Monday, September 08, 2003

Disruption in the music industry As you have probably heard, Universal Music Group (UMG), the world's largest recording company, announced it is lowering its CD prices. The new suggested retail price for most of their CDs will now be $13, down from $19. The actual change at discount stores will probably end up being $10, down from $13. It's considered likely that the other four major recording companies will be forced to follow suit. This comes as Vivendi, the owner of UMG, is selling its movie, U.S. TV, and amusement parks to GE/NBC. Vivendi had hopes to sell off UMG as well, but it couldn't get anything near what it wanted for that division, thanks to the current travails of the music industry. After all, industry-wide sales of music have decreased by over 30% in the last few years. The hope is that lower prices will encourage a big spurt of buying that will match and even exceed the discounts. If that can strengthen the bottom line of UMG, then it might be easier for Vivendi to offload it at what it judges to be a reasonable price. This long overdue move has a background. When CDs were invented in the early 1980s, the recording companies promised that the new technology would lower prices from those for vinyl records and cassette tapes, No such thing has happened. In fact, the music industry has paid substantial fines for conspiring with major music chains to keep prices artificially high. There have been no general price reductions since the technology was introduced in 1980, while costs of all other media have declined. In fact, CDs now cost substantially more than most movie DVDs to buy. That's in spite of the fact that the cost of producing and manufacturing a CD is relatively trivial compared to that of making a movie. And while the CD industry has been declining (from $14.9 billion in 1999 to $12.6 billion in 2002), DVD sales are doing quite well. (In recent news, for example, Bertelsmann/BMG's another of the Big Five recording companies, recently reported serious declines in CD sales.) The industry oligopoly, especially though its trade association, the RIAA, claims that all the losses are due to illegal downloading. They have used their considerable political clout to criminalize copyright infringement, and they have been trying to prosecute college students and threaten their colleges. While there has been apparently a slight reduction in downloading as a result, there has been no corresponding rise in CD purchases. Many commentators feel they are only angering their clients without having chance to increase sales. It's one set of pirates (the downloaders) against another (the price-fixers and rabid litigators). What the record companies are suffering is a major disruption in the market. Surely, music sharing is part of this change. But there are other factors at work as well. Consumers are increasingly upset that they are buying CDs with one or two good songs, and a score of second-rate losers. The desire to have an a la carte system has been made reality, between illegal downloaders and legal copiers who make mix CDs of their own, paid-for music. Another factor is the increasingly barren relationship between the recording companies and Clear Channel, where the recording companies give payola to the radio giants in return for play time. This, along with Clear Channel and Viacom's domination of the airwaves, has resulted in stifling the music scene, clogging the channel with blockbuster acts like Britney and N'Sync, and turning off most listeners. Finally, there's the Internet, which the major record companies have had an approach-avoidance relationship, announcing a series of half-hearted tries at making music available online. (Sony just announced yet another one a few days ago.) For many listeners under 21, the idea of going to a store and buying a CD is unimaginable. Even if they do buy, thanks to better prices, it's likely to be through Amazon or some other Internet connection. But more likely they want to download online tracks, as from Apple's music site, and press their own CDs. The obstacles that industry has put in front of that simple desire have been manifold' the oligopolists still don't get it. This willful misreading of their audience makes the Big Five vulnerable to major disruption. The earnest, but almost forlorn hope of music-lovers and musicians, is to get rid of these middlemen and their markups. It may be that the blindness of the oligopoly members in the face of the industry disruption, may just force some better way to distribute music, opening up the cushy oligopoly of the Big Five, who seem likely to go down swinging their subpoenas. 7:58:22 PM

comment []