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Music Industry Intent on Commiting Hari-Kari

Posted By Barry Ritholtz On April 24, 2004 @ 1:16 pm In Finance,Music | Comments Disabled

Its fascinating to watch an industry implode — in slow motion — over the period of a decade. It becomes even more engrossing when the wreckage is self inflicted, due to foolish policies and technophobia.

Mind you, we are not discussing historical anachronisms, like steam engine manufacturers or the machine leather belt companies which were needed to transfer the steam power to a mechanical device. No, what I refer to is occurring right now in the music industry. It has been poisoning itself for decades, and we are seeing — a kind of time lapsed photography — the long term effects of their own toxicity and short sightedness.

After 3 years of a overpriced, recession driven, anti-competitive, alternative entertainment choice induced sales slow down, the music industry — for a brief instance — found religion. The industry settled many of their own litigation/criminal issues; And then, the Universal Music Group slashed prices.

What-do-ya know, sales increased!

Alas, short memories abound: “Universal Music Group, the largest record conglomerate in the world, has announced an increase in the prices of their CDs. This comes only months after UMG slashed prices in order to make CDs more competitive in a marketplace that features pay downloads as well as the dreaded “free” (or as record executives and the RIAA like to call them “illegal” downloads”). ”

Ans, its on top of very recent attempts to make “legal” download music more expensive [1].

The impact of this April 15th increase is already visible in the weekend adverts: None of the usual advertisers — Best Buy, Target, J&R Music (I didn’t see Circuit City’s) — have a single CD on sale for less than $9.99. Before the price hike, select CDs were advertised for $7.99 and even $6.99 [2].

It only took a quarter or two of increased sales for the potential revival of the Music Industry to be put into danger. Its a case of Munchausen syndrome crossbred with self immolation.

The Chicago Tribune [3] was one of the few major papers to cover the recent price increase. They noted:

“Universal stunned the industry eight months ago with the announcement that it would slash the wholesale price of its CDs by 25% in a bid to revive an ailing market and discourage piracy. At the time, Doug Morris, Universal Music’s chairman, said the cuts were intended “to reinvigorate the record business in North America” and would remain in force at least through the holidays.

But Universal’s competitors didn’t follow suit with wholesale price cuts. Some record label executives privately dismissed the price-cut plan as a promotional ploy aimed at boosting short-term sales numbers.”

My prediction: the recent sales uptick of CDs will either flatten out (i.e., small or no rise in sales) or even be reversed going forward.

I expect to see dissappointing sales numbers in Q3 / Q4 2004. And, Macro wise, those quarters should not be all that challenging on a year-over-year basis.

Here’s the underlying problem which the music industry still doesn’t get: I could buy the new Diana Krall for $9.99 . . . But is that really as good an entertainment deal, dollar for dollar, as let’s say, The Usual Suspects [4]for the exact same price? Best Buy has both for $10, or Animal House [5], Armageddon [6], Shawshank Redemption [7], Gladiator [8], and a bunch of others recent or well loved films — at 2 for $20. As Audio Revolution [9] so succintly put it, “the long term diminishing sales of prerecorded music has as much to do with the lack of video in the value proposition for a CD as it does with the overall price of a CD.” That’s one of key misunderstandings of the Music biz — their competition is for the consumer’s entertainment dollar (DVDs and Video Games) — not one CD versus another.

We have mentioned in the past that DVD sales have been cannibalizing CD sales [10] for quite some time now; Its only going to get worse going forward.

There are other issues we have barely explored in this blog. One of my pet peeves is the mediocre sound quality of MP3. Audio Revolution [9] observes:

“The CD has bigger problems than being overpriced. Competing with illegal downloads is impossible; however, the problem with the CD as a format is that it no longer meets the technological or entertainment value demanded by the modern consumer. On a technological level, CDs sound better than MP3’s without question but in comparison to DVD-Audio or SACD (UMG prefers SACD but has released a number of titles in each format) the CD is pathetically underpowered. CDs (in almost all cases) do not have 5.1 surround sound, higher resolution stereo tracks (20 and 24 bits at 96 or 192 kHz sampling rates) and other added values found on the new DVD-Audio and partly on the SACD format.

Despite the late rush to promote and sell lower resolution downloadable music, consumers still appreciate better quality. In the world of video, hundreds of thousands of consumers per month upgrade to HDTVs that are exponentially more expensive than traditional TVs. Even with very little HDTV programming being broadcast to date, consumers find the value proposition of a wider, more resolute TV worth $3,000 to $30,000 or even higher. Thevalue proposition of CDs is far less favorable to consumers now 20 plus years into the format’s tremendous run.”

So not only is the industry failing to market themselves creatively, they are wed to an outmoded format, which will likely only make their problems worse as time goes on.

“Aside from that Mrs. Lincoln, what did you think of the play . . .?”

Universal Music To Increase Cost of CDs [9]
Jerry Del Colliano
Audio Revolution, April 16, 2004


Music labels mull digi-music price rise [11] http://www.macworld.co.uk/news/main_news.cfm?NewsID=8397
Macworld, April 08, 2004


Universal Eases Off on CD Price Plan [3]
Jeff Leeds
Chicago Times, April 16, 2004


Price hike will sink iTunes [12]
Matt Buchanan
Washington Square News, 04.22.2004


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

URL to article: http://www.ritholtz.com/blog/2004/04/music-industry-intent-on-commiting-hari-kari/

URLs in this post:

[1] more expensive: http://bigpicture.typepad.com/comments/2004/04/downloading_mus.html

[2] advertised for $7.99 and even $6.99: http://bigpicture.typepad.com/comments/2004/04/tuneful_tuesday.html

[3] Chicago Tribune: http://www.chicagotribune.com/technology/la-fi-universal16apr16,1,4157729.story?coll=chi-technology-hed

[4] The Usual Suspects: http://www.imdb.com/title/tt0114814/combined

[5] Animal House: http://www.imdb.com/title/tt0077975/

[6] Armageddon: http://www.imdb.com/title/tt0120591/

[7] Shawshank Redemption: http://www.imdb.com/title/tt0111161/

[8] Gladiator: http://www.imdb.com/title/tt0172495/combined

[9] Audio Revolution: http://www.audiorevolution.com/news/0404/16.universal.html

[10] DVD sales have been cannibalizing CD sales: http://bigpicture.typepad.com/comments/2004/03/cd_no_dvd.html

[11] Music labels mull digi-music price rise: http://www.macworld.co.uk/news/main_news.cfm?NewsID=8397

[12] Price hike will sink iTunes: http://www.washingtonsquarenews.com/opinion/columnists/7370.html

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