Are declining CD sales good news?

The numbers are in for the first quarter and they don’t look promising, at least not on the surface. Nielsen SoundScan reports that 89 million CDs were sold from January 1 through March 18. That’s a drop of nearly 20% from last year’s number of 112 million. This is the latest in a series of declines that began as early as 7 years ago. Year after year the industry has seen declines in the 5-10% range. This year could bounce back somewhat, but many analysts are suggesting we’ll continue to see sales of physical units slip.

The first follow up question you want to ask is “Did digital sales make up the difference?” The short answer is “no.” The longer answer is “somewhat.”

Breitbart.com reports that online sales of “digitized albums” fell from 119 million (during the first quarter of 2006) to 99 million. That’s a 17% decrease. What exactly is meant by “digitized albums” in unclear since later in the article they indicate that physical CD sales still account for 90% of sales.

Individual digital track sales did increase from 242 million tracks during the same time period last year to 288 million this year. That’s an increase of 16%. Industry wide though, estimates place total revenue at 25% less than it was a year ago.

So how is this to be viewed as good news? Michael Arrington, author of the popular technology blog Techcrunch, thinks it’s a good thing because it will force the industry to face the facts. (Story here)

The faster music labels realize their massively profitable days are over, the better it will be for them, as well as the bands they represent and us, their customers. Digital music sales are not going to make up for lost revenue. Suing their customer base is not going to make up for lost revenue. In fact, absolutely nothing is going to make up that lost revenue. The industry, revenue-wise, is going to continue to shrink.

As the marginal price of recorded music continues to fall towards zero, its natural price, bands will need to make money elsewhere. Live concerts will become more and more popular, and will be the largest source of revenue for many artists. Recorded music will be used to promote those live events.

I agree with him that the labels need to recognize and deal with the new economy of a changing industry. I don’t totally agree though that the natural price of recorded music is zero. I think the music has value and savvy people will figure out how to leverage it.

He does seem to be correct about live concerts though. Billboard is reporting that 2006 was a banner year for live concert income, showing a gain of 35% over 2005. We’ll see if that trend continues.

My own personal opinion on the whole state of the industry is twofold. First I’ll reference a a post I wrote some time ago on the subject in which I suggested that consumer spending on entertainment media has simply shifted to other formats.

the rise in sales of DVDs (grew by twice the decline in CD sales during the same period) and video games…consumers may be spending their discretionary income on these titles rather than CDs.

Secondly, let me state again that my personal opinion is that much of the music introduced to the consumer via major labels…stinks! People just aren’t buying it because it isn’t good.

Closely tied to that is my third point. The entire industry landscape is changing. If you are interested in the subject I suggest you read The Long Tail. The labels, by nature of their business model, are only interested in hit records. But with the internet at his fingertips, the consumer has been presented with a whole plethora of choices the labels never gave him. And he’s making those choices. People are finding music that appeals to them, but might not appeal to a mass market large enough to interest the major labels. So we see the rise of the independent artist.

This is good for the art form and the consumer, but bad for the labels. I think it’s good for bluegrass as well. If we, as a genre, can take advantage of this shift in landscape to put our music in front of new consumers who are just now discovering that they might like something different, we could see a rise in sales of bluegrass recorded music and ticket sales.

The question is, “How do we accomplish this?” Any ideas?

  • I think that one market labels need to look at is the niche of the collector and the completist. Rounder and Rebel have both taken steps toward this market and I see that as a great sign.

    I don’t know the costs involved with remastering an album entirely, but I would imagine it could be worth their while for labels to release a series aimed squarely at the niche that wants an older, perhaps obscure, album and is willing to get it in digital format.

    We see smaller forms of this market on CD with Bear Family and Rhino Handmade and I think it is a market that is waiting to be exploited.

    As to your question of how to accomplish putting the music in front of more people, I think one answers lies in the very nature of the Bluegrass genre. With few exceptions, the bulk of Bluegrass artists are independent artists and operate on indie labels. In my mind this puts them in the perfect position for this coming (or arrived) shift in the music industry model because while other genres are scrambling and reeling, we already know how to operate in these waters. The accessibility of Bluegrass artists at shows, the quality of the music and production and the proliferation of small town and regional festivals puts the music in front of many people and because these reasons it will grow.

  • ryanfbaker

    The Long Tail was clearly dead-on, and it’s interesting to hear that Rounder and Rebel are paying attention. Eric, do you have any more detailed information on what they’re doing exactly? Is it just getting their whole catalog online, or are they actually remastering every one? That would imply a much more expensive process.

    The folks at Smithsonian Folkways are in the midst of an admirable and gargantuan effort to get all of the old Folkways catalog available on CD with special packaging that pays homage to the fabulous old album covers of FW releases. They are doing this, however, having already put all the material up online for digi-download. They have an excellent website and system of getting to this music — folks should check em out if you haven’t yet.

    I am not sure what’s holding back other labels from following suit. Maybe it’s the technical infrastructure needing to be designed. It would involve coordination of a number of different areas of the company – finance, royalties, IT/web, audio production, etc… I suppose this is the holdup in many cases.

  • Ryan, I don’t have much detailed info on what either company has in store long term, but both companies are making progress at least. Rounder has The Rounder Archive (www.rounderarchive.com) which they use to issue some of the their older and more obscure releases for download.

    On April 3 Rebel will be releasing three albums from their catalog in digital format only (which there is a post on that here on Bluegrass Today).

    Sorry I couldn’t provide more detail than that, but from a consumer point of view it looks like they are heading in the right direction.

  • Jon Weisberger

    The entire industry landscape is changing. If you are interested in the subject I suggest you read The Long Tail. The labels, by nature of their business model, are only interested in hit records. But with the internet at his fingertips, the consumer has been presented with a whole plethora of choices the labels never gave him. And he’s making those choices. People are finding music that appeals to them, but might not appeal to a mass market large enough to interest the major labels. So we see the rise of the independent artist.

    I’ll note that both the reasoning and the data on which the Long Tail argument is based have been challenged, but that’s not really my main point here. As a friend of mine pointed out in conversation a couple of days ago, the Long Tail has value to aggregators – the amazon.coms, the iTunes, etc. – but not necessarily to the individual provider. The Long Tail argument says that amazon can make the same amount of money by selling 5 copies each of 50,000 CDs as by selling 250,000 copies of 1 CD, but it doesn’t address the fact that the cost of producing a 5-copy-selling CD isn’t 1/50,000th of the cost of producing a 250,000-copy-selling CD – and in the end, you can’t aggregate what’s not being produced.

    I would also note that the wide range of choices presented by the Internet doesn’t necessarily work to the consumer’s benefit. To the knowledgeable consumer’s, perhaps, but the sheer volume of unknown material tends to discourage, rather than encourage exploration. The independent artists who are “rising” are, for the most part, either those who have some marketing angle that, in the end, is based on their appeal not to niche tastes, but to mass ones, or else they’re artists who have succeeded in leveraging “old style,” major label careers. It’s all very well for folks like Janis Ian and Natalie Merchant to tout the virtues of independence, but they didn’t start out as independent artists, and one has to be pretty naive to think that their independent careers aren’t based in large part on fan bases built during their pre-independent years.

    And, finally, while concert revenues may be up, where’s the evidence that they’re not concentrated among a relatively small number of big-time artists? Talk to bluegrass artists or promoters, and a lot of them will tell you that things are tougher now than they were a couple of years ago. From a bluegrass perspective, the picture Michael Arrington paints is potentially a very grim one.