Bad Year for Music Biz

The year 2001 was a bleak one for the music industry. Of the major labels, only Universal Music Group managed to turn a profit.

Sony Music reported operating losses of $91 million for the last two quarters. Bertelsmann's BMG Entertainment posted a loss of $70 million for the year. EMI was $77.6 million in the hole for the first half of the year, and is still reeling from an ill-conceived $80 million contract with pop diva Mariah Carey, whose film Glitter crashed and burned, as did the soundtrack recording. Even if the British music conglomerate can escape the contract, as it is reportedly attempting to do, it will emerge at least $10 million short on the gamble, according to recent analysis by Jeff Leeds in the Los Angeles Times.

Other companies are eliminating marginal operations. On December 17, Warner Music Group announced that it would close its London-Sire label, with some artists on its roster to be assigned to other WMG labels and others to be let go entirely.

Industry executives almost unanimously attribute the losses to the ease of downloading free music, but music lovers blame the lack of compelling new releases—and the high cost of CDs. Nothing much is likely to happen on the artistic front, but there are indications that some labels and music retailers may be seeing the light regarding pricing. A December 27 report by Ellis Mnyandu of the Reuters news service says that $9.99 may "soon be a standard offer at music stores as retailers slash prices in a bid to battle the scourge of online music piracy."

Mnyandu mentions that the competition is hot for consumers' dollars—especially from DVD movies, which can be found discounted to prices similar to CDs at full retail. Consumers understand that movies cost millions of dollars to make, and see $18 for a DVD as something of an entertainment bargain. The same can't be said for music CDs that may have cost only a few hundred thousand to produce—especially in view of the fact that most CDs are purchased for only two or three favorite tracks. Music fans and audio industry journalists have been saying for years that CD prices are too high.

The pricing situation may be changing. "Music software CD prices may soon permanently decline to $9.99, given weak sell-through of new artists and continued Internet piracy that appears unstoppable," Merrill Lynch retail analyst Peter Caruso told Mnyandu. The industry initially responded to a slowing market by raising prices, to the point where top-line new releases now list for $17.99. That strategy appears to have backfired, as evidenced by massive losses at most of the major labels. A decline in prices may spark a resurgence in buying, but it will also likely result in personnel cutbacks at the labels, along with the possibility of mergers and joint ventures to conserve cash.

Some high-profile music retailers have already gotten on the discount bandwagon; Virgin's Megastore in New York's Times Square is reportedly already selling many popular hits as low as $10 each. Others have yet to get with the program. Tower Records' San Francisco stores, for example, still carry Roger Waters' Amused to Death for $17.99, even though it is available at nearby Best Buy outlets for $11.95.

Musicians in general aren't helped by high prices. Only top-tier recording artists earn as much as $1.00 per disc; most make between 50 and 75 cents—approximately 18% of each disc's gross profit—out of which they must pay back development, production, and marketing costs to their record labels. The situation leaves most performers at break-even or worse, given that 90% of most releases make no profits. Sales and marketing consume the bulk of any CD's sales revenue.

The indentured servitude faced by many musicians has provoked a rebellion, with some artists going to direct marketing in order to increase their share of profits. Others have campaigned for more equitable contracts with the labels. In order for that to happen in a market where sales are declining, the labels could be forced to thin their ranks of overpaid executives. Will those who make the music, and those who enjoy it, both benefit from the pressure the industry is now under? The coming year may provide the answer.