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5/16/2004

Plummeting revenues change face of industry

By B.J. Plasket
The Daily Times-Call

DENVER — Much as it did decades ago, the recorded-music industry serves as a reflection of the youth culture.

The latest releases are still topics of conversation among the age group that still buys most of the recorded music in the United States, and recorded music appears to be as popular as ever.

But things have changed for the recording industry in the years since Britney Spears and Eminem replaced the Beatles and the Beach Boys at the top of the record charts, and the record store’s place in the music business might never again be what it once was.

“The industry is changing at breakneck speed,” said Paul Epstein, the owner of the successful Twist and Shout record store in Denver. “It changes every day.”

Those changes haven’t been kind to the mainstream record industry, which has seen record sales — and revenues — drop precipitously in recent years.

According to Billboard Magazine, sales of compact discs fell in 2003 for the third straight year, forming the longest-running sales slump in 20 years. Statistics provided by the Recording Industry Association of America show that CD sales dropped from a record 1.16 billion in 1999 to just over 800 million in 2001. The RIAA claims the number of CDs shipped annually fell by 15 percent between 2000 and 2002. Midyear figures for 2003 indicate sales were down 15.8 percent in the first half of that year.

Revenue from record sales, according to the RIAA, dropped from $14.6 billion in 1999 to $13.7 billion in 2001.

The news also was bad for record stores, which in past decades sold virtually all of the record albums bought in the United States. According to the RIAA, 36.8 percent of record sales came from record stores in 2002, but that share dropped to 33.2 percent of sales in 2003. Last year, Best Buy closed 110 of its Sam Goody and Sun Coast Video Stores, and earlier this year one of the largest record-store chains, Tower Records, entered into Chapter 11 bankruptcy — emerging only a month later under a restructuring which gave its creditors 85 percent of the company’s stock.

Declining numbers have caused record-industry fingers to point in several directions.

Online downloading or file sharing has taken the brunt of the blame.

The price of CDs also has been blamed.

Independent recording artists who distribute their music through online sales and subscription downloading also have taken a bite out of record stores.

The five largest record companies — Sony, Universal, EMG, BMG and Warner-Elektra-Asylum — say illegal downloading or file-swapping is their biggest enemy and are taking on downloaders by the thousands. In 2003 the five companies, operating under the RIAA banner, sued 261 Colorado residents for downloading music files from the Internet. That action came after the industry won its long legal battle with Napster, the largest of the files-sharing sites.

“We will continue to fight this on every front,” RIAA vice president Amy Weiss said when the 2003 legal assault began. “This is the first in a wave of lawsuits.”

RIAA president Cary Sherman was even more blunt about file-sharers.

“These people are cyber shoplifters,” she said.

Armed with new federal legislation that allows for hefty civil fines, the record distributors are settling civil suits against downloaders for sums ranging between $12,000 and $17,000. RIAA says it has targeted only the “most egregious” downloaders, whom it claims have downloaded more than 1,000 music files.

A study released earlier this year, however, concluded that downloading is not as big an enemy as the record industry might think. That study, conducted by Felix Oberholzer of the Harvard Business School and Coleman Strumph of the University of North Carolina Business School, concluded that “file sharing has only a limited effect on record sales.”

But the study also shows that online file sharing is still rampant, in spite of the legal death of Napster. According to Oberholzer and Strumph’s research, more than 3 million users shared over a half-billion files in 2003 on the most popular site, KaZaa and that file-sharers downloaded a billion files each week last year.

The Oberholzer-Strumph study also pointed to the young people as the biggest class of downloaders, claiming that “more than half” of those under 18 years old have downloaded files. It said that only one-fifth of those in the 35-44 age group had downloaded music files.

In a poll taken as part of that study, 65 percent of those polled said downloading led them to not buy an album, while 80 percent “claimed to have bought an album after sampling it.” Oberholzer and Strumph said those apparently conflicting poll results indicated that some of those who took part in the poll may have “overstated their additional purchases” to minimize the effect of their downloading. The study also concluded that “high-selling albums actually benefit from file sharing.”

The record companies also are busy trying to replace illegal file sharing with paid-subscription-downloading. In the past year, all of the Big Five record companies have joined subscription downloading services in an attempt to fill the downloading void with paying customers.

Epstein, who has owned Twist and Shout for 16 years, said downloading “has replaced radio as the place where young people learn about music” and is part of what he called a “fragmented” music industry that has changed immensely since virtually all record sales were spurred by radio play. The industry now, he said, allows “fanatical fans” of one group or genre to buy music without going to traditional record stores.

“Phish sells CDs of every one of its shows,” he said. “The Pixies have been recording their shows and selling the CDs 10 minutes after the show is over. They are burning 1,000 CDs at every show and selling them out.”

Video games have further fragmented the market, with some recording artists producing music exclusively for specific games. Video-game manufacturers, in turn, often release that music in CD form — further eroding sales by the major record companies.

The balding, 50-something Epstein said he used to keep up with the record industry by “reading Rolling Stone cover to cover” but now stays on top of the game on his computer. He uses subscription downloading to produce CDs that he sells in his store, which has traditionally offered music not produced by the Big Five record companies.

Epstein, like many other independent store owners, was shocked last year when the Rolling Stones signed an exclusive distribution deal with record-store giant Best Buy for their greatest-hits album “Forty Licks.”

“That’s more dangerous than anything — giving exclusivity to one big company,” he said. “I went to Best Buy and bought a bunch of them, marked them up and sold them in my store. We sold quite a few.”

Epstein said downloading is “only a piece of the puzzle” in the record industry’s struggles, and a small one at that.

“I think the three major factors are CD burning, the general high price of CDs and the continued fragmentation of what was once called the youth scene,” he said. “If a person buys a CD and burns 10 copies for his friends, that kills.”

Epstein said the “average price of a CD has to come down to 10-to-12 dollars” in order for the mainstream record industry to recapture its former glory. He said a short-lived 2003 price reduction by Universal Music Group — one which lowered the wholesale price of CDs from around $12 to around $9 in order to create a retail price of around $12.99 — didn’t catch on with other distributors and “didn’t provide the lift” the company was hoping for.

“You had to advertise their product at your expense in order to get the good price,” he said. “It didn’t work.”

In spite of its current problems, Epstein said, the music industry has a bright future for those companies and stores that can quickly change with the times.

“For me it looks good because I’m not handcuffed to the old mode of doing business, unlike a giant chain such as Tower. The big record companies used to be privately held and were run by music people. Now they are publicly held and are run by bean counters,” he said.

“The major chains will survive and the strong independent stores will survive,” Epstein said. “The mid-sized chain is dead.”

B.J. Plasket can be reached by e-mail at bplasket@times-call.com.