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Facing the Music

11 Sep, 2003 By: Erik Gruenwedel

Unless you've been sharing shade space under a tree with Rip Van Winkle, it's no secret to you that the music industry is in trouble.

Whatever the myriad reasons -- Internet piracy, indifferent consumers and/or weak releases -- first-half U.S. shipments for all music formats from major labels Universal Music Group (UMG), Sony Music Entertainment, Bertelsmann Musik Gruppe (BMG), Warner Music Group (WMG), and EMI Recorded Music, among others, fell 15.8 percent compared to last year's first-half figures, according to the Recording Industry Association of America.

Those are sobering statistics considering last year's shipments fell more than 10 percent compared to 2001. And CD shipments continued to drop (15.3 percent) in the first half of 2003 compared to a 7 percent decline in the first half of 2002.

As music sales remain off key, music DVD sales are the bright spot in the industry, increasing about 20 percent in the first half versus last year's comparable period.

Home video revenue is up 15.7 percent in the first half of 2003, due to increases in the sales of DVD titles and ongoing proliferation of DVD players, which skyrocketed to 47.7 percent penetration this year, according to Video Store Magazine market research. DVD players can be found in more than 50 million homes.

And the music industry is taking note.

DVD Helps Keep Music Afloat
After a sluggish run with VHS, the music industry is embracing the DVD format like a lifeboat in the eye of a storm. To be sure, industry experts will extol DVD's enhanced sound quality and visual platform of concert footage and music video. In reality, the labels recognize a market force in DVD that consumers appear willing to pay for and can't steal -- yet.

This year there will be 821 music DVD releases, compared to 380 in 2001, according to industry sources.

Last December, EMI's DVD release of Paul McCartney's Back in the U.S. sold a then-record 61,000 units in its first week, according to Nielsen SoundScan. The record was shattered in May when the Led Zeppelin DVD debut from WMG nearly doubled McCartney's first week tally at 120,000 units.

“We could describe ourselves as having stuck our toe in the [DVD] waters in a meaningful way last year,” said an EMI spokesperson. In April, EMI upped the ante with the release of a five-disc DVD The Beatles Anthology ($79.98) to favorable results. The title sits at No. 4 on Nielsen SoundScan's year-to-date music DVD sales charts as of Aug. 24.

“It's done very well considering its price point,” said the spokesperson.

The Hi-Res Dilemma
Technological advancements also have produced DVD-Audio (DVD-A) and the Super Audio CD (SACD) -- and a format war. The competing formats experts say will revitalize music sales and help combat illegal downloads with high resolution 5.1 surround sound, copy protection options and DVD-A's video capacity. But the two formats have been slow to take off.

Similar to a music DVD, DVD-A offers superior sound in addition to a visual element. DVD-A can be played on DVD-Video, DVD-A, and select video game players; SACD is compatible only to a SACD player. Hybrid SACD discs are backward compatible with CD players, but the hi-res sound quality is lost.

DVD-A and SACD appear to have unilateral support among the majors, with the exception of Sony, which supports SACD and WMG, which supports DVD-A.

Sony developed the SACD format with Phillips and will release titles in DVD-A “if and when it gains acceptance in the marketplace,” according to a spokesperson.

WMG remains committed to DVD-A due to the format's video capabilities and industry tracking by Nielsen SoundScan, said SVP David Dorn.

John Trickett, chairman/CEO of Los Angeles-based 5.1 Entertainment, says DVD-A represents a necessary link to help transition music back into a value proposition for consumers.

Trickett says the contrast between a $17.98 music CD and comparably priced Lord of the Rings DVD with six hours of bonus features is glaring.

“There are probably two songs on the CD that you like and your kids can probably find them [for free] on the Internet,” said Trickett. “Where's the consumer going to spend their money?”

To help promote DVD-A, Trickett has joined forces with the DVD Audio Marketing Council, whose members include WMG, BMG, EMI, Meridian Audio, Dolby Laboratories and Panasonic MEI.

Less Dollars, More Sense?
UMG two weeks ago surprised many when it announced that Oct. 1 it would slash wholesale music CD prices more than 25 percent -- from around $12 to $9 -- in an effort to revitalize sales and thwart online piracy. At the same time, UMG recommended retailers slash a CD's SRP from $18.98 to $12.98 and lower.

It remains to be seen whether other labels will emulate the cuts, especially for DVD-A and SACD.

Reaction from sources familiar with the majors ran the gamut from resistance (“There are no plans to follow UMG's lead”) and caution (“We're going to take a hard look at how [the reduction] goes over in the consumer marketplace”), to no comment.

Fighting piracy may be one of the drivers pushing music DVD formats but its evolution is more about offering alternative listening formats to consumers, according to Mike Gillespie, VP of sales and marketing for Universal Music & Video Distribution (UMVD).

“The industry has never done well when there's only one [listening] format, which goes all the way back to 78s,” said Gillespie. “I liken [DVD-A] to the LP [album] days when you had lyrics and photos to look at along with your music.”

Beefing Up the Hi-Res Audio Slate
UMG will offer its first DVD-A titles on Sept. 23, including releases from Beck, Ryan Adams, Sheryl Crow and Sting. The label released its inaugural SACD titles last year.

Ronn Werre, SVP sales and catalog marketing for EMI Music Marketing, says EMI supports both formats because it believes in giving consumers a listening choice.

The label is not averse, however, to maximizing its revenue streams. Last month, EMI entered into partnership with Digital Theater Systems (DTS) with plans to releas some catalog titles in multi-channel 5.1-surround sound by Winter (VSM Aug. 31-Sept. 6).

“It's a great deal for us because we're essentially not bearing any of the [financial] risk,” said an EMI spokesperson, referring to the expense necessary to re-master recordings in new formats.

DVD-A and SACD represent something of a blessing and a curse to retailers, who appreciate the formats' appeal to bigger-spending audiophiles but bemoan the time and resources needed to educate the average consumer.

“The DVD-Audio is a tougher sell because of the lack of ubiquity of players,” said Storm Gloor, director of music at Houston-based Hastings Entertainment. “There's not enough of a step up [in sound quality] for the average user without purchasing a [5.1 sound system]. In our markets, there's definitely less penetration of the high-end hardware.”

Trans World Entertainment's Mark Higgins calls the formats a “natural byproduct” of music retail.

Best Buy spokesperson Brian Lucas says SACD and DVD-A appear to be creating a core audience.

“It seems to be attracting a fairly loyal audience quickly,” Lucas said. “We're excited about any development that gets people excited, especially about music.”

New Player on Format Front?
The dual disc or flip disc CD/DVD-Audio combo, which features CD audio on one side and DVD video on the reverse, appears to be a work-in-progress that the labels won't comment about because technological concerns regarding the disc's compatibility in all DVD players -- especially car dashboard players, remain.

Regardless, scuttlebutt suggests some labels hope to launch selected releases in the format by the holidays because it supports an industry belief that the visual element is here to stay. And a dual disc cuts in half the amount of plastic needed to deliver the goods.

“We've had two generations of music fans who have grown up during the MTV era and don't think of music as something you only listen to,” said Geoff Mayfield, director of charts and senior analyst for Billboard.

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