[JPL] The Record Industry's Decline (Rollingstone.com)

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Back to The Record Industry's Decline

The Record Industry's Decline
Record sales are tanking, and there's no hope in sight: How it all went
wrong

Brian Hiatt and Evan Serpick

Posted Jun 19, 2007 2:29 PM
This is the first part of a two-part series on the decline of the record
industry. Today we're including Brian Hiatt and Evan Serpick's report on
where the music business went wrong, from the current issue of Rolling
Stone, as well as an interactive graphic illustrating the industry's slide.
Tomorrow, check back with RollingStone.com for interviews with industry
leaders on the future of the music business.


Sales figures courtesy of Nielsen SoundScan

For the music industry, it was a rare bit of good news: Linkin Park's new
album sold 623,000 copies in its first week this May -- the strongest debut
of the year. But it wasn't nearly enough. That same month, the band's record
company, Warner Music Group, announced that it would lay off 400 people, and
its stock price lingered at fifty-eight percent of its peak from last June.

Overall CD sales have plummeted sixteen percent for the year so far -- and
that's after seven years of near-constant erosion. In the face of widespread
piracy, consumers' growing preference for low-profit-margin digital singles
over albums, and other woes, the record business has plunged into a historic
decline.

The major labels are struggling to reinvent their business models, even as
some wonder whether it's too late. "The record business is over," says music
attorney Peter Paterno, who represents Metallica and Dr. Dre. "The labels
have wonderful assets -- they just can't make any money off them." One
senior music-industry source who requested anonymity went further: "Here we
have a business that's dying. There won't be any major labels pretty soon."

In 2000, U.S. consumers bought 785.1 million albums; last year, they bought
588.2 million (a figure that includes both CDs and downloaded albums),
according to Nielsen SoundScan. In 2000, the ten top-selling albums in the
U.S. sold a combined 60 million copies; in 2006, the top ten sold just 25
million. Digital sales are growing -- fans bought 582 million digital
singles last year, up sixty-five percent from 2005, and purchased $600
million worth of ringtones -- but the new revenue sources aren't making up
for the shortfall.

More than 5,000 record-company employees have been laid off since 2000. The
number of major labels dropped from five to four when Sony Music
Entertainment and BMG Entertainment merged in 2004 -- and two of the
remaining companies, EMI and Warner, have flirted with their own merger for
years.

About 2,700 record stores have closed across the country since 2003,
according to the research group Almighty Institute of Music Retail. Last
year the eighty-nine-store Tower Records chain, which represented 2.5
percent of overall retail sales, went out of business, and Musicland, which
operated more than 800 stores under the Sam Goody brand, among others, filed
for bankruptcy. Around sixty-five percent of all music sales now take place
in big-box stores such as Wal-Mart and Best Buy, which carry fewer titles
than specialty stores and put less effort behind promoting new artists.

Just a few years ago, many industry executives thought their problems could
be solved by bigger hits. "There wasn't anything a good hit couldn't fix for
these guys," says a source who worked closely with top executives earlier
this decade. "They felt like things were bad and getting worse, but I'm not
sure they had the bandwidth to figure out how to fix it. Now, very few of
those people are still heads of the companies."

More record executives now seem to understand that their problems are
structural: The Internet appears to be the most consequential technological
shift for the business of selling music since the 1920s, when phonograph
records replaced sheet music as the industry's profit center. "We have to
collectively understand that times have changed," says Lyor Cohen, CEO of
Warner Music Group USA. In June, Warner announced a deal with the Web site
Lala.com that will allow consumers to stream much of its catalog for free,
in hopes that they will then pay for downloads. It's the latest of recent
major-label moves that would have been unthinkable a few years back:

In May, one of the four majors, EMI, began allowing the iTunes Music Store
to sell its catalog without the copy protection that labels have insisted
upon for years.

When YouTube started showing music videos without permission, all four of
the labels made licensing deals instead of suing for copyright violations.

To the dismay of some artists and managers, labels are insisting on deals
for many artists in which the companies get a portion of touring,
merchandising, product sponsorships and other non-recorded-music sources of
income.
So who killed the record industry as we knew it? "The record companies have
created this situation themselves," says Simon Wright, CEO of Virgin
Entertainment Group, which operates Virgin Megastores. While there are
factors outside of the labels' control -- from the rise of the Internet to
the popularity of video games and DVDs -- many in the industry see the last
seven years as a series of botched opportunities. And among the biggest,
they say, was the labels' failure to address online piracy at the beginning
by making peace with the first file-sharing service, Napster. "They left
billions and billions of dollars on the table by suing Napster -- that was
the moment that the labels killed themselves," says Jeff Kwatinetz, CEO of
management company the Firm. "The record business had an unbelievable
opportunity there. They were all using the same service. It was as if
everybody was listening to the same radio station. Then Napster shut down,
and all those 30 or 40 million people went to other [file-sharing
services]."

It all could have been different: Seven years ago, the music industry's top
executives gathered for secret talks with Napster CEO Hank Barry. At a July
15th, 2000, meeting, the execs -- including the CEO of Universal's parent
company, Edgar Bronfman Jr.; Sony Corp. head Nobuyuki Idei; and Bertelsmann
chief Thomas Middelhof -- sat in a hotel in Sun Valley, Idaho, with Barry
and told him that they wanted to strike licensing deals with Napster. "Mr.
Idei started the meeting," recalls Barry, now a director in the law firm
Howard Rice. "He was talking about how Napster was something the customers
wanted."

The idea was to let Napster's 38 million users keep downloading for a
monthly subscription fee -- roughly $10 -- with revenues split between the
service and the labels. But ultimately, despite a public offer of $1 billion
from Napster, the companies never reached a settlement. "The record
companies needed to jump off a cliff, and they couldn't bring themselves to
jump," says Hilary Rosen, who was then CEO of the Recording Industry
Association of America. "A lot of people say, 'The labels were dinosaurs and
idiots, and what was the matter with them?' But they had retailers telling
them, 'You better not sell anything online cheaper than in a store,' and
they had artists saying, 'Don't screw up my Wal-Mart sales.' " Adds Jim
Guerinot, who manages Nine Inch Nails and Gwen Stefani, "Innovation meant
cannibalizing their core business."

Even worse, the record companies waited almost two years after Napster's
July 2nd, 2001, shutdown before licensing a user-friendly legal alternative
to unauthorized file-sharing services: Apple's iTunes Music Store, which
launched in the spring of 2003. Before that, labels started their own
subscription services: PressPlay, which initially offered only Sony,
Universal and EMI music, and MusicNet, which had only EMI, Warner and BMG
music. The services failed. They were expensive, allowed little or no CD
burning and didn't work with many MP3 players then on the market.

Rosen and others see that 2001-03 period as disastrous for the business.
"That's when we lost the users," Rosen says. "Peer-to-peer took hold. That's
when we went from music having real value in people's minds to music having
no economic value, just emotional value."

In the fall of 2003, the RIAA filed its first copyright-infringement
lawsuits against file sharers. They've since sued more than 20,000 music
fans. The RIAA maintains that the lawsuits are meant to spread the word that
unauthorized downloading can have consequences. "It isn't being done on a
punitive basis," says RIAA CEO Mitch Bainwol. But file-sharing isn't going
away -- there was a 4.4 percent increase in the number of peer-to-peer users
in 2006, with about a billion tracks downloaded illegally per month,
according to research group BigChampagne.

Despite the industry's woes, people are listening to at least as much music
as ever. Consumers have bought more than 100 million iPods since their
November 2001 introduction, and the touring business is thriving, earning a
record $437 million last year. And according to research organization NPD
Group, listenership to recorded music -- whether from CDs, downloads, video
games, satellite radio, terrestrial radio, online streams or other sources
-- has increased since 2002. The problem the business faces is how to turn
that interest into money. "How is it that the people that make the product
of music are going bankrupt, while the use of the product is skyrocketing?"
asks the Firm's Kwatinetz. "The model is wrong."

Kwatinetz sees other, leaner kinds of companies -- from management firms
like his own, which now doubles as a record label, to outsiders such as
Starbucks -- stepping in. Paul McCartney recently abandoned his longtime
relationship with EMI Records to sign with Starbucks' fledgling Hear Music.
Video-game giant Electronic Arts also started a label, exploiting the
promotional value of its games, and the newly revived CBS Records will sell
music featured in CBS TV shows.

Licensing music to video games, movies, TV shows and online subscription
services is becoming an increasing source of revenue."We expect to be a
brand licensing organization," says Cohen of Warner, which in May started a
new division, Den of Thieves, devoted to producing TV shows and other video
content from its music properties. And the record companies are looking to
increase their takes in the booming music publishing business, which
collects songwriting royalties from radio play and other sources. The
performance-rights organization ASCAP reported a record $785 million in
revenue in 2006, a five percent increase from 2005. Revenues are up "across
the board," according to Martin Bandier, CEO of Sony/ATV Music Publishing,
which controls the Beatles' publishing. "Music publishing will become a more
important part of the business," he says. "If I worked for a record company,
I'd be pulling my hair out. The recorded-music business is in total
confusion, looking for a way out."

Nearly every corner of the record industry is feeling the pain. "A great
American sector has been damaged enormously," says the RIAA's Bainwol, who
blames piracy, "from songwriters to backup musicians to people who work at
labels. The number of bands signed to labels has been compromised in a
pretty severe fashion, roughly a third."

Times are hard for record-company employees. "People feel threatened," says
Rosen. "Their friends are getting laid off left and right." Adam Shore,
general manager of the then-Atlantic Records-affiliated Vice Records, told
Rolling Stone in January that his colleagues are having an "existential
crisis." "We have great records, but we're less sure than ever that people
are going to buy them," he says. "There's a sense around here of losing
faith."

Additional reporting by Steve Knopper and Nicole Frehsée


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