Stopping the Steady Slide

25 Sep, 2014 By: Thomas K. Arnold

How do we stop the steady slide?

When I heard that U2’s new album was being given away free to every iTunes account, I thought to myself how far the music industry has sunk – to the point where albums, once the cash cow of the business, are essentially worthless.

It was actually a slow and steady process, and one in which music industry leaders have only themselves to blame.

Back in the glory days of vinyl LPs, eight-tracks and cassettes, kids like me had a great sampling mechanism for new music. It was called the single, and it cost 89 cents at the Wherehouse. We’d buy singles of songs we liked on the radio; if the flip side was good, as well, we’d spring $3.66 for the album down at Tower.

The model changed with the introduction of the CD in 1982. Record industry moguls, smelling money, jacked up the price of the CD single to $3.99; when consumers, outraged at the steep price hike, stopped buying them, they killed off the single completely and focused on raising album CD prices to make up the difference. That’s when consumers revolted and, with the birth of the Internet, took to swapping music files online through Napster and other sharing sites.

The record industry took a hard line against this practice, suing their customers and raising the price of CDs even more, to over $20. Ultimately, their plan backfired; consumers kept finding new ways to share music for free and the music industry’s profits plummeted until finally they caved and began selling music downloads themselves, at a fraction of the price they had been getting for physical discs.

The leaders of our industry watched and learned. When the movie industry launched a new format, the DVD, the price of movies went down, not up, and consumers responded by buying boatloads of movies and building massive home libraries.

And yet our industry’s fatal flaw was believing that the DVD gravy train would last forever and migrate over to the next advance in physical media, the Blu-ray Disc. They overlooked the fact that quality, as the music experience had shown, wasn’t nearly as important as they had thought. Music downloads don’t sound nearly as good as CDs, but to the average consumer that doesn’t matter: They gladly give up quality in return for cheaper product and ease of access.

And that’s our next big stumbling block: How do studios maintain the profit margin when consumers are perfectly OK with spending less than $10 a month to stream movies over Netflix, even if the quality isn’t as good as disc and the selection is limited to catalog product?

Keeping new releases out of the subscription streaming cycle has worked so far, but there are only so many hours in the day, and the novelty of Netflix has yet to wear off. This has led to a precipitous decline in disc sales, with consumers no longer hell bent on immediately rushing out and buying the latest hot new movie release when there’s plenty of stuff they still haven’t seen on Netflix.

The sale of movie downloads — EST, Digital HD, whatever you want to call it — is supposed to save our business, but despite early windows the practice still hasn’t caught on as studio heads had hoped. It’s still a fringe business, and there are those who believe it will never really flourish until the price comes way down, to $5 or less, a move that would destroy margins and put a serious dent in Hollywood’s revenue stream.

That’s why the studios continue to support the disc business, while looking everywhere they can to cut costs.

Will we eventually suffer the same fate as the music business, where content is essentially being given away? I hope not, but the truth is, we’re almost there. To counter this, studios need to find some way to transform the subscription business into a transactional business, although there are those who say it’s already too late.

If it is true that every challenge presents an opportunity, I hope we find it. I’ll be thinking of possible solutions, as well — perhaps while listening to my free U2 album on my iPhone.

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About the Author: Thomas K. Arnold