CD Sales Plunge 20% so far in ’07

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The WSJ had a front page story on the ongoing decrease in CD sales (Its now on the free site). I’ve been meaning to get to this, but given the more pressing FOMC events and market action took precedence.

Here are the relevant data points:

• Compact-disc sales dropped 20% from a year earlier over the first three months of this year.

• CDs account
for more than 85% of music sold.

• Major retailers have closed about 800 music stores.

Apple has sold ~100 million iPods.

• 2007 has seen the
two lowest-selling No. 1 albums since data began being kept (by Nielsen SoundScan) in 1991.

• "American Idol" runner-up Chris Daughtry’s
rock band sold just 65,000 copies of its chart-topping album; another
week, the "Dreamgirls" movie soundtrack sold a mere 60,000. In the past, No. 1 records could sell 500,000 or 600,000 copies a week.

• Digital sales of individual songs this year have risen 54% from a year
earlier to 173.4 million — not enough to offset the 20% decline from a year ago in CD
sales to 81.5 million units.

• Sales of all music — digital and
physical — are down 10% this year.

• According to BigChampagne, one billion songs a month are traded on illegal file-sharing networks.

• Mega-Retailers like Wal-Mart Stores and Best Buy represent about 65% of the retail market — up from
20% a decade ago.

The one line in the article that needed debunking was this: 

"The music industry has found itself almost powerless
in the face of this shift."

That turns out to be not exactly right — they were not powerless. Rather, the present situation is the result almost entirely of their own making. If they are powerless, it is through their own horrific judgment. In fact, the industry has made some simply god-awful business decisions over the past 20 years, and they are now reaping what they have sown (details to follow).

Next week, I’ll go over some of the decisions, judgments, strategies of the industry, including making of their major mistakes, and what it might mean to the future of the recording industry.

>

Source:
Sales of Music, Long in Decline, Plunge Sharply
Rise in Downloading Fails to Boost Industry; A Retailing Shakeout
WSJ, ETHAN SMITH
March 21, 2007
http://online.wsj.com/article/SB117444575607043728.html

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What's been said:

Discussions found on the web:
  1. Michael Schumacher commented on Mar 23

    Totally agree with that assessment BR, RIAA had dollar signs in it’s eyes and missed a huge paradigm shift as a result. Now they are trying to make it up by suing college students and forcing them to settle for $3,000. Pretty heavy handed…..

    Reminds me of BBI in the late 90’s when they could have done two things: have an exclusive lock-up on all future video/dvd releases (eminatting from Warner Bros.-which at the time would hav spilled over to the other studios) they declined to do it and John Antioco said : they need us more than we need them….fitting now since where is he headed?..out the door. The second thing was to buy NFLX for $50m…..you know how that turned out too.

  2. onda commented on Mar 23

    my comment is that is more then 1 year since i bought a cd…

    being able to buy only the songs you like in the album, this is the real advantage of digital: freedom.

    maybe for the new blonde avril lavigne i will buy the cd. :)

  3. mDave commented on Mar 23

    I couldn’t agree with you more. I work in the music industry in Nashville and during a meeting one of the major music execs said “Digital sales are up but for every $100 of CDs we sell we only sell $20 of digital products” he continued how there’s still lots of money coming in so industry people aren’t panicking like they should. (at least in Nashville) If you haven’t seen the Frontline episode “The Way the Music Died” I highly suggest it. You can watch the whole show online

    Music business second problem is radio which you’ve commented on before. Consolidation is killing it. A blog I wrote, Music Radio Should Be More Like Talk Radio, addresses a possible solution. Take a read and let me know what you think.

    Keep up the great entertainment posts. I visit and read everyday.

  4. LAWMAN commented on Mar 23

    Screw the RIAA and the big music companies. They screwed the consumers for decades, and decided to fight digital sales, instead of embracing them.

    They reap what they sow.

  5. me commented on Mar 23

    I haven’t bought a CD since they started putting root kits and other viruses to reduce the quality of playback. I spend good money of software to keep my PC bug and virus free and will not knowingly introduce them. Fair use is fair use.

  6. day4night commented on Mar 23

    Questions:

    What will be the effect on the quality and quantity of music? What has it been?

    Also: Will the movie industry face the same peril? If I want to watch any movie, I pretty much just have to ask one of several people I know who have already downloaded it to add to their hard drives of illegally copied movies.

    Are BOOKS next? I’m a reader, and I admit that I possess several illegally pirated books. As text display and eInk technology improves, is the publishing industry going to be BitTorrented, Limewired and eMuled? Have you seen the Sony Reader?

    At the same time, books provide an interesting parallel. If you want to read a book without buying it, no problemo. Go to the library!
    People still buy books because the library is an inconvenience and maybe also because books are nice objects to have around.

    If illegal copying can be made inconvenient enough, and digital wares more convenient
    (as in fast to d/l and cheaper), can the creative industries survive?

  7. Michael Schumacher commented on Mar 23

    day 4 night-

    movie biz is actually a little farther ahead than music is/was. They have seen the problems of being reactive as opposed to proactive. They still are greedy slimeballs too. Problem with movies is that anyone with the ability to set up a downloadable service (backbone, copy-protection etc.) will have a deal from the studios. If Apple (jobs+disney) could’nt secure the rights to a large chunk of catalog then it still will be a ‘niche thing…..Apple TV sounds great until you realize it’s fairly limited…but it’s a good start.

    There is a reason that most download services have a huge hole with regards to content….studios still see DVD’s as the cash cow the are..until the content is shifted to the internet then DVD’s will continue to be the focus. Studios get the bulk of revs. from purchases at WM, Target,Best Buy, etc…. They will not risk that until they have a large scale acceptable solution..which they are doing nothing to accomplish when they do deals with anyone under the sun. The other part of the equation is the lock-up of the content at various places like HBO, SHowtime, and mass market outlets…that’s another issue entirely.

    MS

  8. Tom B commented on Mar 23

    Clear Channel did more to kill the industry than Napster. I buy lots of CD’s. Not Brittany Spears; not garbage “rap”; not forgettable synthetic-stars (American Idol). I get jazz– John McGlaughlin, John Zorn, Madeleine Peyroux; rock– Derek Trucks, Warren Haynes; Acoustic–Dave Grisman. ALL stuff YOU NEVER HEAR on pop radio. NPR and podcasts somewhat fill the void– that’s where you need to go to hear new stuff/good stuff

  9. Bruno commented on Mar 23

    I agree with the WSJ article in general and disagree with your comment that the situation of the recording industry was of their own making. The truth is that with piracy (old Napster, Kazaa, etc.) and paid digital downloads the total size of the pie has has shrunk for the entire chain. So (unless you happen to sell iPods and digital downloads) the profits will go down for record companies, record stores and musicians/performers. Notice that sales of all music (including digital) are down 10% in a year. How could the recording industry have done well?

  10. Barry Ritholtz commented on Mar 23

    I’ll go in details next week — but you need to explain why you think they industry is blameless . . .

  11. DukeJ commented on Mar 23

    I have a question you might help me with: Could the closure of 800 music retail outlets be a contributor to the startling sales drop this quarter, rather than solely a result of prior sales drops?

    It seems that with less retail accessibility (a lot less!) — and also, as the article mentions, big box stores narrowing their music sections — that sales would go down more than otherwise.

    I have a small cd and instrument shop in a small town; sales are indeed down, but not by much (budgets have noticably tightened amongst my customers – the ‘r’ word, I daresay), but I have also noticed that there have been very few notable releases since christmas.

    From my vantage point, btw, the industry is its own (and our) worst enemy.

  12. M.Z. Forrest commented on Mar 23

    For clarification sake, the only reason this hasn’t happened to the movie industry is because of the size. Bandwidth isn’t so cheap that you can have 50,000 of your friends and acquaintances download via your DSL connection. For a home entertainment center version, you are talking over a 2 GB transfer. If you degrade the quality enough, you can get it down around the 250 MB. Even at 1.8 MB – a little over a T1 – you are looking at a 2 hr+ download time for the degraded version. Even if the consumer had a 5 Mbp upstream – which they generally don’t – the most simultaneous downloads they could support would be 3. The size is simply not conducive to file swapping.

  13. Bob A commented on Mar 23

    And every CD that IS purchased finds it’s way on to probably from 100 to 1000 or more Ipods where it is enjoyed for free forever. Would love to see a scientific study on that.

  14. jkw commented on Mar 23

    day4night,

    You can also get movies and music at the library. People who wanted to get them without paying have been able to for years.

    I doubt it will affect the quality much. The RIAA did not create music, they merely figured out a way to make lots of money controlling it. Music is older than economics, and nothing is going to stop people from making new music. The only thing the RIAA has that helps improve music quality is good recording studios. Those are getting cheaper, so it is less of an advantage now than it used to be.

    The big difference that filesharing will make is that it will lower the barriers to entry. 10 years ago, someone with a video camera and a good idea could have made a movie, but they couldn’t have distributed it. Now they can. The free market is generally thought to be the best way to improve things, so lowering the barriers to entry should improve the quality of music and movies.

  15. Ross commented on Mar 23

    Daddy what’s a CD?
    Certificate of deposit sweetheart.

  16. Lars Ulrich commented on Mar 23

    I haven’t bought a CD since before the days of Napster.

    No more paying 20 bucks for one MAYBE two good songs.

    Viva La Revolution!

  17. TheFinancialPhilosopher commented on Mar 23

    I worked for PolyGram International for several years (before it merged with MCA, now known as Universal Music Group). I bailed in 1998 to get into financial services, which turned out to be one of the best decisions I’ve ever made…

    I think it would be interesting to include in your analysis a parallel between success in the music business and building a portfolio of securities: Success requires taking risks; having a plan, good business sense, patience, passion, and so on…

    I believe we are now seeing inevitable symptoms of a larger disease: The music biz refuses to take large risks but somehow expects large returns. If an act doesn’t sell big out of the box, their dumped. That drives up operating costs and disorients the consumer. Like I’ve stated here before, some of the biggest acts in history like Led Zeppelin and Kiss would have been dumped after the first album if the biz was operated back then like it is now…

    The industry is also incredibly political and beurocratic, much like the government, which is why the most brilliant business-minded people either get in and leave quickly or never even get in the business to begin with. That does not make for a healthy future for the music business. If you think about it, the words “music” and “business” do not even belong in the same phrase. It’s like saying “emotional logic”…

    10 years later, I own a successful Registered Investment Advisory firm in beautiful Charleston, SC. If I stayed in the music biz, I’d probably still be the “tape copy boy” at Universal Music today.

    Kent (aka The Financial Philosopher)

  18. Ken J. commented on Mar 23

    In lurking around music biz chat forums (mostly thevelvetrope), and in reading other emissions from the industry such as the replies to Steve Jobs’ recent statement on DRM, I have been struck by a common theme. Big Music seems to be begging for outside parties to rescue it: Tech firms must do more to stop copying. Universities and ISP must control the file sharing of their populations. Law enforcement and the courts must do more to stop file sharing. The stores and hardware makers in the digital file market must come up with the perfect interoperable standard format which flows freely between all devices while stopping copying. (*coff*)

    Big Music often sounds like whiny victims. I don’t hear much about moving forward by delivering a better product and experience to the audience.

  19. Steven Walcott commented on Mar 23

    a few quick comments without ranting:

    1. i agree with the financial philosopher above. the record companies have churned the market and are not interested in nurturing anyone or anything. music is a scene, even it takes place on the net, and if you don’t nurture it no one is going to care.

    2. the people commenting here are hardcore music fans, and that won’t change. however, i think the present drop off in sales is the migration of a whole generation of people away from music to other forms of entertainment. and the longer this goes on, the more difficult it will be to get music going again.

    3. it’s more than just a drop in physical cd sales, as many people have commented. radio is f*cked up, the live music scene is drying up, MTV isn’t about music, etc. the whole system is dysfuncto and all the parts have to work somewhat together to differentiate music from other entertainment. nothing beats a kick ass live music show, but no one is into that.

    4. people might laugh at this point, but it is true — there has been extensive mafia involvement in the music business from the very beginning. if you look at the way the music business is run, it’s run with a mafia mentality. payola, unfair pricing, crappy contracts, suing college kids for downloading, etc. the list goes on and on and on. read Hit Men by Frederic Dannen, you’ll be shocked and not amused.

  20. Michael Scumacher commented on Mar 23

    Post of the day belongs to:

    I haven’t bought a CD since before the days of Napster.

    No more paying 20 bucks for one MAYBE two good songs.

    Viva La Revolution!

    Posted by: Lars Ulrich | Mar 23, 2007 4:36:03 PM

    Brilliant!!!

    I hope most get it….

    MS

  21. muckdog commented on Mar 23

    Maybe another reason is that the nation is aging. I just listen to music much less often than I used to. There are lots of other things to do.

  22. tmcgee commented on Mar 23

    The music industry does reap what it sows. Not only did they spend all those years milking buyers on overpriced CDs, as the landscape started to change a DECADE ago they were busy filing lawsuits against…college students. Yeah, now that’s a long-term strategy.

  23. Bruno commented on Mar 23

    I say the industry is not to blame because there was a big change in consumer behavior, regardless of what the industry did. First, people started stealing (‘sharing’) the music they used to buy. Then they started buying the 2-3 best songs of a CD for 99 cents each instead of paying ~$15 for an entire CD.

    What could the industry have done diffently? They could have launched their own iTunes-like service, instead of having Apple as the middleman. But I would not expect the industry to be that innovative as they would canibalize their legacy CD sales.

    I think the reason people perceive CDs as overpriced and hate the industry so much is that it is a model with high development costs and low marginal production costs. Like software, perfumes, prescription drugs.

    You mentioned the other day Amazon’s Classical Blowout store. As a buyer of classical music, I checked their offerings and found many really good CDs at unbeatable prices. Their regular classical store is not cheap at all; I find better prices at Wal-Mart or Overstock.

    For hard to find titles (including out of print), Arkivmusic.com is the place to go. It is worth reading these articles (links below) for a great example of exploring the Long Tail. Are burned on demand CDs the future of classical music?

    http://www.nytimes.com/2006/11/25/arts/music/25cust.html?ex=1322110800&en=b7931364751f5502&ei=5088&partner=rssnyt&emc=rss

    http://stereophile.com/news/120406heaven/

  24. sk commented on Mar 24

    I really look forward to your analysis. I’m puzzled by how luddite the music business has been about this – though having lived in LA and interacted with people who work in IT at the studios I know how backward they are.

    I recall a friend of mine a while back setting off on a mission to find a song by the Marmalades called “reflections of my life” from 1969 and ended up downloading the BillBoard Top 100 1967, 68,69.., 74. early – the ENTIRE set for “nothing” and nowhere in his searches was he able to quickly, easily find a Time Warner or EMI or DECCA site where he could simply put together his own Greatest hits list of those years and pay say 20 – 40 bucks and do it legally..

    I liken the music business to the Russian aristocracy as the Russian revolutionary movements started gaining ground from 1903 onwards – they simply could not adapt and so they disappeared..

    -K

  25. DavidB commented on Mar 24

    What we are seeing is an industry floundering on the rocks because it is being driven by greed. The captains of the ship have had monopoly control of the distribution channel for a long time. So long that they do not even understand their customer any more if they ever have at all.

    They need to go back to the drawing board and learn all about those poor kids who aren’t willing to spend $10 for 8 useless songs and one that they are looking for.

    Humility would do wonders for them

  26. Barry Ritholtz commented on Mar 24

    Bruno —

    People have been sharing music as long as its existed in recorded form (Recall the “Home Taping is killing music” meme of the 1970s). For most of my life, I found most of the new music I list to via sharing, and went out and bought what I really liked. I still do.

    Singles existed as a market long before albums or CDs existed.

    What could the industry have done different? Think of the Seinfeld episode of The Opposite: Look at pretty much every business decision the recording industry has made (including sins of omission), then imagine what would have happened had they done the exact opposite.

    More to follow . . .

  27. Dervin commented on Mar 24

    I think Steven Walcott makes a great point about there being a lot more choices in entertainment today.
    The networks suffered because of Cable, VCR & the internet. Sports teams (non-NFL) are suffering. Movies are suffering. Why should the music industry be any different.

    But when the entertainment industry puts out a great product, people flock to it. The 300, Phoenix Suns Basketball, Lost/American Idol.

    And the music industry hasn’t found anything groundbreaking in quite some time.
    Mainstream Rap is just Money and ho’s.
    Mainstream Rock is just aggressive whining.
    Country is still stuck in the early 1990’s.
    Pop is just some advance marketing techniques.

    There will always be a music industry because I don’t want to sit through 500 hours of crap to find 10 minutes of good music. I’ll buy the stuff I really want and I’ll download the stuff that I might want.

  28. MarkTX commented on Mar 24

    Gotta love that American Idol stat that the runner-up only sold 65K copies….

    I think the show is full of PHONIES.

    People on the other hand watch with fever…

    The news/media pumps up the show and the actors/contestants…

    Simon and whats here name rant and rave and blah blah blah…

    BUT IN THE END 65K copies for such “talent”… Ha Ha Ha

    Yes the LARS ULRICH comment is very clever…seems his band last CD sucked big time too! Worst selling album for his group ever!

  29. Jon H commented on Mar 25

    I bought a CD, the Neko Case Live one, this year, but can’t recall the one before that. Mostly I get my music on iTunes. The convenience can’t be beat, and I don’t end up with physical detritus to store or dispose of (also a factor in why I don’t buy newspapers, and magazines only rarely.) The DRM and 128k bit rate don’t bother me – your mileage may vary.

    The only reason I bought that CD was that I happened to be at Newbury Comics right next door to my client’s offices, and ran into it.

    Normally, when I’m out and about, buying CDs doesn’t even occur to me. Most stores that carry CDs charge too much, or don’t carry anything I like, and even if they did I probably wouldn’t have heard of anything new that I want. The only big chain stores where I would even bother looking at CDs are Best Buy and Borders.

    Generally, if I find out about a new release, I find out about it online. Since I’m online, it’s easies to just go to iTunes and buy it there.

  30. Darvin Dowdy commented on May 28

    I think its several factors. The major factor is the music. It sucks! I think the day of the “singer/songwriter” is coming to a crashing halt. Its been a great ride but its over! We have to face the music. No pun intended. Its time to go back to master songwriters who do nothing else. Master studio musicians. And master producers. Now we can still use the old has been singer songwriters. Their face and their voice and their name recognition. But they need to be told what to do and if they don’t do it then get someone else. There’s a-plenty out there needing work.
    Also needed – good project managers to keep the costs down so that they price of CD’s can be reduced. I say $8-$10. Max. Yes it can be done.
    Now these gems of wisdom will hold true for most all genre’s.
    There’s still plenty of honest folk out there who’ll buy CD’s if the songs are great/melodic, the production is great and the price is right.
    Problem is the music industry has been conquered by a bunch of absolute morons and they have a choke-hold and will not let go. Someone powerful and enlightened needs to do a hostile takeover. DD

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