Friday, April 27, 2007

What's Really Killing The Music Industry?

Piece in the Wall Street Journal today about retail giants, the music industry and the fate of the Compact Disc. Reprinted in it's entirety:

Wal-Mart, Target, Best Buy Tighten Their Grip on CDs As Sales, Choices, Decrease

By ETHAN SMITH April 27, 2007; Page B1

When Wal-Mart Stores Inc. informed record labels it was looking for CDs to include in a promotion of Jewish music last year, executives at Naxos of America Inc. leapt at the chance to get some of their ethnic recordings onto the shelves of the big-box retailer.

But within months of shipping thousands of CDs to Wal-Mart, the classical music distributor's loading docks were swamped with unsold copies of "Klezmer Concertos & Encores" and "Great Songs of the Yiddish Stage." Since they hadn't sold quickly enough to meet the retailing giant's standards, 80% of the CDs Naxos shipped to Wal-Mart were returned. Record stores typically return only 20%. "In hindsight, if we'd thought about this a little more, we wouldn't have done it," says Naxos Chief Operating Officer Jim Selby. "Jewish classical music, going into a Wal-Mart store, it's pretty farfetched that we'd have 60% or 70% sell through." He adds, "It's niche-y music." Music executives -- and not just those who traffic in obscure genres -- are in an increasing bind when it comes to selling their wares on CD. As dedicated music stores, including Tower Records, have closed up shop by the thousands, big, generalist chains like Wal-Mart, Target Corp. and Best Buy Co. have tightened their already firm grip on the sale of physical CDs. The chains order huge quantities of some titles, while other releases find it hard to get a foothold. In past decades, deejays and music critics helped shape musical trends. Today, many music industry executives agree, the big boxes have become the new tastemakers. Even as compact disc sales fall, their choices dictate which CDs are widely available on store shelves across the U.S. Big boxes are the industry's biggest distribution channel -- and the rock, hip-hop, jazz and classical music titles they choose not to carry face drastically reduced chances of reaching mass audiences. Thanks largely to aggressive pricing and advertising, big-box chains are now responsible in the U.S. for at least 65% of music sales (including online and physical recordings), according to estimates by distribution executives, up from 20% a decade ago. Where a store that depends on CDs for the bulk of its sales needs a profit margin of around 30%, big chains get by making just 14% on music, say label executives who handle distribution. One of these executives describes the shift as "a tidal wave." Despite the growth in online digital music sales, physical CDs still are the core of the recording industry, accounting for about 85% of music sales. Big-box chains say they're trying to give customers what they want. "We also are making changes to the CD selections in our stores to reflect customer preferences in each market," says a Wal-Mart spokeswoman. But some labels worry that the big boxes are becoming even more restrictive in what they carry. That's partly because, with CD sales falling steeply, the discs aren't as hot as other products the stores sell. Also in the wake of the Don Imus controversy, the debate over the lyrical content of rap, rock and pop has flared up again. Oprah Winfrey recently has focused on rap lyrics on her talk show. Wal-Mart, for example, has long refused to carry any album bearing a "parental advisory" label warning of lyrics that are potentially inappropriate for minors. As a result, major record labels typically create sanitized versions of albums for sale there and at other sensitive retailers. People in the music industry, however, say some hip hop and rock albums can be difficult to sell to the big chain -- even if the releases lack controversial content. "Even Target's getting more difficult," says Jeff Rabhan, a talent manager who has pop and hip hop clients. "Especially with everything that's going on right now with Imus and Oprah, it is becoming increasingly difficult to get hip hop records prominently displayed and even in some cases stocked," Mr. Rabhan adds. Wal-Mart's stores don't sell a number of prominent, popular releases, including the punk band Green Day's best-selling album "American Idiot," the critically acclaimed alternative rock band The Strokes' "First Impressions of Earth," and rapper Mos Def's "Black on Both Sides." A Wal-Mart spokeswoman says these releases aren't carried because edited versions aren't available. The chains tend to emphasize fast-selling hits that move tens of thousands of units a week. A typical Best Buy stocks 8,000 to 20,000 different music CDs titles, according to Gary Arnold, the chain's senior vice president for entertainment. Some chains carry even fewer titles. By contrast, the biggest of the defunct Tower's 89 locations carried more than 100,000 titles. (Tower still has some online operations.) It's not just classical music and jazz that have trouble making it into the big boxes. Up-and-coming pop, rock or hip hop acts are unlikely to be welcome until they are proven sellers. And back catalog titles are also feeling the squeeze; even the Beatles are frequently represented in big chain outlets by just one or two albums. That means there are fewer places than ever to buy any CDs but the newest, most heavily promoted titles. What's more, as CD sales have slipped -- sales have plunged 20% so far this year -- big chains are starting to de-emphasize them. Best Buy's Mr. Arnold says his chain has reduced the square footage allotted to CDs across the chain over the past year, though the size of the reduction varies by store. "Certain businesses are starting to flourish at the expense of others," says Mr. Arnold. "Right now the hottest categories in entertainment are gaming and the movie business." Recently, Wal-Mart has quietly circulated word to major-label distribution executives that it will reduce the space devoted to music, perhaps by as much 20%, in hundreds of its stores. Some record label executives say they have heard similar warnings in the past that have not materialized. Managers and lawyers who work with record labels say that partly as a result of the big-box squeeze, labels have become more conservative in the kinds of artists they are willing to sign. For his part, Best Buy's Mr. Arnold 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. Chain retailers are unlikely to eliminate music altogether. Big-box chains often set CD prices so low the retailer loses a dollar or two on the most aggressively priced titles. If nothing else, Mr. Arnold readily acknowledges, music remains cheap bait to lure customers who may end up purchasing, say, a brushed-steel refrigerator. "I couldn't imagine Best Buy without music," he says.

Piracy isn't killing music. Retail is killing music, and the record labels themselves are culpable to a degree. The sheer volumes and low margins of the big box chains are squeezing the life out of dedicated music retailers (A&B Sound and Sam the Record Man come to mind). When Wal-Mart says "we're giving people what they want" they're really saying "we'll tell you what you want" (this ties in nicely to this week's evil empire theme).

In the face of declining music sales, clinging by their talons to an outdated business model forces the labels and the retailers to focus on only promoting and distributing the potential best-sellers, sidelining artists who might or might not be breakout stars, but the retailers won't risk putting their albums on the shelf. This is a blessing in disguise to my mind, because more and more fantastic artists are able to market themselves online, and hopscotch the traditional distribution model, which of course aggravates the decline of the record companies, but it's hard to feel bad about them.

*UPDATE* WSJ has finally taken the article from behind the firewall here.

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Anonymous said...

I agree with your post. Quality tunes have taken a backseat to lowest-common-denominator marketing and payola. A great example of a huge talent marketing himself to the masses who has almost broken through is Joe Bonamassa, guitarist extraordinaire. Check him out at

Mark said...

I'm the publicist for Naxos of America, the distribution company from Smith's article that put the Jewish music CDs in Wal-Mart.

I posted a response to this article on my blog, The Naxos Blog at Sequenza21:

One of the things we learned from that Wal-Mart experience was that having your product in front of a huge number of people doesn't guarantee huge sales. We have had big box success with other products, including a Jazz Icons DVD series, but, in general, nontraditional retailers--online stores, download stores--and independent chains serve our audience better.