The Record Industry's Decline

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:

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."

In my old age the music of my choice has become classical. But I was brought up on Sixties Top 40. How good was that music? It was incredible. The great thing about YouTube is that you can go back and look at some of those performers and get blown away. I can easily spend a couple of hours just letting my mind wander and typing in names like Jay Black and the Americans or the Kinks and I marvel of how good the music was, and how today the music seems to have no originality or energy.

"If they think that we need a “new Zepplin” to show that music is viable, then music has died."

I like a band called "Evanescence." I am in my late 40s and don't much go for new music but the lead singer, Amy Lee, is a trained classical pianist and has a very powerful voice. The band mixes a lot of the new rock with various other forms of music to create their own rocking sound. Very talented artists.

I mostly watch them on Youtube. She does some good acoustic numbers too. Their AOL Sessions and concert in Toyko are worth checking out as are the made for videos songs. "My Immortal" is powerful.

JMHO

Good post, but a bunch of snobby, silly responses.

There is a lot of good music being released today. But folks who are tied to the radio or the CD aisles at BestBuy or Wal-mart aren't likely to be exposed to any of it.

You can find sites on the web that cater to any musical taste with selections you won't be able to find in any store.

Folks who complain that there is no good music being released today are akin to my father who, in the late 60s, used to insist that in 20 years rock and roll would be dead and no one would even remember who the Beatles were.

end semi-rant

just as I get my cassette collection updated to CD's, now we have Ipods, whatever they are......

An iPod is a device than enables you to take all the music on your CDs and place it on a portable little box that you can carry anywhere.

On the iPod that is on my desk right now, I have 1879 albums with 20,882 songs - all copied from my CD collection.

It's not like going from cassette to CD - you don't have to buy all the music all over again.

Music sucks because corporate suits don’t have any taste. They’d rather dictate the trends than follow them. The public isn’t buying

Exactly. The problem is that there is no music. It all garbage Simon Cowell pre-packaging, aka The Monkees model. Your right about needing a new Led Zepplin type of band to introduce music away from this hip-hop rap crap! A bunch of non-singing unintellagable getto trash that can't carry a tune, mangling half-assed Dr. Seuss garbage, (how I miss Marvin Gaye, The Temptations, Four Tops, James Brown and the Spinners.) All I listen to is 70's and 80's music nowadays.

Good semi-rant.

Of course, most artists promoted by the major labels today are ephemeral and their music is subpar.

The labels aren't promoting anyone as creative as the Beatles today.

You really have to look to the indie labels or the less-promoted artists on the majors to find quality.

In 1968 you didn't have to dig to find great music, but today - as you say - good luck finding the timeless classics of tomorrow at Best Buy.

That Dual has to be like, what, 30 years old? I had one, it was great. There is software now to convert vinyl to digital. It works very well - I got the Microsoft product for $19.

Thanks for the tip. I have similar demographics as you, and with just over 4,000 songs on my iPod I’m always scouting out potential, but it is, as you note, slim pickin’s. A lot of hip-hop stuff that sounds stunningly similar to my ear.

Today’s music is junk, that’s what has killed the music industry.

The music industry as we know it is dying because it tries to hang on to yesterday, much like music fans who categorically claim today's music is junk. Unlike nostalgic music fans, however, the RIAA and MPAA also get Congress to pass horrible laws as part of their desperate attempts to live in the past, and also coerce software and hardware companies into crippling their consumer offerings.

I don't know if the horse-and-buggy industry made such a nuisance of itself when it died out, but the current recording and movie industries will soon join it.

this hip-hop rap crap! A bunch of non-singing unintellagable getto trash that can't carry a tune, mangling half-assed Dr. Seuss garbage

There is excellent hip hop music out there. It is not promoted by major labels, which prefer to market illiterate gangsters instead, but it is out there.

For ten bucks a month you can distribute the music through a website

I see and hear an amazing amount of music peeking over my daughter's shoulder looking at Myspace.com.

Here’s a thought.

Why should music be an “industry”?

The artists write the music and play the music people want to hear.

Why do we need a lot of suits, skimming off 80 percent of the money?

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.

If you were a musician, would you want people copying and distributing your material for free? It would sure piss me off.

I don't see how this can represent anything other than the death of commercial music altogether, unless copy-protection is reintroduced.

People like to dance on the graves of record companies, but you couldn't pay me enough to sit through hundreds of crappy garage-band CDs to get to a Bruce Springsteen. The record companies, like magazines, provide editing.

Just as Video killed the radio star - the ipod killed the recorded music industry.

I think the problem is the dearth of talent. I grew up in the late 60's to the 80's. I can name 100 GREAT bands from that period. I can't name any from the past decade.

the recording industry did their best to commit suicide

when they eliminated the smaller talents in search for

the megastars.

Why do we need a lot of suits, skimming off 80 percent of the money?

For the same reason we need phone companies charging us $5 a month for using call-waiting that has been hardwired into a network, when it could be free software on our interface.

Let's see:

Rock: Crap. Recycled riffs that were old when Zeppelin stole them. The last semi-fresh rock and roll was punk, and that was merely 1950s rock and roll played loud and fast.

Country: MOR pap made for beauticians and check out clerks. A damn shame what has happened to the genre that gave us Marty Robbins, Johnny Cash, and (going way back) Jimmy Rodgers.

Rap: TACKY! Has become an unconcious self parody.

Classical: ANY great composers since Stravinsky?

R&B: Overproduced, little rhythm, NO blues. Much like country, has become very feminized.

Salsa: Peaked in the 1960s, as did Merengue. Its been downhill ever since.

Pop: As has always been the case, a producers medium that produces memorable jingles, but not artistic talent.

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