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Update: NARM Convention Focuses on Solutions

23 Aug, 2004 By: Thomas K. Arnold

SAN DIEGO — After several years of getting clobbered by file-swapping — and watching its core CD business crumble — the music industry is finally beginning to fight back.

That was the overlying theme at this year's National Association of Recording Merchandisers (NARM) convention, where the spotlight this year was not on the “woe is me” chest-thumping of years past, but on practical solutions to fix an industry whose way of doing business has been broken a very long time.

At the top of the list: new DualDisc technology, a two-sided disc made up of a CD on one side and a DVD on the other to give consumers added value. It's developed by Warner and Sony, and supported by a consortium of other big labels, including EMI and Universal.

High list prices for CDs have been a top retailer complaint for years, particularly since the record companies have been slow to come up with any extra content. Prices have come down drastically over the past couple of years — the average price is now $14.30, down from a high of nearly $20, according to PriceWaterhouse Coopers — but in the bonus materials arena, CDs are still lacking.

Retail attendees at NARM also saw a lot of bell-clanging for in-store CD burners, which present them with a way to tap into the emerging market for paid downloads — a market PriceWaterhouse Coopers projects is so dynamic it could lead to overall growth in the music sector in the coming years.

PWC analyst R. Wayne Jackson sees the market for legitimate digital downloads mushrooming into a $2.19 billion business by 2008, up from just $171 million this year. He attributes the expected boom to “faster pipes,” noting that broadband use is soaring. In the United States alone, Jackson predicts, the number of connected households will more than double over the next four years, from 22 million in 2003 to 54 million in 2008.

Driven by legitimate downloads at 99 cents a single and $10 an album, the music industry is poised to recover and should be back at the $14 billion level within four years — a threshold last crossed in 2000.

Music retailers are keeping their fingers crossed — and hoping for the best.

“Don't say no — try everything, just make sure all the experiments are above the waterline,” said convention attendee John Marmaduke, CEO of 151-store Hastings Entertainment of Amarillo, Texas. “We do lots of experimenting in our own stores, and a lot of times the unintended results teach us the most.”

Aside from toying with new technologies, record companies also are stepping up music DVD production, although they're still trying to figure out how to market the discs. Critics say their efforts are woefully inadequate and urge them to see what's happening on the movie side, where gala DVD release parties generate gobs of publicity — and where retailers have plenty of advance word about what's in the pipeline.

“We put [music DVDs] right in front in our stores, so people can see them right away,” Marmaduke said. “There's a lot more demand than there is marketing.”

Indeed, according to Nielsen Entertainment, music DVD sales are soaring, with year-to-date sales up more than 100 percent from the same period last year, at 15.7 million units.

The music industry's do-something attitude comes at a time when the loss to the digital download demon has slowed, thanks to a flurry of lawsuits against illegal file-swappers that were deemed frivolous at the time, but have had results.

Legendary music industry mogul Clive Davis, speaking during the opening business session, said studies suggest there was an immediate drop in illegal downloading once the first lawsuit was filed.

Analyst Jackson agreed, stating during a presentation that experience has shown “legal action will stem the piracy tide.”

Further boosting spirits is the fact that after four consecutive years of losses — music sales fell from $14.6 billion in 1999 to $11.8 billion in 2003, according to the Recording Industry Association of America — sales appear to be rebounding.

Acting NARM chief Jim Donio in his opening remarks noted that year-to-date CD sales for 2004 are up 9 percent from the same period in 2003.

“Music sales are rebounding across a variety of artists and genres,” Donio said, crediting an improving economy and significant progress in the fight against piracy.

PWC figures show consumer spending on music this year are on track to come in at $11.9 billion, flat with last year. But beginning next year, the firm projects CD sales will stop falling while a huge and steady growth spurt in digital download sales will drive spending to $12.3 billion in 2005, $12.7 billion in 2006, $13.4 billion in 2007 and just below $14 billion in 2008.

Additional reporting by Jessica Wolf.

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