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DVD-Video Is a Bright Spot In the Music Biz

28 Feb, 2002 By: Thomas K. Arnold

As the nation's music retailers head to San Francisco next week for their 44th annual convention, DVD-Video is one of the few areas of their business not plagued by problems.

The audiocassette is headed for extinction. CD sales are down for the first time since 1997, the year of the music industry's last great shakeout. And DVD-Audio, touted as the great hope at last year's National Association of Recording Merchandisers (NARM) confab, sputtered and stalled on takeoff. Some analysts predicted sales of as many as 40 million DVD-Audio discs in 2001; in actuality, total shipments came in at a meager 300,000 units.

“The only place we're getting any growth is DVD,” said Russ Solomon, founder of the 100-store Tower Records and Video chain based in West Sacramento, Calif. “Thank God for DVD, because it made up for all the slacking off that's happening in the music business.”

Larry Gaines, president of the 406-store Wherehouse chain, said while he doesn't think “anyone's enjoying success” with music sales, Wherehouse stores that have been open at least one year are posting “triple-digit gains in DVD sales.”

“It's very, very exciting,” Gaines said.

Analyst Derek Baine of Paul Kagan Associates said music retailers “are looking for anything which will move traffic.”

“With DVD taking off, packaged music sales soft and record companies launching MusicNet and Pressplay, the future of the retail music industry looks weak in comparison to DVD,” he said.

DVD-Video accounts for more than 10 percent of Tower's business; Solomon said, but video over all is approaching 20 percent, an all-time high for a company that built its stake nearly four decades ago with music.

“It's pretty remarkable,” he conceded.

At Torrance, Calif.-based Wherehouse, DVD accounts for 15 percent of revenues, “and we expect that to go up further,” Gaines said.

What works for big music chains like Tower also applies to small independent operations like Crow's Nest Music, with three stores in the metropolitan Chicago area.

Manager Brad Hathaway said Crow's Next began carrying a “small rack” of DVDs when the format was launched five years ago and now has huge DVD sections in the middle of its stores, including its newly opened 20,000-square-foot superstore in the heart of the city. DVD generates 10 percent of the chain's total revenue, Hathaway said.

“DVDs are a good market,” he said. “The whole center of our stores is DVD, and they're definitely helping us out, particularly now during the slow time.”

This comes as no surprise to the studios, who derive as much as half their DVD revenue from retailers that have traditionally emphasized music, both music specialty stores and consumer electronics chains.

“With the downturn in music, DVD is a logical way for music retailers to offset their losses with a product that in the consumers' mind is not that much different from a CD,” said Jeff Fink, president of sales and marketing for Artisan Home Entertainment. “They're already carrying digital audio, so why not complement that with digital movies?”

Fink is among many studio executives who are attending this year's NARM convention. He noted that DVD accounts for 50 percent of Artisan's home video revenue and that music retailers -- with stalwarts like Best Buy/Musicland, Trans World Entertainment and Tower in the lead -- account for more than half of Artisan's DVD business.

“That's far more than music dealers ever accounted for in [VHS] cassette sales,” Fink said. “The new variable with DVD, the whole day-and-date availability at a sellthrough price, put these guys into the new release mix.”

Music retailers can use the lift they're getting from DVD. The NARM convention, scheduled for March 8 to 12 in San Francisco, comes just after a new report from the Recording Industry Association of America (RIAA) showing a dramatic fall in CD and cassette shipments.

Shipments of CDs from record companies in 2001 fell 10.3 percent from 2000 to 968.6 million units, while their cassette shipments were off a whopping 40 percent to 45 million units.

The dollar value of all music product shipments decreased 4.1 percent from $14.3 billion in 2000 to $13.7 billion in 2001, the RIAA said, fingering free Internet downloading -- or “piracy,” as the association calls it -- as the prime culprit. RIAA-commissioned surveys of 2,225 music consumers between the ages of 12 and 54 found that 23 percent said they did not buy more music because they had downloaded or copied the music for free.

NARM executive VP Jim Donio conceded downloading has had an impact on traditional music retailing, but maintains there are other reasons for the downturn as well.

“It's hard to say there's any one reason,” Donio said. “The effect of downloading is certainly one, but you also have to take into account the economy, particularly after 9-11, and the lack of a lot of quality new music coming down the pike. That's a concern everyone has. We're looking for new artists and careers to be nurtured, but there's too much emphasis on how much someone sells in the first week and too frequently a potential career is nipped in the bud.”

Donio also cites the lack of an affordable “entry point” to sample new music -- a void once filled by the single. A decade ago, single sales across the three configurations -- cassette, CD and vinyl -- totaled 111.7 million units, including 84.6 million cassette singles. Last year, the total was just 21.3 million units, with sales of CD singles plummeting 49.4 percent from the previous year and sales of cassette singles falling a whopping 215.4 percent, with returns outpacing sales (the net total for 2001 is 1.5 million units).

Tower's Solomon also sees the lack of a viable “single” format as a major problem.

“There's no entry level,” he said. “With the death of the single, everyone's downloading songs. It's really pathetic -- the record industry refuses to listen to what the public is telling them.”

The single fell by the wayside because prices rose sharply in the transition from vinyl to cassette and then to CD. CD singles, the few that still come to market, retail for about $4 to $5. Even at that price, though, Solomon maintains, the record companies could still post respectable sales instead of ceding the entire entry market to the Internet.

Solomon also believes CD prices are too high, particularly since DVDs retail for just a little more but offer so much more in the way of visuals and extra features.

“The studios are much more aware of what the public is willing to pay than the record companies are,” he said. “The record companies are like snails in this regard -- the pricing is all wrong.”

Solomon also blasts the record companies for taking a misstep with DVD-Audio.

“There's no good reason for DVD-Audio,” he said. “It's nothing but five channels of CD, so you've got CD quality and five channels and it's expensive as hell to remix. It just doesn't go anywhere.”

“It's hard enough to get someone to spend $15 on a CD,” added Crow's Nest Music's Brad Hathaway. “We're trying to get people to not download music, and what do the record companies do? They make discs that are even more expensive.”

Analyst Baine said the failure of two competing formats to agree on a compromise, the way the Sony-Philips and Warner-Toshiba factions did with DVD-Video, compounds DVD-Audio's acceptance problem.

“DVD-Audio is problematic because there are two formats, SACD and DVD-A,” Baine said. “I don't think people want to invest in building libraries when there are two formats out there. Plus, if you look at the content that is available, it's pretty pitiful.”

NARM's Donio conceded, “I have not seen a whole lot of DVD-Audio. I heard a lot about its potential, but I think it's sort of stalled. There was a lot of discussion among retailers and suppliers at our convention last year, and a lot of excitement and enthusiasm about its potential, but that hasn't been realized.”

“[DVD-Video], on the other hand, has had dramatic impact on the [music retailing] marketplace,” Donio said. “Dollar for dollar, people are embracing DVD-Video much like they embraced the CD 20 years ago. It's no secret that DVD-Video is helping the bottom line when music is not selling as we would have liked to see it sell.”

Indeed, analysts note that CD sales declined on a percentage basis for the first time since 1997, when the RIAA reported a 6.5 percent drop in album shipments. Retailers were in the midst of a prolonged down period resulting from weak product, lowball pricing from big discount chains and fallout from their own rapid growth. Big chains Camelot Music and Wherehouse Entertainment filed for bankruptcy and others, including Musicland Stores Corp. and Trans World Entertainment, posted huge losses.

The music industry eventually recovered after considerable consolidation on the retail front and a slew of hit albums by such hot stars as Pearl Jam, Metallica, Garth Brooks and Celine Dion, as well as a successful record company crackdown on below-cost discounting. But then Napster and the arrival of digital downloading sent the industry south again.

Crow's Nest Music's Hathaway, however, remains optimistic. “Every business has its ups and downs,” he said. “I don't believe the downfall of the CD is near. But with DVD, we can give our customers one more option. They can buy movies as well as music. And that's what we're really trying to do, cater more to the customer.”

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