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CD Sales Rise as Economy Recovers

Posted By Barry Ritholtz On February 25, 2004 @ 6:30 am In Finance,Music | Comments Disabled

The economy slows, CD sales slow.

The economy recovers, CD sales recover.

If I am going too fast for you with this complex and sophisticated economic argument, please let me know. I can’t make this explanation any simpler, but perhaps I can find some crayons or blocks for you to play with.

The simple truism above is well known to everyone outside of the music industry. For unknown reasons, the music industry and the RIAA act as if they are exempt from the business cycle. Most sectors of the economy suffer during recessions — the exceptions are “interest-rate sensitive” groups, like Autos, Home, and Durable Goods, which benefit from the falling rates which usually accompany economic slow downs.

As we have been discussing for quite sometime now [1], sales of discretionary entertainment products like CDs are not an exception.

Despite the high, illegally price-fixed costs of a CD, you don’t yet need to take out a mortgage to buy one. So there is simply no reason to believe that CD sales have ever benefited from a broader economic slowdown. Yet judging strictly from the public statements of the recording industry over the past 3 years, one would never have even known that a post tech-bubble recession happened from 2000-2003. They simply never mention it. The New York Times, in an article about the continued uptick in music sales (“CD Sales Rise, but Industry Is Still Wary [2]“), never reaches the issue of the economic weakness during the past three years.

As the economy weakened, so have CD sales:

Annual CD sales
album_yearly.jpg
Source: New York Times [2]

Not surprisingly, industry sales are running parallel to the broader economy.

Indeed, in the aftermath of the world’s greatest speculative bubble, during a recession and a bear market which saw the Nasdaq lose 80% of its value, the sector only saw a 12% drop in sales during the same period. Its hard to undestand why music executives are wringing their hands over this; Most businesses would have been thrilled with “only” seeing their business off by 12% during this period.

Since then, we have seen an improving economy. Although consumer confidence remains shaky — mostly due to anemic job growth — we have seen a general improvement in spending. This has been especially true in the second half of 2003, as the hottest part of the Iraq war passed.

As the economy continued to gather strength, sales of CDs recovered. The last quarter of 2003 saw a marked marked uptick in total album sales [1].


In addition to the economic recovery was an improvement in the product offering. The Times noted “last fall also benefited from a strong release schedule, with albums that became hits from the rappers OutKast and Ludacris; the pop singers Ruben Studdard, Rod Stewart and Josh Groban; and the rocker Sheryl Crow. Price cuts have also helped; some major-label albums now sell for closer to $10 than the nearly $20 that was formerly the industry standard.”

album_1st_6_weeks.jpg [2]
For the first six weeks of this year, album sales were up 13% from the same period one year ago.

The Times further noted “the industry’s critics have cited high CD prices and substandard music as the real reasons that annual album sales fell to 687 million units by last year, down by almost 100 million units, or 12.5 percent, from 2000.” The Times somehow omitted increased competition for consumers’ time from other leisure activities, radio station consolidation playing much less varied than ever, a 30% drop in the number of titles released, and of course, the recession, amongst other factors.

Go figure. Better product and an improving economic backdrop caused revenues to rise. (Would someone please get Harvard Business School [3] on the phone — they need to know about this).

A large part of CD sales is that the music industry remains wed to a “superstar” business model. Despite the fact that consumers are demanding ever more diverse music in increasingly narrow genres, we see a continued overdependence upon a small number of artists producing the lion’s share of sales. This model –more suitable for the film industry than music — is vulnerable anytime there are weak offerings. That’s the risk when only a handful of artists become the main beneficiaries of the ever more consolidated radio industry’s limited playlists:

Album sales topped 17 million during Valentines Day week (Feb 9-15)
all_album_sales.jpg

Source: New York Times [2]

The industry must find other way to monetize music. Already, the cell phone Ring Tones business [4] has emerged as a $3 Billion annual worldwide industry. And, its growing at double digit rates.

The question now remains whether the industry and the RIAA will continue its ruinous course of litigation and self destruction. As the industry alienates its customers, they risk losing an entire generation of muisic fans. “Some experts and users say that file sharers are only being more secretive, and that file swapping is actually increasing. [5] At least two research firms say more than 150 million songs are being downloaded free every month.”

Young consumers are increasingly turning to other forms of entertainment –the internet, video games, and music DVDs. The industry should expect to see additional negative reactions, including boycotts and consumers increasingly seeking alternatives to mainstream fare, as they react to the music self inflicted foibles.

The danger is the industry may be alienating an entire generation of music fans. Once lost, these fans will be gone forever.

Sources:
CD Sales Rise, but Industry Is Still Wary [2]
CHRIS NELSON
N.Y. Times, February 23, 2004

http://www.nytimes.com/2004/02/23/business/media/23music.html

Cashing In on Ring Tones [4]
BOB TEDESCHI
N.Y. Times, February 23, 2004

http://www.nytimes.com/2004/02/23/technology/23ecom.html

Song Trading Still Popular Despite Suits [5]
By JASON STRAZIUSO
Associated Press, February 22, 2004, 2:09 PM EST

http://www.newsday.com/business/nationworld/ats-ap_business11feb22,0,1830859.story


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2004/02/cd-sales-rise-as-economy-recovers/

URLs in this post:

[1] discussing for quite sometime now: http://bigpicture.typepad.com/comments/2003/12/music_sales_ris.html

[2] CD Sales Rise, but Industry Is Still Wary: http://www.nytimes.com/2004/02/23/business/media/23music.html?ex=1392872400&en=59f990fa6f46f142&ei=5007&partner=USERLAND

[3] Harvard Business School: http://www.ritholtz.com/blogwww.hbs.edu/

[4] Ring Tones business: http://www.nytimes.com/2004/02/23/technology/23ecom.html?ex=1392872400&en=59e590db01d303c5&ei=5007&partner=USERLAND

[5] file swapping is actually increasing.: http://www.newsday.com/business/nationworld/ats-ap_business11feb22,0,1830859.story

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