Sunday, January 01, 2006

Recording Industry Deja Vu

A few weeks ago Steve Jobs made this comment to the press (I'll quote from one of my favourite sites, Ars Technica Ken "Ceasar" Fisher's blog at ars technica Jobs calls music industry greedy
If they want to raise the prices, it means that they are getting greedy," said Apple's CEO, Steve Jobs. "If the price goes up, they (consumers) will go back to piracy and everybody loses." He added, "Theft is bad," and the Buddhist joked that "You dont want to burn in Hell.
With that shot across the bow of the recording industry he entered a battle which some retailers have been in for decades. Namely the over pricing of flawed products in the name of music and culture.

Like many other young music lovers, I wanted to work in a music store. In the mid-eighties, I entered music retail industry completely unaware of what it was really like.I had all the product knowledge needed. I was pre-trained by my enthusiastic reading of magazines like Stereo Review and High Fidelity. I got my wish and during a transition period in this particular retail store's history, I stepped forward and asked to manage the Classical and Jazz department.

Chris, the VP of Software (music sales)
a&b Sound walked quietly onto the retail floor wearing his usual biker boots and blue jeans and motioned me to come with him and we walked down to the greasy spoon a few doors down on Seymour, where we frequently talked shop.

Our conversation was the usual you would expect in a job interview. However, what he told me about the industry shocked and dismay me. They waste money, and they over charge for their product, he told me. Further, he went on, if you expect that this might lead to a job with one of the labels you will be disapointed. They rarely hire from retail, instead they choose to hire people with no industry experience and no specialized product knowledge.

I soon found out how right he was. At almost every release period, the sales rep for the labels would approach me with my thoughts on the new releases. This wasn't just about expected sales. I was telling them about the product they were supposed to be selling to me. Essentially I did most of their job and they got the commission on the sales.

Just at the dawn of the CD era, the major recording labels were suffering from a dramatic drop in the sales of LP's. After the energy crisis of the mid 70’s, a rise in the cost of LP’s and cassettes due to the cost of oil. Dissatisfaction with the quality of vinyl in North America took was at an all time high. It was the unexpected massive acceptance by the North American public that pulled them up into the CD boom of the 80’s.

The industry saw it as a chance to attempt to set a much higher price point for the product. They blamed lack of production facilities for the higher costs. However when efficiencies and copious pressing plants came into operation, the lower costs of production were not passed on to the consumer.

Basically the boom consisted of the consumer purchasing their whole collection again on CD. While my customers were excited about the new format, I heard underneath the resentment over re-purchasing their whole collection. Customers resented re-purchasing product. Many were eventaully forced to when turntable production replacement parts became hard to find. The public has never forgotten this.The public’s unhappiness with the recording industry runs deep.

Most of the complaints about the vinyl quality were sloughed off by the Industry as unfounded. Of course anyone who did any amount of listening could tell. When they purchased expensive pressings imported from Europe, their suspisions were confirmed. European prressings for the most part were sliky smooth, clean sounding with few flaws in the vinyl. North American pressings were a nightmare.

One day sometime circa 1987, I was talking to the Western Regional Vice President of one of the major Canadian Branch Plants of a Large Multinational Conglomerate Music Label (which no longer exists) when he explained, after returning from a major overseas conference, that plans were afoot to make music directly downloadable to the consumer on CD. I was shocked (of course worried about my own job). The mechanism?

Apparently a number of major labels had been digitizing all their holdings and were planning on making music downloadable into a kiosk type booth or store where consumers might even make to order any CD they wanted. That one day, retailers would no longer be needed (especially ones like the one I worked for which did business on a cost plus basis and were devaluing the product.

At least one major label was planning music downloads nearly two decades ago. What happened? They blinked. And in the time it took them to blink they lost the cutting edge of the market. Consumers took the problem of overpriced products with less than adaquate content into their own hands. As soon as it was feasible on the Internet, all the music you had always wanted and could never afford was now available at the best price ever. Free! Consumers chose their own price point!

Enter Steve Jobs and Apple Computer, iTunes and a little hand held digital music player called an iPod. No one believed that Steve Jobs and Apple Computer could pull off what no one else had been able to do. That is get agreement from all the major players to open iTunes stores in each country around the world. All this he accomplished on his terms for the most part. Ninety-nine cents was his price point.

It was Apple Computer that killed the floppy drive in their new computers replacing them re writable CD-ROM drives. I'm sure the recording industry were aghast! Next came DVD players and DVD-Burners.

Jumping back to my time as a retail manager, a&b Sound was a volume discount retailer who originally sold only consumer electronics and wanted to sell a few LP's to play on them. It turned into a major success story. Because of the pricing policies which was cost plus basis. No "Suggested Retail Price". In actual fact a supplier may not tell a retail outlet how to price his goods. As well, a&b Sound made it a point to be less expensive than anyone else. They fought tooth and nail over pricing, even resorting to buying single copies of all new releases for the duration of the disagreement. This resulted in the lowest CD prices in North America and perhaps the world.

We were accused of "devaluing the product" by passing all the savings on to the consumer. No one at the retail level of the music industry makes much money. Just like Steve Jobs and Apple Computer, do not make money on the music they sell. They make money on those incredibilly well designed digital music players they sell. There were continuing battles over pricing, but no major label decided they could not afford to do business. I guess they liked those large 4 and 5 digit numbers beside the names of major releases to much and the mobs of customers lining up to buy CD's. I guess they did make money after all!

EMI thinks that a price rise is certain. And of course the Industry fired back at Steve Jobs. Edger Bronfman Jr. ( the rich kid that bought his way into the entertainment business) says (as quoted by Red Herring) "There’s no content that I know of that does not have variable pricing". Where has he been since he bought Universal?

There have always only been two or at the most, three price points. All new releases and main catalogue are full price. Re-releases come out at mid-price and other extremely old content comes out at bargain-price. No, one album does not cost more than another. They are all priced equaly. I believe at one time the industry considered pricing some artists and releases higher than others and I think it was a disaster. There is no reason in the world why iTunes should work any differently than any other retailer.

The music industry never ceases to amaze. They get greedier and greedier. iTunes saves them millions in distribution and packaging costs. In fact, they have fewer expenses. In the music business, the wholesaler/distributor plays the shipping costs. In the industry, the labels at this time of the year are getting ready to accept returns from retailers. That's what happens at this time of the year, barely any product is purchased and lots is returned. The labels can expect about a 20% rate of return. Of course there will be no returned product from iTunes. Is the picture getting clearer? Where does all that money go for the tunes sold by iTunes? Straight into the pockets of the major labels.

Things change. The major labels have all changed hands. a&b Sound has also changed ownership but what Chris told me back then in that greasy spoon on Seymour Street is still true today. They are greedy!


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