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Hard to Spin Dreary News on Compact Disc Sales

by Greg Bartalos
26 January 2008

The compact disc is in serious trouble. That’s no secret. But recent headlines suggest it’s in even worse shape than previously thought.

The U.S. consumer, responsible for more than two-thirds of domestic economic activity, is facing a possible recession. Oil is near record levels. Inflation is rising. Credit problems are growing. The real estate bubble is bursting. And the stock market is getting hammered.

And unlike the late nineties when stocks—and tech stocks in particular—pumped money into oh so many brokerage accounts and unlike the past several years, when real estate exploded in value, we are now in a period where no widely owned assets are in a bull market.

Heck, even people who stash cash under their mattresses are coming up short. In a bid to stimulate economic activity, the Federal Reserve, in an inflationary move, this month slashed interest rates dramatically at a time when the dollar is already at multi-year lows against other major currencies. (In November, the Taj Mahal said it would no longer accept payment in dollars!)

Within this increasingly negative macro-environment, the music business has more than ever to worry about (not to mention RADIOHEAD’s name-your-price experiment, which we’ll likely see more of in the future from other acts).

According to Nielsen SoundScan, U.S. compact disc sales plunged 19% last year. With the consumer wobbling like a Weeble (but with no guarantee that he won’t fall down), results will likely be even worse this year.

ALICIA KEYS’ latest topped the Billboard charts for the past week, selling all of 61,000 copies, according to Nielson SoundScan. That’s the lowest weekly figure ever for a #1 album aside from the “Dreamgirls” soundtrack, which sold 60,000 copies last year.

And there was more bad news this month.

On January 10th, Barnes & Noble surprised Wall Street slashing its fiscal fourth-quarter profit projection, saying, “Sales of recorded music were significantly below forecast.”

Yes, even with all this doom and gloom swirling about the industry, the numbers still were a shock.

Barnes & Noble stock suffered its biggest one-day decline in seven years, plunging almost 20% to a 52-week low. The sell-off cut about $400 million from company’s value. Later that day, Borders Group said its music sales fell almost 13% from a year earlier.

Barnes & Noble’s results – in particular – weren’t a total surprise.

I’ve bought discs at Amazon.com, Overstock.com, eBay.com, Amoeba Records, Virgin Records, the WFMU Record Fair, stoop sales in Brooklyn and even a flea market in Rome (the FABULOUS POODLES’ hard to find His Master’s Choice).

But never from Barnes & Noble.

Why?

It offers the worst of both worlds: limited selection at awful prices.

As a bookseller, first and foremost, Barnes and Noble should seriously rethink its music strategy, up to and including exiting the business entirely.

But don’t shed any tears for the big boys. Save them for the smaller players who have much more to worry about than just downloading and CD ripping.

A lack of scale, resources and product diversity prevents them from competing effectively against deeper-pocketed rivals who can sell music at a loss to attract customers in hopes that they’ll buy higher margin items.

Therefore, CD sales will come from fewer and fewer retailers. And because these are primarily general interest destinations that cater to the masses, if you’re looking for something even relatively obscure, well….good luck to ya! Go online.

Exacerbating this downtrend, many retailers are reducing or plan to reduce the amount of space allocated for CDs. An April 27, 2007 Wall Street Journal article pointed out that 65% of U.S. music sales (including digital sales) are through big-box chains like Wal-Mart, Target and Best Buy. To be fair, although these retailers offer little to discerning music fans, they shouldn’t shoulder all the blame:

“For his part, Best Buy’s Mr. Arnold [senior vice president for entertainment] says the blame for waning consumer interest in CDs lies with the record labels, not with stores like his. “Music has become a commoditized item,” he says. “The CD is perceived by the consumer to be a $10 item, and the manufacturers continue to release new titles at $15 to $18.98.” To remedy that situation, he says he has urged labels to move to a “paperback-book model,” with no-frills packages priced cheaply for most customers, and more deluxe presentations for die-hard fans.” (WSJ 4/27/07)

Mr. Arnold is right. The take it or leave it one-price approach is increasingly anachronistic.

My question to the record companies: Since I, like many people, won’t pay a retailer $18.98 for a new CD why not get some of my business rather than none of it?

Yes, that would require some adapting. But if adapting is out of the question then empty stores will soon provide the answer.

Filed under music industry music technology

Comments

maybe not impossible to spin (clever title!). I for one am mainly a fan of independent music, and good luck finding any in the large stores you mention in my small town; also, 18.95 is a laugh and a half for a CD, it always has been if you ask me. Additionally, now that downloadable music is being released at higher bit rates it has begun to appeal to me more and more.

How long has it been now that major labels had any interest in creating new music fans? No fans=no sales, and maybe that is finally starting to emerge as a reality.


— I dunno    2008-01-26 18:47    #

You know what is a great strategy? Rhino Handmade reissues limited edition CDs appealing to music lovers of a certain age (not to kids!) who still want to actually read the booklets. I got the Rank and File CD (I had emailed it as a suggestion to them; I like to think it was me who pushed the green light on it!) but I missed out on the complete Stooges’ Fun House sessions 7 CD box set.


— Ed Lin    2008-01-28 12:29    #

I was in a Barnes & Noble in Macon, GA and they didn’t seem to even have CDs for sale other than a few “hits” up front. Borders keeps having 40% off sales on CDs for Borders card members. When I went to the Borders sale,the stock was disorganised and very slim. I think the book stores are about remove CDs from the stores or at least the lack of care they put into it says that. Higher bit rates for music downloaded online will put the music stores under at some point soon. A few collectors stores should be around for years.


— Steve Witte    2008-01-28 14:40    #

The music industry has long been a victim of its own greed. The cost of manufacturing a compact disc has always been minimal. The major labels really don’t spend a great deal of money marketing anymore, and the days of outrageous artist contracts are pretty much gone too. A similar economic model would be like Wonder Bread suggesting that grocery stores buy their bread for $15.98 a loaf; consumers would stop buying Wonder Bread if they decided to do that. The fact of the matter is that the nature of the business is changing; consumers are going to get their music in different ways and blaming it on bloggers, pirates and peer-to-peer is just ignoring the elephant in the room. Why should I, as a consumer, spend $15.98 for a CD with ten songs I don’t want when I can download the two songs I do want for 99 cents each on iTunes, or better still, 49 cents (depending on which plan you buy) on EMusic. It doesn’t take a genius to figure out why CD sales are tanking and will get worse. For my part, I think that in the next few years you will see groups releasing singles more and more and full albums less and less.


— Carlos deVillalvilla    2008-02-07 16:37    #

Hi I Dunno,

You’re right about improving bit rates. Amazon song files apparently average 256 Kbps. And yes, a lack of investment by the record companies in nurturing talent has now come back to bite them. If they give no reason to attract new fans they shouldn’t be surprised by the state of the industry.

Hey Ed,

Congrats again on your book! I just received my copy from Amazon. I look forward to reading it. Separately, I totally agree with the strategy used on the Rhino Handmade reissues. For music lovers of a certain age money isn’t much of an object when hard to find and tastefully packaged material is made available. By releasing these in limiting quantities—say under 5000 copies—it’s relatively easy for the labels to turn a profit, albeit a modest one. And by the sound of it, I’d wager that Rhino listened to your Rank and File CD suggestion!

Hi Steve,

I’m not surprised by what you saw at Barnes & Noble in Macon. I’m sure the same scenario is playing out all over the country. However, 40% off sounds pretty fair of Borders. That said, too bad their selection left a lot to be desired. I agree that we’ll see more digital downloads, fewer CD sales and a persistent if not growing smaller market of dedicated collectors.

Hi Carlos,

You asked:

“Why should I, as a consumer, spend $15.98 for a CD with ten songs I don’t want when I can download the two songs I do want for 99 cents each on iTunes, or better still, 49 cents (depending on which plan you buy) on EMusic. It doesn’t take a genius to figure out why CD sales are tanking and will get worse. For my part, I think that in the next few years you will see groups releasing singles more and more and full albums less and less.”

I couldn’t agree with you more. Check out this story at Silicon Alley Insider:

Thanks for writing!


— Greg Bartalos    2008-02-07 23:01    #

you can also buy a lot of $19 cds for around $4 or $5 from sellers on amazon with excellent ratings. i bought the last paul mccartney record that way, it was half what i would have spent buying it at starbucks (and truth be told, still twice what the music turned out to be worth), even with the postage cost! that said, i still see a lot of fans spending their music money on concert tickets and merch these days instead of on cds, so there is still money in the music biz, just not for the major labels. hmm, too bad! you give nothing for something long enough, your consumers will eventually only accept something for nothing. p.s. loved the top 10 for 2007. five of those were on my own top 20, so needless to say i agreed!


— jack rabid    2008-02-14 02:38    #

jack—if you care about the artists (of course you do), beware those amazon sellers. in my experience, much of their discounted inventory is comprised of promo CDs—legally forbidden for resale but amazon does nothing to police this. artists assume the cost of making these promos (often directly) and postage to send them to reviewers and radio stations (who often resell them without even listening) but receive none of the revenue when these give-aways are sold on amazon. they don’t even get soundscan points because the barcodes are punched out or otherwise defaced!

rant over, here’s a fascinating article about “the new economics of music” that is really worth reading:


— Jim Santo    2008-02-14 13:50    #