Record companies try adding value

Record companies are looking for ways to make more than 99 cents per song. One new effort is to bundle a group of added attractions around a new release. Epic, a Sony label, is offering a $17 “season pass” for fans of their group, The Fray.

"The pass delivers songs, video footage and photos, but spaces out the offering over several weeks in the hope of holding consumers' attention and justifying the premium price."

The music industry is flailing about, looking for new revenue streams. It may be that producing value-added bundles of this sort might be one way out of their dilemma. Interestingly, their problem has been caused by the collapse of bundled deals -- albums -- that they have been offering for generations. Downloads have de-bundled albums, and consumers are choosing to buy the one or two songs per album that they care about and ignore the useless filler songs that the record companies had been forcing their customers to pay for.

These new bundles will work only if enough consumers see the extra material as being of real value.

Sony and BMG parting company

The Sony/BMG merger that four years ago created the #2 record company is ending with a Sony buy-out. Bertelsmann will walk away with a lovely parting gift -- about $1.2bil, plus some European music rights.

My first reaction was that anybody leaving the music business was probably making a good move, but this article indicates that maybe there's more money still to be made there than I (or a great many others) had thought:

For Sony, the split-up is good news. Analysts say they were surprised to learn that the $3.9-billion company was sitting on such a big cash stockpile. In terms of earnings, Sony Music Entertainment won’t boost the numbers much. But it won’t hurt them, either. They’re expected add 2.2% to sales and almost nothing to profits if Sony consolidates the business in the second half of the fiscal year. (Though profit margins are 8%, profits will be offset by a restructuring charge this year, analysts say.)

8% is not fabulous, but it's certainly OK (the oil industry, which some folks think needs a windfall profit tax, makes about 8.5% or so).

The other reasons for the buyout seem to be that it gives Sony more content for its entertainment businesses, and it puts an end to the internal power struggles that plague so many mergers, and appear to have been a big problem within Sony/BMG.

More private-label music at Wal-Mart

The New York Times describes Wal-Mart's push into exclusive deals with big but somewhat faded acts, which have led to some pretty big sales for the bands:

On Tuesday Wal-Mart started selling on an exclusive basis a three-disc collection by the popular 1980s band Journey called “Revelation.” The difference, however, is that there is no middleman: the album was bought directly from the band without the help of a record label. Journey went right to Wal-Mart and kept most of the money a record company would normally take as profit for the group. Last year Wal-Mart made a similar deal with the Eagles, who like Journey are represented by Front Line Management, the nation’s largest music management company.

The Eagles CD sold three million copies, and Journey started of with 45,000 in its first three days. Good numbers even back in the good ol' days of music, and huge in the age of downloads.

I find the info about cutting out the labels interesting:

“It just goes to show you that fewer artists need to be associated with record companies,” said Larry Mestel, chief executive of Primary Wave Music Publishing and former chief operating officer of Virgin Records. “They don’t need to give up a big chunk of money to the record companies when they’re iconic. They can go direct to Wal-Mart and make four to five dollars per CD.”

It’s hard to tell how much traditional labels are threatened by the prospect of artists’ selling directly to retailers. New albums from more established acts can be less profitable if they have negotiated a higher royalty rate. And although the Eagles are reliable sellers, Journey is what industry executives delicately refer to as a “heritage act,” a steady summer concert attraction that sells relatively few albums of new material.

In addition to being a moneymaker (one presumes) for Wal-Mart, such deals are also traffic-generators and brand-builders. For the labels, though, it's just another problem:

“Shelf space has shrunk so much over the last five years that for anyone to give you shelf space and exposure is a big deal,” said Terry McBride, chief executive of Nettwerk Music Group. “Should the labels be worried? There’s been a move away from the labels for a number of years now. And it’s not necessarily their fault. The shelf space to have those records sell just isn’t there. That’s the market reality.”

These older acts have long been a reliable source of income for the labels -- steady sellers that don't require much promotion. They also appeal to older consumers who are less likely to download and pirate music.

Oh, and the NYT left out another such deal, announced today, with AC/DC.

Music distribution continues to evolve

A couple recent developments demonstrate the continuing changes taking place as the music business seeks to find ways to deal with the changing times.

Whole Foods seems to be entering the record business as Starbucks is leaving, offering a line of CDs featuring emerging artists:

The first artist in the Whole Foods Artist Discovery Series will be Greg Laswell, currently signed to Vanguard Records, a historic indie label that was once the home to the Weavers and Paul Robeson. Laswell's second LP is due from Vanguard this July, but before then he'll drop the EP "How The Day Sounds," which will be sold in Whole Foods locations this month.

Amazon, meanwhile, is going to be offering a "disc on demand" service, making available out of print CDs, in partnership with Sony, BMG, and EMI.

The bright spot in the entertainment biz

The woes of the music biz have been discussed endlessly (here and elsewhere). The movie biz is hurting as well, and the networks' TV ratings are crashing through the floor. Not coincidentally, video game revenue growth has been phenomenal. It's not a coincidence because teenage boys and young adult males have always been among the biggest buyers of music, and a large part of the audience for movies and TV.

The incredible $500mil generated by Grand Theft Auto IV in its first week (the company is calling it the biggest entertainment event ever -- possibly hyperbole, but I can't think offhand of anything bigger) is not the only evidence of the shift. Activision had no new intros, but is still generating great results based on older titles:

Activision Inc posted a quarterly profit on Thursday that blew past expectations as demand for its "Guitar Hero 3" and "Call of Duty 4" video games made up for a complete lack of new releases. [,,,]

Revenue was $602.5 million, towering 93 percent above a year ago and burying the average estimate of $373.6 million.

Not bad, and more than enough to have folks at the record companies saying, "So that's where my missing $600 million went!"

Meanwhile, Microsoft announced that it has reached the ten million mark in sales of Xbox 360, although Nintendo's Wii is outselling it now and close behind at 8.8 million.

The worst thought for the traditional entertainment venues is what this probably means in terms of talent. If you were a young, talented, creative person, would you be dreaming of a future in music, movies, TV ... or video games?

iTunes is #1 retailer

An important milestone has been passed as for the first time an on-line retailer has taken first place in a major product category, as Apple has surpassed Wal-Mart to become the top music retailer in the US.

But success inevitably brings increased competition:

Apple Inc. said the iTunes online store, not quite 5 years old, has become the nation's leading music retailer, surpassing music sales at the world's largest retailer, Wal-Mart Stores, Inc.

Also Thursday, MySpace.com said it would expand digital music offerings on the social networking site to include three major labels—Universal Music Group, Sony BMG and Warner Music Group—to go along with the numerous indie labels that already offer music on MySpace.

That means two of the Web's biggest players—MySpace, the top social network, and Amazon, the top online retailer—will try to chip away music sales from iTunes. Amazon launched digital music sales late last year.

Wal-Mart wants tiered pricing for CDs

Wal-Mart is pushing the record labels to come up with a tiered pricing plan for CDs, according to an article from Billboard:

The major music companies have been resistant to lowering their price on CDs, but now they may be dragged to that point: Wal-Mart, the largest retailer of music with an estimated 22 percent market share, has proposed a five-tiered pricing scheme that would allow the discounter to sell albums at even lower prices and require the labels to bear more of the costs.

The tiers would be:

• Top 15-20 titles: $10
• Hits and current titles: $12
• Top catalog: $9
• Midline catalog: $7
• Budget items: $5

The article quotes a Wal-Mart exec as saying:

"When you look at sales declines with physical product, and you have a category declining like it is, you have to make decisions about what the future looks like," he said. "If you have a business that is declining and you want to turn it around, it really takes looking at it from all angles."

The fascinating item is that there is apparently consideration of dropping music altogether, or at least cutting back to a couple racks, if the labels don't come around. This is a great case study of an industry in crisis. I'll bet there will be a bunch of MBA papers written on the music industry in a few years.

iTunes is #2 music retailer

iTunes is now outselling Target and Best Buy, moving into second place in the music retailing biz.

The survey, compiled by New York-based market researcher NPD Group, showed that Cupertino, Calif.-based Apple Inc.’s online iTunes music store edged to the number-two music retailer, ranking behind Bentonville, Ark.-based Wal-Mart Stores Inc.

According to NPD, legal downloading accounts for 10% of music sales in the US.

The CD biz is even worse than you thought

Analysts have revised estimates on how quickly the bottom is dropping out of the compact disc market.

In a report, industry analysts Richard Greenfield and Mark Smaldon of Pali Research in New York said they now expect U.S. unit sales of CDs to slide 20% in 2008, a bigger decline than the 15% drop they had previously predicted. Moreover, decline would come on the heels of an expected 18% drop in U.S. CD sales in 2007.

If my math is right (and it is) that would mean that 2008 sales will be less than two-thirds of sales in 2006. You can't last long in that kind of market.

The big question, of course, is how long before retailers pull the plug:

A key factor affecting CD sales: how quickly those big-box retailers such as Best Buy shrink the amount of floor space they devote to music to levels more comparable to Wal-Mart. Combined with the growing utility of digital music, it could easily lead to even more rapid decline in CDs in 2008-2010 ....

I've seen no evidence thus far that the music industry has figured out any way to address the new market realities, other than suing everybody in sight.

The Times They Are A-Changin'

Bob Dylan didn't have channel structures much in mind back in the sixties when he wrote that famous song, but the music reference is apropos: What has happened is that one group of channel interlopers has been passed by another in the music biz.

I've posted on the destruction of the music retail channel before -- the death of stores such as Wherehouse and most recently Tower, killed off by mass merchants. But now we're seeing another whole channel, or two, taking a big piece of music retailing.

According to NPD Group, ITunes has moved past Amazon and Target to take third place in music retailing. The top five are:

1. Wal-Mart - 15.8% market share
2. Best Buy - 13.8%
3. ITunes - 9.8%
4. Amazon - 6.7%
5. Target - 6.6&

Just for old-times sake, I think I'll listen to Subterranean Homesick Blues on my Ipod.

I nailed it!

Okay, I didn't nail it exactly, but I was close.

Over a year ago, in this post, I speculated that Wal-Mart could carry their private labeling of music to the point of establishing their own record label:

The question is, could Wal-Mart apply the concept of private label to music -- could they, in short, become a label themselves? And the answer is -- you bet they could! In fact, some estimates are that, in country music at least, Wal-Mart accounts for 50% of sales.

I nailed the concept, but I had the wrong party. According to this article, Starbucks has decided to establish their own record label:

Having already proven that it can sell other companies' music, coffee giant Starbucks is planning to launch its own record label and is close to a deal for the next album from former Beatle Sir Paul McCartney to be its first release, according to sources familiar with the plans.

The formation of Starbucks Records, as the unit is expected to be called, could be announced as soon as this week, according to these sources.

So who's next? I still think Wal-Mart, with their 50% market share of country, but Target and Best Buy seem like good options as well. The times they are a-changin'.

More private label music

I've posted several times before (here and here, for example) on the subject of music going private label -- a phenomenon that once would have seemed impossible.

Private label began, after all, in commodity categories, and few things are less commoditized than music. It's easy to substitute generic creamed corn for the branded product, but less so one singer for another.

And yet, it seems that a form of private label -- exclusive distribution deals -- is increasingly hot in the music biz.

USA Today reports here on several such deals:

As national music chains dwindle, big-box retailers such as Target and Wal-Mart are taking cues from Starbucks and iTunes by adding more exclusive music to their shelves. Target's new Spotlight Music Series offers 15 discs, including new adult-contemporary music, genre compilations and mixes handpicked by Avril Lavigne, Jason Mraz, Dave Matthews and others.

This is the first article I've seen, by the way, that references the private label analogy:

"It's private branding," says Christman. "How many companies make their own cereal for a supermarket chain? How many companies make their own detergents for a discount retailer? That's a set retail strategy."

You read it here first.

Private-label music

Last year, one of the surprise best-selling CDs was by country singer Garth Brooks. The surprise was two-fold -- Brooks' popularity had declined a bit, and the CD was available only at Wal-Mart.

Wal-Mart is back at it, this time with another once-popular act with a still-big name -- the Eagles.

The Eagles and Wal-Mart Stores, Inc. today announced an exciting long-term strategic marketing agreement that will encompass sponsorship, exclusive audio and video releases, and product visibility.

You'll pardon me, I hope, if I snickered a bit as I read this part of the press release:

The Eagles were attracted to a Wal-Mart partnership because of the retailer’s drive to take a lead in sustainability and make a difference for future generations.

Without questioning the Eagles' commitment to the environment, one suspects that Wal-Mart's ability to move a ton of CDs might have played a role in their decision as well.

In any case, this is (yet another) nail in the labels' coffin.

Song sung blue

It's the end of the line for Tower Records. We've reported on their troubles here and here, and on the general sad state of music retailing here.

The company was sold off to a liquidator, who outbid rival music retailer Trans World Entertainment, which had planned to continue to operate the stores.

The sell-off of Tower's inventory, valuations of which run as high as $200 million, could have a wide-ranging impact on the music business at large. The company's West Sacramento, Calif., warehouse is filled with product from the vendors of its independent distribution company, Bayside Distribution, and its accessories suppliers. Companies with a high degree of exposure could be dealt a serious blow when their product is returned for full wholesale cost.

The closure of Tower further narrows the retail marketplace, especially as it relates to "genre" music and non-hits in general.

"Retailer of the Year" goes bye-bye

Tower Records is in Chapter 11. As we noted a couple weeks ago, they had been cut off by their distributors for nonpayment.

According to their press release, they are seeking a buyer:

"Tower Records has conducted an extensive sale process and this step will allow buyers to complete a sale in time for the holiday season while maximizing the value for stakeholders." In March of 2006, the Company retained Houlihan Lokey Howard & Zukin as its marketing and sales agent. The Company is evaluating Letters of Intent from parties interested in acquiring the Company. Mr. D'Amico stated, "Potential parties seeking to acquire Tower Records recognize the strength of the brand and its unique position within the marketplace, making it a very attractive opportunity."

The amusing part of the press release was this:

Last week, Tower was voted 'Retailer of the Year' (Large Division) at the 48th annual National Association of Recording Merchandisers (NARM) convention for the third consecutive year.

How bad are conditions in an industry when the "Retailer of the Year" is in Chapter 11?

Distributors cut off Tower Records

The major music distributors have cut off shipments to Tower Records, apparently because the company has stopped paying its bills.

The move comes just days after Tower Records named a new chief executive: crisis management and bankruptcy specialist Joseph D'Amico. Tower executives informed record companies this week that they would not pay outstanding invoices, according to sources familiar with the conversations.

Tower executives, including D'Amico, did not return phone calls. A Tower spokesperson declined to comment.

Industry insiders and analysts said it was unclear whether Tower Records had run out of money or was attempting to pressure the record companies to extend better terms.

If the music companies suspend shipments for long, Tower Records could be forced to shutter its 89 locations, including the famous store on Los Angeles' Sunset Strip, analysts said.

Tower Records confirmed Thursday that it was working with a Los Angeles investment bank to sell the company.

The retailer reportedly received at least five bids this year from private equity firms. When a sale failed to materialize, D'Amico was hired in what is the third management shuffle in four years.

We wrote on the long, sad decline of the music business in general and music retailers in particular a few months back, when Musicland went belly-up. The loss of music retailers is partially the result of conditions peculiar to that category (music downloading and piracy) and partially the result of conditions common to all of retailing -- the increasing concentration of power in the hands of a few retailers.

The problem is one consumers should be concerned about, because the closing of specialty outlets for music narrows choices dramatically -- a condition that will be repeated in other categories.

It should worry manufacturers, because the closing of alternative outlets reduces their marketing options and increases still further the power of the few remaining retailers.

Spinning the unspinnable

I love it when somebody tries to make a disaster sound good. Album sales are down 4.2% this year, this is the fourth year of the past five that sales have declined, and what's the industry spin?

The decline reflects in part a dearth of big hits compared to the same period in 2005, which saw Mariah Carey and rapper 50 Cent each release multi-platinum sellers.

"Considering that you haven't had a 50 Cent to be the Pied Piper during the first half of the year or a Norah Jones the year before that, being behind 4 percent in album sales is really not that bad," said Geoff Mayfield, director of charts for music tracker Billboard.

Uh, I have news for you. Yes, it's bad.

I have this image of Zinedine Zidane's agent trying to sell an endorsement deal: "Hey, other than the head-butt, he had a really great World Cup."

Bertelsmann exiting music biz?

Financial Times is reporting that Bertelsmann is looking to get out of the music biz (and who can blame them? I commented on the poor prospects for the industry in this TPM Update).

Four people familiar with the company's plans said a sale was under preparation, though still at an early stage. The group is examining the sale of its 50 per cent stake in Sony BMG and of its wholly-owned BMG Music Publishing division, which has the rights to more than 1m songs from artists including Christina Aguilera, Keane and Coldplay.

Together, the music companies reported revenues of €2.1bn last year, down 16.5 per cent as CD sales fell. Operating earnings before interest and tax were up from €162m to €177m. Bertelsmann declined to comment.

The prospect of the third largest music publishing company being sold is likely to prompt keen bidding. Vivendi Universal, owner of the largest recorded music company, wants to build up its music publishing assets.

A marketer with its own channel

Many marketers have at one time or another owned their own programs -- most famously the soap operas owned by P&G, et al.

But how about owning your own channel? That's what Universal Music is planning, apparently. They're trying to work a deal with EchoStar that would both settle a lawsuit between them and create a channel, called International Music Feed (IMF), to promote Uni's music:

Record executives have long dreamed of owning a music-video channel on which they’d showcase their artists and address music fans’ hunger for the videos that MTV has moved away from. Previous efforts have been snagged by antitrust issues and the fear that labels would put the best videos on their own channels ahead of rival networks.

IMF will feature an array of international artists, including Latin and Indian, and a hefty dose of American artists on various Universal labels, such as Black Eyed Peas.

DoJ investigating music industry

The Department of Justice announced that it's investigating the music industry -- apparently in regard to possible collusion in pricing of music downloads.

...two music industry sources said on Thursday the DOJ's probe appeared to be focused on ... whether the labels colluded to set wholesale pricing for song downloads.

The investigation also could be related to licensing renegotiations with Apple Computer Inc.'s, maker of the wildly popular iPod digital music player, for its iTunes music store, industry sources have said.

The major players in the industry were smacked down a few years back by the Federal Trade Commission for collusion in regard to minimum advertised price policies in their advertising programs, which the FTC said amounted to price-fixing. One wonders if (in the event the allegation pan out) the previous case would cause this to be viewed as a "repeat offender" situation.