Saturday, January 30, 2010

FOUR THINGS WORKING WITH THE MUSIC INDUSTRY TAUGHT ME IN 2009

THE INDUSTRY WILL NOT WIN AGAINST FRUGALITY
I'm not blaming the industry for Napster, but let's be real, here: Napster is the product of a society that had lost its tolerance. It started with a punk that didn't see that music was worth paying for and then, like wildfire, he surrounded himself with an army of millions that agreed. Myself included. And this was long before economy would be reduced to unrelenting famine. This was 1999. What it taught everyone but the music industry was that there were some fundamental issues that had never been discussed before. It's not an issue of who owns music, but rather what's it worth? The answer for many was it's worthless. And furthermore, I'll be happy to risk prosecution to prove it. It doesn't really matter whether or not the industry agrees, that's the perception and the only ones that can change this perception is the source.

And the industry didn't.

Instead, they tried to suffocate, smoke out and/or break down the doors and arrest these perps to protect their assets like the freaking Wild West. Instead of listening to focus groups and putting their commentary into actionable defenses, they instead went on the offense and attempted to prosecute, embarrass and publicly assassinate those who had robbed from them. You'd think that an industry that had as much power, money and interest would find a better way to sort through their problems. Instead though, they took the approach of a angry bull. Careless. Reckless. And unsuccessful.

With no "plan B."

You can't say they didn't have fair warning. Here we are, a decade later, and the same holds true. Except now, we're involved in two wars, the housing market has hit rock bottom (and continues to fall, incredibly), the economy has completely gone to hell, unemployment has soared to levels unimaginable and here, the stupid and hapless music industry, is still trying to sling CDs for $16.99.

The very definition of idiocy.

This ain't paper towels or diapers. This is a compact disc. It's a medium that is archaic and, as we've found, replaceable. We found that out ten years back when people were exchanging this new format called an MP3 for free on peer-to-peer applications.

Some companies have found a way to offer retailers cheaper goods and have reaped the benefits. Others still think that somewhere, somehow, someone is still going to pay $16.99 for the Beatles, Led Zeppelin, Eagles, Pink Floyd. Now, I haven't been to every corner of the globe, but I can guarantee you this. If they're out there, there ain't many of them and to find them, you're going to burn all of your pending profits...as few as there might be. If I can buy Zoso for $8.99 digitally (almost half the price of a compact disc), where's the value in that old, tired piece of plastic? If I only want "Stairway," I'd be better off just shilling out $1.29 instead of paying $16.99 for the entire record.

You can't reverse the trend. You can't convince a population that has already severed their tie to the physical good that, overnight, it's now worth $16.99 again. They've abandoned that idea. Gone. There's no wisdom in thinking that's going to happen. And if your model doesn't offer profitable margins at selling the same CD to retailers for $6.00 so they can retail them at $8.99 everyday, then you need to recreate your model because that's the reality.

The music industry will not be win against frugality. Movie industry found that out. The game industry is finding that out. Music industry has had a 10-year head start and still hasn't figured that out. It's almost like they're waiting for it to turn around.

They blame everything from artist contracts to manufacturing costs as to why they can't offer a cheaper good. I'll put this as simply as I can: at the current model, there soon will be NO PROFITS because no one will spend more than $8.99 for a CD. Tell Jimmy Page he'll have to tour until he's 95 because he ain't gonna make no more cheddah off of his the actual sell of his recordings. That or he's gonna have to sell a helluva lot of Swan Song t-shirts at Target. Will I ever see Physical Graffiti for $12.99? Who knows?

Will this generations greed mean that, forty years from now, no one will even know what in hell Led Zeppelin is and why is Floyd pink? If we can't sell the music, will anyone care?

Will anyone miss it?

Cheaper products can jump sales. The music industry will have to adjust their model to make it profitable. Right now, it's retail that's taking the hit for them.

THERE'S MORE EMPHASIS ON THE PROFITABLE PACKAGING THAN ON THE PRODUCT
Over the past decade, the industry has tried nearly every idea on how to retain their profits through crafty packaging and re-packaging. Problem is, they actual product has suffered. The value proposition has been compromised. Let's say, for example, a CD sells to retailers for $12.05 and yields the distributor/label $4.05 of profit (meaning that the good costs them $8.00 to manufacture, royalties paid, etc).

Let's say we cut out the liner notes and, instead, just put a four-panel sleeve in there and save us $.75 per unit. Then, we found a way to cut back on packaging by employing a light-weight cardboard sleeve. That saves us an additional $.50 per unit. Let's say we shave off about four songs off of the album. That's less royalties we'd have to pay the artist. Let's say that's saves us another $.50 in royalties we'd have to pay (that's a damn good contract--this is purely for example). Music industry would increase their profits by $1.75 per record because, now, that same piece that they intend to sell to retailers will cost them $6.25 to make. Still will be sold to retailers for $12.05 and then retailers will be expected to sell this "lite" good for the same price as "premium" goods.

Fail.

Then, the industry instead decides to attempt to split the difference by selling it for $11.00. They still increased their profits by $.75 when all is said and done and they feel satisfied that they offered a cheaper good to retail. Problem is, if retail was selling the full-priced premium good (full packaging and all) for $15.99 (and not selling many, mind you), that was a profit of $3.94. Because the "lite" packaging was, well, less value, they had to pull their price down $2.00 to move any significant amount of them into the hands of the skeptical and frugal end consumer. So, now, at a selling price of $13.99 on a $12.05 good reduces the profits to $1.94. Now, if the retailer can sell twice as much at two bucks less, than they're making $3.88 where before they were making $3.94. $.06 less, but it's keeping the category alive. Not likely anyone's doubling units, though, off of a more flimsy package. In fact, they'd be lucky to sell 30% more. Knowing this, the distributor says they'll cut the price because they realize that the package is "lite." The price is now $11.00. Retail's saving a $1.05 from the $12.05 cost previously because of the distributors crafty repackaging. Remember, though, I'm only going to increase sales by 30% tops at $13.99. I was making $3.94 a sale at $15.99. Making only $1.94 when I reduced it to $13.99, but my units increased by 30% so I'm really making $2.52 off of the increased sales from moving it to $13.99. Even by the reduction of the cost of goods to $11.00, I'm only making $3.88. I'm no closer than I was before by selling them at $15.99. It's a superficial cost change that, in the end, hits the consumer because they have a substandard good because distributors are attempting to increase profits by decreasing the end value of the product. Without a consumer to buy it, there's ZERO profits. The last person I'd want to piss off is the consumer. Secondly is the retailer who is the vehicle of delivery to that consumer. Without both, the future is beyond bleak. It's non-existent.

The music industry has tried everything to increase their profits instead of finally lowering their profit expectations and increasing their units shipped (like the 30% increase we were quoting before). The trick is to make less per unit, but ship more units...therein increasing your overall profitability.

For retailers, because they only make tops $3.94 off of the sale of a product that costs them $12.05 and, secondly, because people are desperate for both CASH and CHEAPER PRODUCTS, the used CD game has been one with a much brighter future. Retailer spends $2.00 to get the same unit out of the hands of the consumer and then turns around and sells it for $7.99. Cheaper than $15.99, y'betcha. Even cheaper than buying it on iTunes and nothing to show for it except a charge on your debit account and a little half-inch image of the cover art. And, for the retailer, they increased their profits from $3.94 to $5.99 (over 50% more). For distributors, they hate the used CD game because they know they'll lose with their $12.05 product. If you're looking for Zoso and there's a $15.99 new copy sitting right next to a $7.99 used copy, which are you buying? No question, anymore.

I feel for the music industry. They're in a tight place. The only solution at this point for increasing sales is not shaving back on the value of their product, but offering a satisfactory good and cutting their own profits to do so. Every industry is going into survival mode at this point as we enter another year of the worst recession most of us will ever see. If there's any industry that is not exempt, it'd would be an industry that has been down double digits year-on-year for the last seven years...the music industry. They could be the heroes if they really wanted to be.

PEOPLE WILL BUY CDS FOR THE RIGHT PRICE
When it's the right price, people will buy almost anything. That's an interesting proposition for an industry that can't turn around their own decline with the help of a thousand focus groups, armies of attorneys and strategists. I was selling some piece of crap Ted Nugent live record hand over fist, week-on-week. Not because it was a good record, but because it was $3.99. You would've thought it was the single greatest record ever made.

I've been critical of rap labels for not following suit and, because of this, many of those old recordings didn't make the leap from the 80s and 90s to the 00s. I mean, you mention 3rd Bass' The Cactus Album or We Can't Be Stopped by the Geto Boys to anyone and only real heads (like myself, haha) will say, "Yep, dope record." No cats have ever heard of that record because very few rap labels are willing to accept that those old records ain't worth the sticker price anymore. I guarantee you if some cat could by the first three Public Enemy records for $5.99 everyday, you'd be seeing high double-digit increases. Those records are still $9.99 everyday. In some markets, even more. The Cactus Album should only be $3.99. Not because it's not a good record. But because it is a good record and people should hear it. Some records are just not worth a dime more like that Nugent live record. But some are well worth it. The $3.99 bin can't just be full of lumps of coal. There gotta be some gems in there somewhere. No one wants to be that gem. They just hand off their garbage to retailers for the $3.99 bin.

Here's what the structure should look like. I'll use Zeppelin again for my example.

$12.99: Physical Graffiti, Song Remains the Same (because they're both 2CDs)
$9.99: Zeppelin I - IV
$8.99: Houses of the Holy
$5.99: Coda, Presence
$3.99: In Through the Out Door

Let's do the same for Pink Floyd.

$12.99: The Wall
$9.99: Dark Side of the Moon, Wish You Were Here, Ummagumma
$8.99: Meddle, Animals, Momentary Lapse of Reason, Division Bell
$5.99: Obscured by Clouds, Saucerful of Secrets, Piper at the Gates of Dawn, Atom Heart Mother
$3.99: The Final Cut, Soundtrack from "More"

Same for Public Enemy.

$8.99: Greatest Hits
$5.99: Fear of a Black Planet, It Takes a Nation of Millions, Yo! Bum Rush the Show, Apocalyspse 91
$3.99: Muse Sick-n-Hour Mess Age, He Got Game, There's a Poison Goin' On

How about the Rolling Stones.

$9.99: Exile on Main Street, Let It Bleed, Sticky Fingers
$8.99: Goat Heads Soup, It's Only Rock and Roll, Their Satanic Majesties Request
$5.99: Some Girls, Tattoo You, Aftermath, Steel Wheels
$3.99: Voodoo Brew, Bridges to Babylon

Beatles anyone?

$13.99: White Album
$9.99: Abbey Road, Sgt. Peppers, Revolver, Let It Be
$8.99: Magical Mystery Tour, Yellow Submarine, Help!
$5.99: With the Beatles, Please Please Me, Beatles for Sale, Hard Day's Night
$3.99: (NONE)

I want so desperately for the music to stay alive, but it ain't gonna happen through $.99 downloads and ringtones. That's close enough to free. Once it gets down to that level, people aren't going to want to pay anything anymore. The music industry has to find the middle ground between FREE and an ABSOLUTE RIPOFF.

NOT EVERYONE IS LADY GAGA
Just before anyone makes another reference to Lady Gaga's success as encouragement for an industry with very little bright spot. Not everyone is Lady Gaga. In the same way that not everyone was Norah Jones. Even Norah Jones hasn't been Norah Jones of late. Don't act like this is a turnaround. It ain't. There's still life in the physical CD but it 95% of it hinges on price. The other 5% is quality of the product. Stop trying to make it better and just make it cheaper. It's that simple.

If I may loosely quote our CEO from a meeting in front of industry executives, "Even a drowning man will eventually start kicking."

4 comments:

sarahsmile3 said...

I would buy much more if the CD's were offered at your suggested price points.

I don't trust having all of my music on a digital format. I have lost it before.

Vinyl is where my heart is when it comes to playing music in the house. Too bad my speakers suck.

Blake Collier said...

Phew...I don't feel so bad about my transgressions against the music industry now...haha...by the way, I totally agree with your pricing scale and I think you are right. I will usually give in and by a CD if it is around 5-8 dollars. That is why I love Hastings' used CD collection...

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