There are three distributors in the US who account for over 80% of the CD volume. These are Alliance, Baker and Taylor and Ingram. All three are struggling. Their customers are the retailers. The physical retailers are all but gone. The on-line retailers rely on the distributors to warehouse the CDs and to pick, pack and ship them to the consumers. This keeps the cost down to the retailer but passes that cost on to the distributor. As the business shrinks the cost of maintaining a huge inventory becomes unsustainable. Distributors are eliminating the low runners – the CDs will small or negligible volume. As you can imagine, the classical CD inventory is shrinking rapidly. This industry will continue to shrink and consolidate. It is likely that a niche player like Naxos will emerge and do for the distribution link in the chain what Arkiv did for the retail link. This will extend the life of the chain for a while.
In the classical recording industry the major labels are Sony, Universal and EMI. Warner was a 4th major but they exited the classical business 2 years ago. No one has to further describe the plight of the labels. Their troubles are regular news items for those of us in the industry. EMI Classics has 2 employees left in the US and they will be the next to go. Classical CDs account for about 3% of the CD sales and it is only a matter of time before Universal and Sony downsize again and eliminate the classical business. Naxos has a business model which is much lower cost and therefore they are better adapted to a lower volume market. As mentioned above they are well positioned to be the consolidator of the classical recording business and benefit from the demise of the higher cost competition. Their business model is controversial among the performers however because, in general, Naxos does not pay for the recording and they never pay residuals. This is a major factor in keeping their costs down but it does not pass the financial return benefit back to the performers.
There are a large number of boutique labels which do a very small business. They will continue on with business models similar to Naxos. Artists will be able to make CDs if they can find sponsors or some other way to finance the recording and production of the CDs. The major outlet for these CDs will be signing events at concerts. This will continue to be an important promotional activity but with the decline of the rest of the supply chain it is unlikely that these CDs will end up providing meaningful income to the artists.
No industry can exist without a healthy supply chain. The CD recording industry supply chain is VERY unhealthy and getting worse by the day. No one in the supply chain can make an adequate financial return. Without a supply chain – or at least without the current supply chain - what happens to the recording industry?
Digital downloads save the industry?
Some people put their faith in legal, purchased, digital downloads. Apple totally dominates the legal download business. From an article in the New York Times, November 9, 2006:
“A recent study estimated that Apple has sold an average of 20 songs per iPod — a fraction of its capacity. The rest of consumers’ music files — 95 percent or more — come from ripped CDs, possibly including discs from their own collections, and illegal file-trading networks, the study said.”
Theft is the major source of music on the IPod. Check this URL for another data point for your consideration - “Average teen stores 842 stolen tracks on their IPod.”
If you think Apple is in the business of selling music you are seriously deluded. Apple is in the business of selling IPods. Selling music is a necessary sideshow for Apple and, with 75% + of the market they barely break even. I personally spent 2 years as an investor in and manager of a major legal download business. I can tell you from painful personal experience that there is no long term opportunity in competing with Apple and selling digital downloads. The margins are razor thin and the market is shrinking. It is true that classical buyers are less likely to steal than teenagers but, unfortunately they are also older, less technology savvy and much less likely to be active users of the Internet and Internet commerce. According to the Soundscan data presented at 2008 NARM, classical CDs accounted for 3% of CD sales in 2007 but classical downloads accounted for only 2% of downloads. The supply chain for digital downloads is no healthier that the supply chain for CD sales.
The definition of “business” observed that the ultimate objective of a business is to earn a financial return. A supply chain is only as strong as its weakest link. For a supply chain to operate successfully all participants must make an adequate financial return. We define the recorded music supply chain as a system where recorded music is created by performers and composers, paid for by consumers and there is adequate financial return to create and maintain a healthy supply chain. There is no prospect of this supply chain enduring through the next decade.
There is a lesson to be learned from Apple however. They are using the ITunes store as a promotional tool to sell IPods. The power of music as a promotional tool is enormous. The best way for artists, performers and composers to leverage the recording of music in the internet age is to use it to promote their performance-based income opportunities. In this application recorded music has enormous potential if it can be created and distributed at low enough costs to justify its promotional value. Recorded music has a great future but the business model will be radically different. Future postings will explore this further and, with luck, the discussion generated will be useful to the community.
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