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Saturday, September 6, 2003

the death of the cd is greatly exaggerated

there are a number of news [ny times- registration required] stories [ap wire via tampa tribune] and the retail perspective [san jose mercury news] that explain the biggest event in the recorded music industry since britney kissed madonna. there are also a number of other things going on, including a rumor about an riaa amnesty program, ticketmaster getting into the auction [ny times – registration], business [cbs].

all this news has reverberated (i couldn’t resist that one) in some pretty well-known blogs, with a piece on legal music downloads at kuro5hin, a bit on rock concerts at ventureblog, the channel at due dilligence (tim oren) and finally, the declaration that music cds are dead by philip greenspun.

i guess that gives you some insight into my surfing habits, but with all these powerful opinions floating around the net, i thought it was time for me to step out on a limb (plank?) and take a stand. after all, i’m working in the “music business space,” so if i didn’t have an opinion on all this, my work isn’t very relevant. i should also say that i actually look forward to possibly working with some of the people i’ve just mentioned – if i don’t burn those bridgets in public right now.

i hope to not repeat [too much] the generally excellent analysis and commentary, so i do suggest checking out those links.

the short version of this kicker story is that one of the big-five record labels (vivendi-universal) has announced plans to drop the wholesale price of most of its retail packaged cds from $12.12 to $9.09, and the recommended list price from $16.98 to $12.98.

so, here’s the short version of my opinion: this is a good thing. the rest of the labels will follow suit. this is the first axe-blow that will eventually destroy the established music manufacturing and distribution infrastruture. and the cd will be with us for quite some time to come.

(what will be interesting is how and what bits get put on those cds)

now, for the long version…

this is some pretty sophisticated company i’m insinuating myself upon, and maybe that’s why we disagree a bit. i’m a little closer to the ramen-based lifestyle, and from here, the perspective is different.

there are some very crazy economics at play in the music industry – economics that conspire to both artificially raise prices and keep prices artificially low. there are group interactions, intangibles, power structures and standard practices that i will try to avoid, just to keep this “long version” short enough for people to actually read. i’m sure i’ll take some other shortcuts – i fear this is going to get huge, but i’m going to try to make a point rather than write a dissertation.

part one – reduced cd prices are a good thing
you will be very hard-pressed to find anyone who thinks that retail packaged music cds are a “good value” today. the easiest (and most common, it seems) comparison for the average consumer to make is a film (dvd) and a soundtrack (cd). on the surface, this makes sense. both come in little plastic packages. both come on polycarbonate discs. both come with pretty cover art. i’ll pick on chicago, just because it was a popular film, it’s a musical, and it’s a recent dvd release. the cd lists for $18.98, and is discounted to $13.49. the sa-cd lists for $18.98 wth no discount. the dvd lists for $29.99 is discounted to $19.45. (i picked an online retailer that shall remain nameless and linkless. these are the prices today. your shopping habits may vary).

so, i can get about an hours’ worth of music for $13.49 or $18.98 (depending on the format), or i can have an hour-and-a-half of video, audio, and all those cute little extra tidbits they pack into a dvd for an extra $5.96 or $0.47. faced with that choice, the choice is obvious.

now, i should explain why this comparison isn’t entirely valid – people don’t think that way and they certainly don’t shop that way. movies are an immersive experience with more continuity than albums. it’s very difficult to “pick a scene” out of a 110-minute movie and totally fall in love with it. you (well, most people – you might…) don’t buy a dvd for “the phoebe cates coming out of the pool scene,” if you hate the rest of the film (or never saw the rest of the film) – you buy the whole film. in contrast, the way the music industry is set up, that’s exactly what you’re supposed to do. you buy the cd because of the hit. the one song (1/10th? 1/15th?) sells the whole album.

now, there’s a lot of potential explainations, but it comes down to tradition (“standard practice”), and it’s a tradition i don’t think i should get into (long story, short blog). the recorded music industry has really, always, been about selling individual tracks. sure, there are a few exceptions and “concept albums” that have made the short and glorious list of hits, but basically, it’s “hits” – and the rest of the album comes along for the ride. if you get a “second hit” from an album, it’s gravy. anyway, it’s worked exceptionally well, for an exceptionally long time. and, by the way, in the past few years the industry has been phasing-out the cd-single (and that was even more obviously a bad value), but the legacy lives on. the recorded music business is about hits.

the record industry also has a long history of increasing prices with each new format, and these formats get cheaper and easier to mass produce – good for margins, bad for consumers. this works because there are so few labels (read: cartel).

the market has spoken, and packaged cds are not worth $16.99 anymore, for a lot of different reasons, including those horrid square waves.

so, it’s a good thing that vivendi-universal is bringing down prices, and they are actually quote bold to be first.

part two – the labels will follow suit
since i’ve introduced the concept of a record label cartel, i can keep this short. once one member of the cartel breaks ranks, the artifically-maintained prices collapse.

one thing that might not slide every cd on the market to this new price point is the idea that cds from different artists are not fungible. there is some overlap, to be sure (say, between madonna fans and britney fans, to bring in another important music industry news item), but there isn’t a whole lot of overlap between britney fans and rolling stones fans. each performer becomes a “monopoly” as the sole source of material that will satisfy their fan base. it’s possible that some recording artists can sustain higher prices in their small niche, but the broader die is cast.

part three – the manufacturing and distribution of music will crumble
most of the “retail price” of a packaged commercial cd comes from the distribution and retail layers of the current multi-tiered distribution model.

there is pressure from consumers to lower prices (and at least one label has responded), but there is also pressure from large retailers to improve margins (do you want to sell your stuff at walmart? walmart calls the shots). the industry has been “eating its own young” for a long time now – squeezing independent and small chain retailers out of the market.

vivendi-universal has gone out of their way to preserve the “retail margin” – actually increasing it a few percentage points – but it’s a few more points on a much smaller pie – so unless this move radically increases sales volume (and i don’t think it will), the net cost to the retailer will be huge. say goodbye to the few remaining indie stores, say hello to big boxes and the internet.

and once the cartel has only a few, big (cartel-like) retail outlets left to sell their polycarbonate discs, they won’t be able to sustain anything. the battle of pennies between vivendi and walmart will squeeze every last penny out of the existing business model.

a lot of people have been predicting the downfall of the music business for a while – now you know how it will happen.

part four – the cd isn’t dead yet
the cd, as a package (or as barlow might say, a bottle), will be with us for a long time. it’s “good enough” – and that’s really all it takes to sustain a format in the market. but there’s more… it’s got a degree of “future proofing” that few prior formats have had.

sure, the fundamental technology for a vinyl record is not much different from a 78 to a 45 to a 33.3rpm disc, and to some extent, they were “backward compatlble” for a generation or so, but the neat thing about the cd is that the “needle” is light (and the spindle speed is irrelevant), and as such, a “smaller needle” [higher frequency] used in future generations can still track all those designed-for-780nanometer pits or marks on cd’s all the way back to 1982.

it’s physical (and this does have some advantages, despite the technologists desire to strip away the bottles, you do need something to carry your wine, or it will run out between your fingers and leave you with a sticky mess), it’s portable, it’s relatively difficult to screw up, it’s cheap, and there are literally billions of devices around the world that can read it – including just about all the new dvd and other fancy optical drives.

people immersed in technology don’t differentiate much between music cd and data cd – so let me throw another bit out there in the cds favor. bandwidth. let’s say you can read a 650megabytes cd in about 3 minutes on your fancy 56x variable-speed super cd drive – that translates to 650MB / 3 m * 8b/B * 1m/60s = 28 megabits/second. (this is an easy place to pick on – but go look up broadband penetration in north america – and then compare it to a .056megabit/second dialup). then, consider the mp3 format. mp3 is another format that has proven itself in the market as “good enough” – it’s lossy, it’s not for audiophiles or purists, it’s got problems and disadvantages, but (and this is all that really matters), it’s good enough and people are using it. combine the two and you can get not 74 (or 80, or 99) minutes of audio on a disc, but more than 7.5 hours (650MB * 8 b/B / 192kb/s * 1000kb/Mb / 60s/m / 60m/h = 7.52 hours). two “good enough” technologies make a powerful combination.

now, i don’t mean that we’ll never escape from the horribly flawed bottle that is the 120-millimeter-diameter polycarbonate disc, but i do mean to say that just because the business model(s) that spawned its creation are failing (in dramatic form), should not imply that the format itself is also failing. in fact, the cd “bottle” may be the best legacy for these failed businesses.

anyway, we have the determinism theme recurring here. cd’s were designed for audio, but that’s hardly all that they are used for today, and as long as they have applications, manufacturers will support the format.

oddly enough, cassettes were designed for dictation machines, but updated chemistry made them “high enough” fidelity for use in a boom box or walkman. good enough that they are still sold. (and just in case the techo-elite reading this blog have any doubts, the vivendi-universal press release included this line: “Concurrently, UMG will also reduce its wholesale price on cassettes so its MSRP for top line releases will be $8.98.” the margin on cassettes is a lot worse than the margin on cds – but vivendi, at least, still finds some value worth pursuing.)

if we can’t kill the cassette after 20 years with the cd, it’s going to take a lot to kill the cd.

update the denver post has a piece that, coincidentally, used chicago as an point of comparison between the music and film industries. it’s worth checking out. i’ll have some more thoughts on this piece later.

posted by roj at 6:49 am