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New analysis: Did downloads really kill the record labels? (1 Viewer)

Andrew Pratt

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Another point that often gets missed is that people say that there were say 1000 copies of song "X" downloaded from napster...that doens't mean that 1000 copies of the CD were lost. Someone may download a song but that doens't he/she would buy the whole CD. I have a few MP3's of songs that I like but I'd never bother to buy the whole CD just for that one song. I'm finding now that most of my CD buying comes from used CD due to the lower cost so if Wall mart sold new CD's for less I'd start buying new again
 

Lee Scoggins

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It does not cost less than a buck to manufacture a CD
For just replication costs, yes it does. I know because I have seen quotes from JVC recently as I am working with other people in the business.
There are, of course, other costs relating to the intellectual capital of people's time. There is a fair royalty to the musicians, for instance. I would be the last to take anything away from them. There is overhead at the label as well, but we often see that this is sometimes ridiculous: witness Pariah Carey's new contract. :D
Still, the price of CDs remains very high and has not come down since introduction despite lower replication costs and a higher number of discs to amortize the costs over.
I stand by my argument on the cost issue. I know record producers who also admit this is a problem.
 

Wayne Bundrick

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I used to be able to go to a movie for $2, now it costs $10. I could buy a meal at McDonalds for under $3, now its just under $7, I used to be able to buy name brand runners for $20, now they're $150. I used to ride the bus for 10¢, now it's $2. I used to be able to buy a car for $7,000, now they're $30,000. I used to be ab;e to buy a house for $20,000, now they're $450,000.

I used to be able to buy a CD for $15, now they're $15.
In my neck of the woods, even a Supersized McDonalds value meal is less than $5. And movies are $4.50 at twilight.

$15 used to be the price of an expensive CD, now it's the on sale price of a CD.
 

John Watson

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Jeez, I remember when the price of vinyl went up, because of the oil embargo, and sales of albums went down, and the big labels reduced their signings, and music got all sterile becasue the labels had to stick with the big sellers and couldn't take a risk on new performers..
Then disco, new wave (Video killed the radio star!), rap, etc.
When it comes to business models, the accountants and lawyers don't know very much about music, and quality. The beat goes on, the song remains the same...
Gotta disagree that the customer is always right tho - that makes Celine Dion a great artist. :)
 

Carlo_M

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Again, I don't have the numbers in front of me, but another thing that hurts the industry is the % of the money that goes to the distributor/production house vs. the amount to the artist. Why is Mottola a gazillionaire leaching off of the talents of struggling artists? And it's like that at all the big music production companies, up and down the corporate ladder with execs making tons off of other peoples' talents. They make Sports Agents look like Red Cross volunteers!

Yet they have a monopoly in regards to what gets played on the radio (thus directly affecting the taste of the listeners as opposed to people choosing what they want to hear) and what gets advertised and what gets put on MTV (which is seemingly a requirement for success nowadays).

True there's always been a hierarchy and red tape to go through in the biz, but it's worse than ever now.

In short, I don't think downloads killed the music biz. It's the business model that is killing them (and making artists unhappy unless you're a boy band or a hot blonde-dyed or natural-with minimal singing talents).
 

Benson R

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I think the real reason record companies see mp3 as lost revenue is that they feel they should be charging you for a download even if you already own the album. Why else would they put so much effort into stopping you from ripping your own albums? After all no matter what copy protection there is any would be 'thief' could hook an analogue output from a stereo to a line in on their computer and record that in mp3. To stop someone from ripping an album right from the cd drive in the computer only stops the less determined person who just wanted to put some songs they already bought onto their portable mp3 player.
 

Iain Lambert

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I didn't really know that much about the US for record sales, until I heard a very revealing documentary on BBC radio over the weekend, presented by Paul Gambacini. It pointed the finger mainly at two things.

Firstly is the record companies desperation for the mega-seller (rather like certain sections of Hollywood only being interested in the megabudget blockbuster), to the point where Aimee Mann had her Oscar-nominated soundtrack to Magnolia turned down and she was dropped off Interscope because they "didn't think it would sell more than 500,000 copies, tops". Despite the fact that additional recording costs would be minimal (the songs were already recorded for the film) and promotion wouldn't have to be massive (its a tie-in to a film that New Line were promoting anyway), they compared her to another 'flop' they had just had who "couldn't even make it to 2 million either".

Secondly, as has been said is the deliberate killing of the single. Record companies were apparently concerned that single sales were cannibalising albums, so practically nothing comes out as a single, and what does costs a fortune. Regularly the number one record on your 'top 100' isn't actually available to purchase as a consumer, and they gave the instance of one week earlier in the year when the Elvis Vs. JXL record was the biggest selling single in the US, but only placed 50 in the chart as it wasn't getting airplay. As a Brit its incomprehensible; our chart is 100% sales. Anyway, if the songs people are hearing on MTV and pop radio aren't available to purchase (and in many cases the album isn't even available yet either), is it really that much of a surprise that kids are taping off the radio or downloading their new fave track instead?

The American Recording Industry is now in the business of stopping your access to owning music so much that its forgotten to actually sell it to you occasionally.

edit - Its almost as bad here in the UK. Because we have a chart that is entirely sales based, we don't get the worst of it by far, but even so its Radio 1 standard policy to start A-listing tracks 4-6 weeks before release now; so often by the time you can actually buy a copy you're sick to death of the thing, or have already got hold of it another way.
 

Brian Perry

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There are a few issues at work here, and I will take each one separately.

First is the debate whether file sharing kills sales or actually enhances sales. To me, this argument is not for us to decide--it's up to the owners of the music to decide. If Napster was increasing sales and the record companies still opposed it, that's their right.

Second is the issue of CD manufacturing costs, and Jeff is right on. The actual plastic may cost 5 cents but the real costs include royalties, recording fees, etc. The powder in that Tylenol capsule you bought probably cost less than a penny, but do you think Tylenol's price should be based on that and not all the research and development?
 

Jeff Keene

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It's my right to hit myself in the head with a hammer, too, but that doesn't make it smart.

I don't think anyone thinks the cost of manufacturing is the only factor in determining the price of a CD. I also don't think ANYONE thinks that the cost of everything combined justifies the price currently charged by the record companies. I also don't think anyone believes that the high price of CD's insn't hurting sales.
 

Josh Lowe

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The industry's idiotic behavior is what's killing it. The crazed, fervant legal threats and endless waves of bad PR.

Are you suggesting that the demise of Napster led you to buy fewer CDs? That's kinda hard to believe
why? since blockbuster music got rid of all their listening stations, fully previewing a new CD before buying it has become nearly impossible. CDNOW only has snippets of the songs on a given CD, and it's hard to make an evaluation based on those. so, since i can't hear more than at best one or two songs off a given CD released as singles, i don't buy unless it's something i absolutely know i'll enjoy. there are a lot of albums out there by a lot of bands now that i'll never buy because there's no good way for me to hear their music.
 

Lee Scoggins

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I also don't think ANYONE thinks that the cost of everything combined justifies the price currently charged by the record companies. I also don't think anyone believes that the high price of CD's insn't hurting sales.
Agreed. Prices are way too high relative to other entertainment options.

I also strongly buy into cell phone usage taking away from music listening. I has hurt the Sony Walkman generation.
 

Lee Scoggins

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Second is the issue of CD manufacturing costs, and Jeff is right on. The actual plastic may cost 5 cents but the real costs include royalties, recording fees, etc. The powder in that Tylenol capsule you bought probably cost less than a penny, but do you think Tylenol's price should be based on that and not all the research and development?
I'm starting to get a bit insulted here as a management consultant. It's obvious to all that R&D is responsible for the high drug prices which is not only fair but good for better treatments in the future.

Of course, there are other costs related to overhead and people's time as I said earlier. But the point I was making is that the margins are very high at the label and retailer. This results in a total CD price being out of line relative to one's enjoyment of the content.

Let's give an example based on real world data - while I am not running a software company I moonlight as an engineer. There was a friend of mine who recently owned a audiophile record label. Here is a rough approximation of how the costs broke down on a recent disc:

Raw Costs
$1.00 to create the CD (replication, artwork and all) It would have been a lot lower if they label sold much larger volume - economies of scale.

Artists Royalty
$4.00 on average

Record Label Profit
$4.00 on average, sometimes more

Total Production Costs (Sell Price to Distributor)
$9.00

Average Selling Price To Consumer
$16.00

Retailer's Profit
$7.00

The above numbers based on actual production data rounded to a dollar.

So what have we learned:

Record labels are taking a lot of the profit as are the retailers. These numbers have moved away from the retailer recently but are a good representation.

Artist's royalties seem rather low relative to the value creation input of them.

There is plenty of room for lower pricing. Retailers have lots of flexibility, not withstanding the heavy debt burden carried by Tower Records parent.

People have a right to be concerned here when they only get a few good songs.

It is like when they boosted payphone calls from 25 cents to 50 cents and the telcos said they had not raised prices for 20 years so the change was long overdue. However, the cost of long distance during that time went DOWN 95+%. Why wasn't there a DECREASE in price? Because they had the marketing power to pull it off.

Like the record labels, higher pricing may work in the short run, although Bricklin's insightful analysis makes me doubt that. In the long run, the record industry business model is broken and shareholders will suffer. In the long run, consumers will seek alternatives.

Maybe Jimmy Buffett's ideas about lower costs artists collaboratives makes a lot of sense in the face of this.
 

TheLongshot

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Artists Royalty
$4.00 on average
I think you are being generous. I think royalties are about half that for the average artist. Most artists don't make much on record sales. It is why I like to buy direct from an artist if I can. I'd rather that they get my money rather than a middleman.

I think Iain hits the nail on the head of some of the main problems of the record industry. The big labels need big sales, and there is no room for artists that sell less. The thing is, not everyone can be huge sellers, nor do they need to be to be successful. It is the reason why I like going to smaller, niche labels, who know their market. If I depended on the majors for music, I wouldn't be listening to much.

Jason
 

BrianB

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There was a friend of mine who recently owned a audiophile record label.
In your quest for cheaper CDs, did you ask your friend to take reduced money from the CDs his label put out? He was obviously in a great position to reduce the cost of the CDs he put out...
 

Josh Lowe

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perhaps I am in the minority but it seems to me like CD prices have dropped. I used to see they were an average of $14.99-$16.99 and it seems like now most are $13.99. New releases I often see sold as loss leaders for $9.99.

For me, personally, cost does not figure into why I buy fewer CDs. For me it's purely because of A) the fact it's now a challenge to preview a CD before purchasing and B) the RIAA's ridiculous, wild-eyed legal threats and lobbying for laws that would not only destroy Fair Use, they'd also greatly infringe on peoples' rights and privacy.
 

Jeff Ulmer

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This results in a total CD price being out of line relative to one's enjoyment of the content.
Sorry, but this is rediculous. For entertainment value, CDs have to be one of the best investments. For the price they offer far more replay value and are more versatile (you can't watch movies while driving) than DVDs, and compared to live entertainment are a steal.

There are CDs in my collection I must have listened to a hundred times. While others may not get as much repeat play, they certainly were worth what I paid for them, far more so than most of the DVDs I own which might get replayed once or twice if that.

I also fail to see the artist royalties cited being anywhere near what you propose. Mechanicals (which go to the songwriters and publishers) will be about $1 per disc, while artist royalties generally fall between 7 and 12% of retail, less packaging, returns, breakage, etc.
 

Lee Scoggins

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In your quest for cheaper CDs, did you ask your friend to take reduced money from the CDs his label put out? He was obviously in a great position to reduce the cost of the CDs he put out...
No I did not, but I have suggested that he pay lesser staff more money to build more loyalty. That's another problem. Mid-level label staff and lower are often on poverty-like wages and they work in high dollar cities like NYC and Los Angeles. Record producers are almost always millionaires.

I do think that there is value in increasing artist's royalties for smaller labels in order to attract more brand name artists and build out one's catalog. There are a lot of option-related effects from working with more networked musicians.
 

Jeff Ulmer

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Record producers are almost always millionaires.
I really question where you are getting your data. While there may be SOME record producers who are extremely successful, they are few in number compared to the overall talent base, perhaps in the 2-3% range, if that, which hardly consists of "almost always". Those who are rich are that way because they can consistently produce albums that sell. They command a price because they can make the difference between an album that doesn't move and one that charts, just like any other professional with a proven track record.

If you are looking for ways to decrease the end price of CDS, paying staff more isn't one of them, although I don't disagree with the concept.
 

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