Here's what the next 20 years of recorded music will be like.  It seems
that fewer people will be paying $19 for pieces of plastic. <grin>

Kelly



The Chicago Tribune

March 30, 2003


    Twilight for the CD

    By Greg Kot
Tribune rock critic

    When it was introduced, the compact disc helped bail out the music
business: Domestic sales of the new technology zoomed from 800,000
copies in 1983 to 288 million by 1990, and continued to surge by the
hundreds of millions through the '90s.

    But with March marking the CD's 20th anniversary, the boom is over.
Compact disc shipments in the U.S. plunged nearly 9 percent last year to
just more than 800 million, according to the Recording Industry
Association of America (RIAA). The statistics confirm a downward trend
that has been gaining steam since 2001, and continues this year, with CD
sales down more than 6 percent from their already slack 2002 pace.

    The ripple effect is only beginning as the music industry braces for
a future that will involve the death of CD stores and the rise of
wireless, pocket-size MP3 players that will enable consumers to access
thousands of hours of music at the touch of a button. The only real
question is how long it will take for those scenarios to become reality.

    "You'll see CD sections in stores decline quickly over the next few
years because they will be replaced by technology that provides
dirt-cheap storage and the ability to basically access and play any type
of music anytime, anywhere," says Mike Dreese, the CEO and founder of
Newbury Comes, a New England record-store chain. "Wireless technology
basically will create a world where we can have anything we want all the
time."

    The death knell is already ringing for CD stores, some retailers and
industry observers say. In January, two major chains -- Warehouse
Entertainment and Value Music -- filed for Chapter 11 bankruptcy
protection. And nearly 500 music specialty stores nationwide have been
shut down in recent months.

    "Brick-and-mortar specialist CD stores are done in five years,"
Dreese says. "Stores like Tower or Sam Goody or Virgin are fast becoming
anachronisms."

    Not so fast says Dan Hart, CEO of Echo, a joint venture of retailers
(Best Buy, Tower Records, Virgin Entertainment, Warehouse Music,
Hastings Entertainment and Trans World Entertainment) that is licensing
songs from labels and plans to begin offering in-store downloads this
year. Internet retailing was one of the few growth areas for music
stores last year, with sales up 8.4 percent to 8.1 million units,
according to Nielsen SoundScan.

    "There's no question CD sales are declining, but the phaseout of
retail will take longer than people predict -- it'll be more like 30
years rather than five," he says. "There is a whole generation of people
out there educated to using CDs as their primary music format."

    But even Hart says that to retain a role in the marketplace, CDs
will have to evolve.

    For two decades, record companies bathed in profit, thanks to the
compact disc. The rise of the new digital technology prompted many
labels to reissue their long-neglected back catalogs on CD: Bands like
the Beatles, Rolling Stones, Aerosmith and The Who made millions of
dollars for their respective labels simply by having their past albums
transferred to the new digital format, sometimes several times over. The
shelved work of artists such as Bob Dylan, Eric Clapton and Robert
Johnson was repackaged in multi-CD box sets, and sold millions of
copies.

    But in the last three years, the bottom fell out of the CD market.
Why the sudden decline in what had been an industry staple? The RIAA
blames Internet "piracy": file-sharing by consumers is proliferating,
with millions downloading free MP3 music files daily through services
such as Soulseek and KaZaa. MP3 files are digitally encoded files that
can be downloaded from the Internet, posted on a Web site, sent via
e-mail or stored on a computer hard drive and then played back or
transferred onto blank CDs. KaZaa alone claims more than 9 million
monthly users. Six of the leading free file-sharing applications were
being used by 14 million consumers a month in a recent comScore Networks
analysis.

    A new set of rules

    Sales of blank CDs soared past the 1 billion mark worldwide in 2000
and increased 40 percent last year. Illegal CDs -- often manufactured
and copied on personal computers from free Internet downloads -- are now
routinely sold for a few dollars in school lunchrooms and on
playgrounds, and are available on street corners from New York to Hong
Kong. "When 23 percent of surveyed music consumers say they are not
buying more music because they are downloading or copying their music
for free, we cannot ignore the impact on the marketplace," says Hilary
Rosen, president and CEO of the RIAA.

    But there are other pressing issues: the $18.98 retail price of most
CDs, when the industry is phasing out less-expensive options, such as CD
singles and cassettes; the dearth of credible acts at a time when the
music industry is more interested in quarterly profits to satisfy
corporate shareholders rather than long-term artist development; and the
rise of a generation of consumers for whom music has become demystified
and devalued.

    "I wish people would realize what value music plays in their lives
and would remunerate artists accordingly," says singer-guitarist Bob
Mould, who now releases his music on his own Web-based record label,
"but if people want music to be free, it'll be free."

    The industry's reluctance to accept that scenario has cost it
dearly, observers say, causing it to fall behind in figuring out ways to
exploit the new technology to its advantage. "The relationship between
artists and labels has been ruptured over such issues," says
entertainment attorney L. Londell McMillan. "Is music worth $10? Is it
worth nothing? Something in between? While the artists and labels are
bickering, the money is going elsewhere."

    The industry has belatedly responded to the crisis by introducing a
variety of Internet subscription services, which essentially try to
induce consumers to pay as little as a few dollars a month for something
they can readily get for free through rogue services on the Web. These
services -- AOL's MusicNet, Liston.com's Rhapsody, Pressplay, Full Audio
-- have gradually expanded their catalogs of available music and
loosened restrictions on burning songs to CD or transferring them to
portable devices. But they still command fewer than 500,000 subscribers,
generating about $25 million in revenue.

    "How we compete with `free'" is the big question facing the music
industry and its nascent subscription services, says Pam Horovitz,
president of the National Association of Recording Merchandisers. "The
solution is to make something better than free."

    Extras, extras, extras

    The industry is putting its future in the digital clutches of
value-added CDs, replete with so many extras (DVDs, bonus CDs, artwork
and graphics) that to download all the data on a personal computer would
tax most hard drives.

    "People will still want to go to stores to browse and hold the
things they are considering to buy," Echo's Hart insists. "In addition,
stores can provide a faster connection to the Internet, so that
consumers can transfer tens of thousands of gigabytes to their iPod
player in minutes. It'll be like going to the filling station for music
consumers."

    But the Internet file-sharing culture has devalued not just music,
it has also weaned consumers off the idea of packaging. For artists who
treat their music conceptually, with complementary artwork and music,
and songs sequenced for particular artistic impact, the hodge-podge
aspect of the Internet is bad news.

    "I would be sad to see CDs go by the wayside," says King Crimson
guitarist Adrian Belew. "For something as conceptual as King Crimson
usually is, the idea of presenting our songs in piecemeal fashion simply
won't work."

    Dreese scoffs. "That's old-school nostalgia crap," he says. "CDs are
going to be interesting to future generations the way 78-rpm records are
interesting to people now. They'll be a curiosity. It's like saying
people will miss the board game Chutes and Ladders in a world of adult
PlayStation games. It's a quantum leap in terms of the kind of
experience it provides. People that are 40 will miss the artwork, sure.
But people who are 15 don't know what CD artwork is, or care."

    Retailers will still have a role in the music world, Dreese insists,
but only if they diversify. Newbury, he says, is transitioning into
licensed goods. In the same way, the music industry will survive if it
starts focusing on building artists who can generate multiple revenue
streams. "It's the Tiger Woods model of marketing," he says. "Tiger
Woods doesn't make nearly as much money on golf as he does on everything
else he does: endorsements, speaking engagements, commercials. The role
of the record label is going to be as a venture capital brand-building
organization. It'll be perfectly reasonable for them to approach the
next Avril Lavigne and say we'll give you a million dollars up front,
but we want a revenue split of all future movies, concerts, endorsements
and merchandise."

    A world of music

    In the CD-free future, music will be marketed everywhere. "You open
a can of Coke and it plays a song," Dreese speculates, "which makes the
can a collectible."

    It means the major labels will be in the business of selling only
the most mainstream artists, those capable of achieving Jennifer
Lopez-like cross-promotional revenue levels. Artists of lesser stature
will be able to use the Internet to direct-market to their fans.

    Some of those fans will still be demanding CDs. But those die-hards
will find themselves in an increasing minority, says Bruce Lehman,
president of the International Intellectual Property Institute:
"Consumers are saying, `I want to get rid of all my CDs. I want a
service that by pressing a button, I hear music through any device in
the house.'"

    As retailers and record companies struggle to meet that demand,
artists and consumers stand to thrive. "The end of CDs doesn't mean the
end of music," Dreese says. "On the contrary, it means there will be
more music more widely available at a more reasonable price than ever
before. In three to four years, we'll have a better consumer experience
and a more profitable artist experience."


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