Tuesday, March 20, 2007

What Up With CD Sales? Popsurfing Vs. NYCD

Here's an email back and forth between myself and Tony, one of the two co-founders of my favorite music store NYCD. I call it a music store, but they shuttered their brick and mortar outlet and now work out of an office, doing most of their business online at Amazon.com and elsewhere. Tony and Sal have a passion for music and they had a great store with a great location (originally) in a boomer neighborhood with no competition for used CDs or indie store customer service. And it just didn't work. Now they're hawking used CDs online. Before, their used copies of say the new Norah Jones had to compete with dozens (even hundred?) of copies located in different stores around the city. Now, anyone can go online and find thousands of copies on sale and the only way to survive is to cut prices. I kept seeing the glass half full, talking about the billions being made in ringtones et al. Tony saw his dream of a career championing new music to music fans slipping away and said I was a schmuck. Here's my longer piece on what's happening to the music biz. Here's our original email debate:

It began with Tony emailing me a Wall Street Journal article from last week that began:

In a dramatic acceleration of the seven-year sales decline that has battered the music industry, compact-disc sales for the first three months of this year plunged 20% from a year earlier, the latest sign of the seismic shift in the way consumers acquire music.

The sharp slide in sales of CDs, which still account for more than 85% of music sold, has far eclipsed the growth in sales of digital downloads, which were supposed to have been the industry's salvation.

MICHAEL: Hmmmm. You look at the sales total of the Top 10 albums and clearly something is up.
But for an article in the Wall Street Journal, this piece is rather bizarrely devoid of hard numbers, mainly dollar amounts. (There's one ref in the middle to digital singles followed by CD units, which are apples and oranges of course.) The only numbers he usually offers are percentage drops from last year. The vaguest number of all was when he said that sales of physical and digital are down 10% this year and even if you include subscription services (a paltry figure, surely), ancillary merchandise (whatever that means -- t-shirts at stores? But not presumably DVDs) and ringtones sales are still down 9%. That means ringtones and ancillary stuff is just 1% of all sales? That is absolutely untrue. Ringtones in 2006 were a billion dollar business. Unless music sales are $100 billion, ie $1 TRILLION dollars, ringtones account for a lot more than 1%. I really find this article unhelpful and unilluminating. What was the annual sales total in 2006? Break it down in dollar figures by CDs, digital singles and albums, ringtones, etc. How does that compare to 2005? Also, is he talking US or worldwide? (Not that worldwide sales aren't in turmoil too, they are.) Does it include music videos on DVD?
In 2005, before ringtones and ringmasters got even bigger, digital singles and ringtones+ were already 8.8% of the business, per the NYTimes.
I assume that figure grew to a conservative 10% in 2006. And the biggest explosion was in ringtones, per Billboard.
Here's a SoundScan-based article about 2006 from an industry newsletter.
It says that SoundScan says music sales were up 19% in 2006 from the moribund 2005 and that online sales were up 65% (which is a slowing in the growth but still growth. 22 songs sold more than 1 million digital copies online (does that include ringtones?) which is a huge jump over the past decade, when singles were basically phased out. The most interesting figure is that 32.6 million "albums" were sold online, as in Van Morrison's Moondance being bought solely in digital form. But only 11 albums sold more than 100,000 copies. That means a LOT of "long tail" sales, you know, the idea that the unlimited availability of titles online means instead of selling 8 million copies of Norah Jones you sell 8000 copies of a hundred different albums.
Half a BILLION digital singles were sold. That's $500 million in sales and doesn't include the 32 million digital albums sold, which is another $300+ million. And that doesn't include ringtones and ringmasters, which are another $1 billion in sales and estimated to grow much more. The music industry destroyed the singles market and now digital sales and ringtones have brought them back. Young people spend $1 to $3 or $4 on a hot single and play it endlessly. That's the way it was for most of the rock n roll era. Labels made that impossible for years. Now it's returning and will be more than 10% of all sales. Digital singles mean catalog albums and songs can be accessed with more ease than ever before. People don't WANT to steal music. As soon as sales can be easily transferred between players (hello, iPod), it'll improve.
But again, that article is very vague and half-assed and even though I've been looking I still can't find hard dollar figures anywhere for the first quarter. But since 2006 was a 20% jump in sales over 2005, then if sales dropped 10% that would still be 10% better than just two years ago. Yep, I'm confused too.

TONY: So if ringtones and digital single sales are saving the music industry, why does the music industry appear to be collapsing? You don't see label execs lighting their Cohibas with $50 bills nowadays, you see them laying off entire departments. Ringtones are wonderful, no doubt, and if you believe that listening to a snippet of a song on your phone is going to make lifelong music fans of the kids today, then God bless ya. But clearly, something isn't adding up. Perhaps the number of digital singles and albums purchased include a large number from subscription services, where a song costs something like 15 cents? I've heard that the labels barely make any money at a buck a song on iTunes, so I can't imagine what kind of revenue stream 15 cent songs produce.

In a nutshell, my guess is that the article is correct -- to make up for the loss of a $15 CD sale, you've got to sell quite a few $1-4 ringtones, even if your margin is higher. And that ain't happening.

My guess is that, eventually, the vast majority of music will be given away, and supported by advertising dollars on the web. Physical CDs will be little more than a merchandising tool to promote the live show, at least for pop music -- I think that jazz and classical fans will want the higher fidelity that physical objects provide. The really interesting question, apart from what kind of work will Sal, Tony and Rob find, is how this will affect the music itself. And on that count, your guess is as good as mine.

Did you read that REVENUES were up in '06 over '05? Or sales? Because, from what I know, '04 has been the only up year this decade, and that was less than a 1% increase. I think revenues have been tanking fairly steadily since 2000. Do you have evidence to the contrary?

MICHAEL: I think you're right about music being given away basically. 90% or more of artists never made money on album sales at major labels anyway -- they made all their profit touring and in merchandising. I think the artist of the future just doesn't need a record label so much. You can make yor music available to the world with MySpace, develop a following there and touring, get placed on a TV soundtrack and so on, or get exposure via a major label and then go independent, etc. etc. etc.
I think it's a great time for the music. I read about an artist and half the time they have a track for me to listen to linked to the online article. Or if I just read about an artist in print, I can go and type in their name and find their myspace page and immediately hear three or four songs from them and see if I want the album, rather than just having to trust a review. It's music on demand and my Best Of list is crowded with all sorts of people. So creatively, I think it'll be just great.MOre music is more available to more people than ever before.
I gave you the links below to the articles I cited. But just like the WSJ article, they were vague with their figures, lacking all sorts of distinctions between wholesale revenue and retail revenue and CDs versus a combo of CDs and digital versus a combo of CDs and digital and ringtones and t-shirts.
I don't dispute that major record labels are becoming dinosaurs and struggling to find out where the money is. But people ARE spending money. Just because Warner bros. isn't making its same margin of profit doesn't mean the money isn't being spent. I've spent five years listening to people say the movie industry is collapsing, that movie budgets are WAY too expensive, that marketing costs are spiralling out of control and that it's insane to think anyone can make any money from movies that cost $100 mil to make and market -- that's the average cost of course, not the $300-$400 mil they'll spend making and marketing say Spiderman 3. Meanwhile, I know that Spiderman 3 will gross $1 bil from straightforward box office and DVD sales worldwide, minimum. They say the sky is falling because the box office drops from say $10.2 billion in 2002 to $9.5 billion in 2003 (I'm making up these numbers), ignoring the fact that movie studios grossed $20 billion on DVD , money they never made before. Who cares if the box office goes down $1 billion, if the trade off is an extra $20 billion in DVD sales? There's also huge growth overseas in DVD and box office. (China and India have barely scratched the surface of screening US movies and that's another 2 billion people ready to see Spider-Man 8. The movie industry has gone - in the US alone -- from a $4-$5 billion business in the early 80s when I first started following the figures to a $40 to $50 billion industry. Almost no articles recognize this simple fact and so they are hopelessly clueless about how much vastly bigger the pie is.
I can't help feeling there is a similar narrowmindedness in the music industry coverage. As an outsider, I don't care if the money is spent on ringtones or digital singles or album sales. The massive sales of the 90s was a fluke when the record industry had a tremendous product and convinced everyone who owned a copy of Dark Sidfe Of The Moon on LP to buy it again at twice the price on CD. That clearly won't be happening again on digital. When you add up all the money, sales are down, but not that much; it's just that the money has migrated from high profit CDs to low profit digital singles and ringtones. But people are still spending money. That doesn't help your business and it certainly doesn't help the major labels but why would anyone with any name recognition stay on a major label? You can make so much more money on a truly indie label or on your own. Paul McCartney just brought his entire catalog to Starbucks and that catalog is incredibly valuable. Obviously, things are changing and major labels have become outmoded. But people are still spending money on music. Just not as much as they were in the 90s, when there was a once in a lifetime fluke that we haven't seen since the LP (and that wasn't so dramatic because people owned a lot fewer 78s and piano rolls). No one buying cassette or eight track felt the need (usually) to buy their LPs all over again in the new format. It was a bizarre, thrillingly lucky moment for the labels when they were printing money by reselling albums again and again.
Oh dear, I've said all this before. I think this WSJ article annoyed me because it was so VAGUE. Percentage drops year to year without any hard dollar figures behind them or historical perspective are pretty useless.


This market analysis by Gartner was covered in Billboard and a lot of other places when it came out six weeks ago. Note that the figures for 2005 and 2006 are hard figures, not estimates.
Music downloaded to cell phones and the like (not digital tracks for iPods) WORLDWIDE (it's a much bigger business in Japan and the rest of Asia, then Europe and then the US in terms of size):
2005 -- $6 billion
2006 -- $9.1 billion
2007 -- estimated $13 billion
and then it goes on to see huge growth. That $9 billion worldwide -- figuring a very high per CD cost of $20 is the equivalent to an extra 450 MILLION CDs worldwide. That is a lot of ground made up in album sales. Yes, the CD as the defining source of revenue may be over. But did that Wall Street Journal add in the $9 BILLION from worldwide ringtone sales to a look at how the business is doing? No, they did not. It's just as dumb as looking only at a movie studio's box office revenue and ignoring the fact that they make twice as much money via DVD sales. Again, if movie box office goes down $2 billion but the trade off is $20 billion in DVD sales,. seeing that as a decline is ludicrous. In music terms, this does ignore the fact that margins are much lower on digital singles, though I'm not as clear as to how it plays out on ringtones.
The NYTimes article on the album by Akon was actually perceptive. No, the album didn't do as huge as it should, but there are a lot of new revenue streams.
Maybe the album only goes gold because kids bought two of his songs at $3.50 a pop for the ringtones instead of the CD. But it's still money.
An MSNBC article quoting the IFPI says digital tracks and albums (not ringtones) account for $2 billion or 10% of all sales worldwide and they believe in 2007 it will make up for the shortfall of CD sales.

Per article:

Kennedy said he now hoped online sales would compensate for the decline of CDs sometime this year.

“There’s nearly the holy grail in three major markets — the United States, Britain and Japan. Next year I would like to be announcing that is the case for around 10 markets,” he said....

Kennedy pointed to mobile music sales as a major area for growth this year, with the launch of Apple’s much anticipated iPhone and the development of music phones by Nokia Corp. and Sony Ericsson. [He's talking about the US of course. It's already huge overseas.]

End quote.
That means the worldwide music sales are $20 billion and that does NOT include the $9 billion spent on ringtones. In other words, music sales were down 3% in a year that grossed $20 billion worldwide. But the total figure when you include ringtones and ringbacks and all that other crap worldwide is more like $29 billion. Guess what? Music sales are UP; it's just that the money isn't going into CDs and isn't going into record label pockets. Seriously, how can you discuss the fortunes of the music industry and not include figures that account for almost 50% of sales? That's exactly what the WSJ did.

TONY: I think the difference between the movie companies and the record labels is that, at the end of the day, the movie companies' bottom lines are fine and they're not crying wolf. If the record companies were merely bitching about CD sales and actually raking in the bucks thanks to ringtones, you'd think they'd be telling their investors about it so their stock would still be performing. And that's simply not the case. Music companies' stocks are plummeting, and investors are headed for the exits. You'd think that if ringtones were the cavalry coming in to save the day, more would be made of this fact on Wall St. I'm not saying that the investors aren't wrong or shortsighted, but it does seem like there are a lot of people who don't agree with your predictions.

(I also think the movie biz is fucked, once computers come along that can do with movies what is currently being done with music. The DVD biz will tank, people will download movies illegally, and those $400 million blockbusters will become money losers. It's just gonna take a few years for that to happen.)

As for the $9 billion number for ringtones -- that would mean that every man, woman and child in America bought ten ringtones last year. Or wait, was that worldwide numbers? That still seems quite inflated, considering that in 2000, the music biz's peak, only about $25 billion worth of music was sold, by my best guess. And again, the bottom line shows that everyone's losing money -- not something the labels want to tell their investors, especially if it's not true.

I do like this spirited conversation, even if we never agree on who's right!

MICHAEL: The $9 billion is a worldwide figure. Only $1 billion comes from the US. The other $8 billion comes from the rest of the world, led by Japan (which has HUGE phone bills thanks to texting, ringtones, etc.) and then followed by Western Europe. The US is way behind in ringtones as a business for lots of reasons, but that just means lots of room to grow.
And movie companies do in fact cry wolf all the time. They love to bitch and moan about the high cost of making movies because they hate paying actors $20 million to appear in films the studios esxpect to gross $300 million worldwide. The film studios also desperately keep info on DVD sales as close to the vest as possible. Unlike weekend box office, they will adamantly refuse to divulge any hard figures on individual DVD titles. It is literally a state secret. In Billboard,. all they do is list titles in order of popularity, with no hint of how much money they're actually pulling in. Once in a while, they'll trumpet the number of copies shipped to stores for a title like, say, Toy Story 2, but again they are ferociously private about sales figures. Once, -- once -- they announced that "XXX," the awful action flick had grossed $100 mil in its first weekend on DVD when you add sales and rentals. I did a story on it and asked everyone why they didn't have a weekly chart for DVD grosses like the weekend box office. Everyone in the DVD divisions said they would love it but that the studios would never let them and in fact they were surprised the company released the figures on "XXX" and said it was kept secret for the very reasons I've mentioned. I've pushed repeatedly and they repeatedly say it's because the studios do NOT want to emphasize that the DVD pie is TWICE as big as the box office pie. They already fight off the biggest stars who want a cut of DVD sales and don't want anyone else beyond Tom Cruise and Speilberg getting any bright ideas. It is a massive cash cow and they like to pretend it doesn't exist. Of course, when they're talking to themselves they can't help admit the business is doing great, like when the MPAA spoke to the theater owners and crowed about the massive growth in audiences over the past 40 years, when ticket sales have increased by more than 50%. In the 70s, 980 million admissions were sold per year on average. In the 80s it was 1.1 billion admissions average per year. In the 90s it was 1.3 billion admissions and the 2000s are so far averaging 1.5 billion admissions per year. That's in the context of an era in which consumers have TRIPLED the amount of money they spend on movies, from X amount of dollars at the box office to 2X amount of dollars on DVD, for a total of 3X. ie. from $10 bil roughly at the box office to $30 bil overall, in the US alone for just admissions and DVD. In the thousands of articles written about the travails of the movie industry and rising film budget and marketing costs, when have you ever heard the two simple facts that movie audiences continue to grow by leaps and bounds AND people leave the theater and buy the movie on DVD.
The easy availability of movie downloads does NOT have to mean people will start stealing bootleg copies of movies. People do NOT want to steal, but if it becomes so difficult to buy a copy and use it any way you want (ie play it on your computer or tv or burn a DVD and use it on your portable laptop or make a second copy to keep in your weekend home etc) then yes people will start stealing just like they do with songs. But it's the fault of the major record labels. They should simply refuse to make their music available to iTunes until iTunes opens up its rights management. More importantly, they should stop putting all sorts of idiotic restrictions on the music, like they did with the Neil Diamond CD. THAT'S why people go to bootlegs. Not because the world is filled with criminals but because record labels make it so hard to be good.

I will respond to the rest of your email later, because I love this kind of thing. But, personally, I ABHOR paying for downloads. I will do so if I have no other option, like with the Herb Alpert albums that are only available on iTunes. But if I can find it easily enough, I'll steal it every time. If I spend money, I want a physical artifact, not a fucking file on my computer. I have no idea what kind of minority I'm in on this one, but I'd assume there are others like me. And it's not like I want to be a criminal or anything. I'm very happy to spend too much money on a CD. I just don't like paying for downloads, that's all.

MICHAEL: Me too.

Wait, "me too" you love this kind of argument? Or "me too" you hate paying for downloads?


I fear being labeled an old fogey because I've never downloaded a ringtone. Actually, the one time I tried to download a ringtone, my cellphone wasn't compatible or something and I lost $2. Never again, I say. NEVER AGAIN. Do you download ringtones? I will not judge, regardless of what your answer is.

MICHAEL: Ringtones, no. I can't be bothered.

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