someway roll back the price cuts. Then it will be back to the street vendors for many incremental buyers.

Goodbye price cuts, hello oblivion.

Sources:
U.S. Music Sales Up as Positive Trend Rolls On
By Sue Zeidler
Reuters Wed Nov 19, 9:56 PM ET
http://www.forbes.com/home_europe/newswire/2003/11/19/rtr1154432.html

Five Consent Agreements Concerning the Market for Prerecorded Music in the United States
FTC File No. 971 0070:
http://www.ftc.gov/os/2000/05/index.htm#10

Hit Charade: The music industry’s self-inflicted wounds
By Mark Jenkins
Slate, Aug. 20, 2002, at 8:19 AM PT
http://slate.msn.com/?id=2069732

EMI halts fall in music sales
By Saeed Shah
Independent Digital (UK), 20 November 2003
http://news.independent.co.uk/business/news/story.jsp?story=465472

How much is digital music worth?
http://zdnet.com.com/2100-1104_2-5117275.html
http://news.com.com/2100-1027_3-5117275.html

Swappers Buy Music, Too
May 7, 2003, 8:25 PM PDT
By Reuters
http://news.com.com/2100-1027_3-1000420.html?tag=fd_top

RIAA lawsuits yield mixed results
http://news.com.com/2100-1027_3-5113188.html?tag=st_pop

Online music on center stage
Conference grapples with new digital world
http://www.sfgate.com/cgi bin/article.cgi?f=/c/a/2003/12/09/BUG7K3IR7E20.DTL