Friday, January 16, 2004

Maybe the guys at Goldman know something I don't (that wouldn't surprise me) but, the increased rating on EMI doesn't make sense. Perhaps it's an after the fact coronation, since, "EMI's stock has soared more than 40 percent since the beginning of the year, bolstered by a report that discounted CD prices pushed UK album sales up 7.6 percent in 2003." If so, it's a sad exhibition of irrational exuberance, since the reasoning behind the 40% stock price increase seems faulty.

Okay, so record companies have perhaps taken off their blinders and recognize lower pricing can increase CD sales. Of course, they'll still complain about the downloading menace, but maybe they'll also fess up that most people and even some downloaders like buying music, they just don't want to spend $20 on CDs. Surely, part of that 7.6% increase is probably pent up demand by purchasers previously discouraged by the $20 price. But the biggest reason this is just a one-time sales bump is that label cost structures prevent any future price reductions. Since it is doubtful EMI will be able to use the same trick next year, I don't think a 40% stock price increase is justified.

This year's positive numbers do not derive from a deep systemic improvement in the industry's economy, but there is a major shift afoot that is not good for business as usual. Let's introduce two other key facts. First, EMI enjoys consistent popularity for it's $15 "Now That's What I Call Music" series of hit compilations. Second, unit sales of digital downloads have exceeded all expectations. The simple explanation for both is that consumers want to pay $1 per song only for the songs they want. That's the straight deal with digital downloads and the implicit deal for purchasers of the Now compilations ($1 per song multiplied by 15 songs).

This $1 per song premise also explains the increase in full length CD sales. For most people, downloading isn't an option (no iPod) and the Now compilations are a bad fit (they don't like all the songs on them). So the option they are left with is buying a 15 song CD with only one song they definitely like (the one released to radio). Let's say they bought a $20 CD and learned they only liked 9 of the other songs. From their perspective, they just paid $2 per song. In fact it's impossible to get down to the $1 per song levelwith $20 CDs, so it's no wonder fewwer and fewer people risked the money. If CDs are priced at $10, however, the chance of a satisfied customer is much higher. If they like 9 other songs, they're acheived the $1 per song nirvana. Anything on top of that is gravy, so I'm not surprised consumers were 7.6% more likely to take the risk.

So what's the problem? Record labels have grown fat on the premise that people will pay $20 for a CD that contains only one song they like. Even now, they only need to guarantee that the one hit song released to radio is good enough to convince people the $10 CD is a good risk, therefore almost all of their production and marketing investment goes into that one song and they essentially bank on getting paid $10 per unit. More and more of the other songs on the album are filler. But, in a world where all consumers can buy just the one song they like, labels will suddenly only get $1 per unit - a 10x drop in revenue. It gets worse when the price point per song drops below $1. That's the source of the implosion.

Now the implosion isn't going to happen overnight, so the industry has some time to adjust, but the changes need to be structural. Albums, if they continue to exist, need to be listen-through experiences: all the tracks need to be worthy and the sum of them needs to be greater than the parts. If an artist has only one song worth selling, they'll need to do so with one tenth the marketing and production they get now or share a large budget with 10 other artists. Finally, labels need to find intelligent ways to increase their hit rate and diversely invest in more bands so they can capture the nine dollars they are missing per mega-hit by cross-selling similar acts. The tough part is: these sorts of adjustments can't happen overnight, and the labels are in a race with their own demise.

Thursday, January 15, 2004

Geez, wasn't it just yesterday that I was saying the existing industry structure would collapse? I didn't know my blog could be so powerful after just one post ;)

Warner Music Warns of 'Significant Restructuring'

This isn't the first time a music company has signaled the hatchet man, but usually he comes around after a merger or after a bad quarter, as happened at Warner less than a year ago. This time the company is just changing hands. Bronfman is no idiot, nor is he flippant about cutting more jobs from a company that already went through the wringer to make it attractive to buyers. He clearly bought the company with the intention of gutting it. Why? Because it was the only way to make it viable.

Many analysts suggest that the survival of record labels this year will depend on more mergers, acquisitions, and restructurings. That's a good strategy for increasing margins in the short term, but not a good way to grow a business. What's missing from this analysis is how to increase the productivity of the remaining people. Otherwise, the company is just prolonging the agony of dissolution.

There is one line of argument that says "if you can fire these people now, what were they doing there before?" That's a fair question. It suggests that either the company was fat before or the company is too thin now (neither is a good thing). I think the more important question is "what are the people you keep going to do now?"

If they keep on with the same way of working, Warner will just be a smaller company (even of the remaining people are on average more talented than the laid-off people). They will only have the hands to properly release half the records they released last year. In a hits business, this seriously spoils your chances at success.

Maybe Bronfman has some special sauce up his sleeve and I wish him the best of luck - if only because I have friends who work at Warner. My advice would be to find a way to release double the records next year even with fewer people. In fact, I've got a few ideas on how he can do it, but I'll save those for later.

Wednesday, January 14, 2004

Anytime I reveal that I work for a music company, I get a mixture of intrigue and pity in response. When I add that it's a start-up music company, shock and awe get added to the mix. People can't fathom the risk of starting a business in an industry that is imploding under intense margin pressure. And since it is a start-up, I don't even have the glamour of a rock-and-roll lifestyle as consolation. So, people are left with the impression that I must just love music so much I don't mind starving.

It's true that I love music, but perhaps the more relevant truth is, music is important. Of course, it's not as basic as the physical needs of food and shelter, or the emotional need of love. In fact, its value is that it transcends basic existence, as a universal source of inspiration and a reminder of what imagination makes possible. It's also fun: a reminder of what makes life worth living. I'm in this business to keep the people dreaming and dancing.

I also think there is a better way to structure the music industry: more music, cheaper prices, more longevity. I think few doubt that the current system is ill-fated. To that end I've devoted my work days and this blog. is just one piece of an emerging puzzle and can't do everything that needs to be done. My hope is that my ideas will get picked up, circulated, discussed and maybe implemented by all the others out there who want to see a better future for music. To paraphrase a one-time boss of mine, we're either geniuses or idiots and history will decide which.