Silent Night for Music Sales – WSJ

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Holiday Buyers Spurn Tunes
As Industry Picture Worsens;
‘Cesspool of Really Bad Bands’

By ETHAN SMITH
Staff Reporter of THE WALL STREET JOURNAL
December 16, 2005

The holiday season has traditionally been a time for the music industry to relax and watch the money roll in as big-name releases all but sell themselves. The stocking-stuffer effect is generally strong enough that the season generates 40% of the industry’s annual revenue.

This year, though, there’s little Christmas cheer to go around. During the crucial Thanksgiving week, for instance, the top 10 albums sold 40% fewer copies than the top 10 albums the same week in 2004. Album sales so far this year are down 7.8%, according to Nielsen SoundScan, compared with the same point a year ago. Sales of individual digital tracks on services like Apple Computer Inc.’s iTunes Music Store have increased — but not nearly enough to offset the slide in CD sales. According to an estimate from SoundScan, overall sales of recorded music are down about 4.5%, if one considers 10 individual tracks the equivalent of an album.

WALL STREET JOURNAL VIDEO

WSJ’s Ethan Smith and Tom Lowry of Business Week discuss weakness in the music industry and the entertainment industry as a whole.

“It’s sort of a bleak holiday season at the end of a bleak year,” says Jim Urie, president of Universal Music Group’s Universal Music & Video Distribution arm.

Retailers who specialize in music say that their outlook is worse than bleak. Music sales at Virgin Megastores’ 20 North American locations are down nearly 20%, according to Simon Wright, chief executive of Virgin Entertainment Group. Other music retailers report similar numbers.

Things are so tough that Rob Roth, owner of the Vintage Vinyl music store in Fords, N.J., says that being able to simply keep pace with last year’s sales puts him among the lucky few. His new motto: “Flat is the new up.”

This season’s slide is evidence that, despite a brief uptick in music sales at the end of last year, the music-industry meltdown that began more than five years ago is far from over. The long decline has been fed by a combination of factors — including online piracy, CD burning, high prices and competition for consumer dollars from videogames and DVDs.

Lately, people in the music industry have said the same basic issues have been intensified by the growing popularity of pricey gadgets like Apple’s iPod and Microsoft Corp.’s Xbox 360, as well as the rising prices for games that go with the new platform.

In the near future, the introduction of next-generation DVDs, which carry high-definition TV signals, is likely to eat into the shrinking space retailers allot CDs. The arrival of Sony Corp.’s PlayStation 3 videogame platform threatens to further erode music sales. And despite some heavy holiday discounting on CDs, many retailers say their customers believe they are still too expensive. Now, there is even competition for digital-music sales within the iTunes store itself from $1.99 episodes of network-television shows.

But many retailers and label executives alike point to a more fundamental problem this year: A lack of hit acts. Don VanCleave, president of the Coalition of Independent Music Stores, says blame lies with “an absolute, gigantic cesspool of really bad bands.”

Consumers seem to agree. This year has seen more albums come and go from the No. 1 sales spot than any year since SoundScan began keeping score in 1991 — a sign that few hits have staying power. This year’s album charts have seen brief reigns, often followed by rapid tumbles, by more than two dozen artists, including Kenny Chesney, Hilary Duff and Rob Thomas.

The music industry hasn’t connected broadly with fans since the late-1990s heyday of the teen pop performed by the Backstreet Boys, ‘N Sync and Britney Spears. “It’s almost like we need a new genre of music,” says John Sullivan, chief financial officer of Trans World Entertainment Corp., which operates music stores under the FYE and Coconuts names, among others. “There hasn’t been anything fresh to get consumers excited in a while.”

The biggest sellers during the current holiday season include Green Day and Mariah Carey, whose albums have been out for months. “These are not as big as the albums we had last year,” Mr. Sullivan says. Last year’s big sellers included new albums by U2, Eminem and Shania Twain.

None of the four global music companies has been immune to the slide. Vivendi Universal SA’s Universal Music has managed to keep its dip to just 2%, but the company has seen disappointing releases by rap stars 50 Cent and Eminem, whose latest releases have done far less well than many retailers had hoped. Mr. Sullivan of Trans World says the soundtrack to 50 Cent’s movie “Get Rich or Die Tryin’ ” was “a disappointment, no question.” The disc sold just about 317,000 copies its first week in stores, compared with over 1 million copies in the first week for the rapper’s previous album, “The Massacre.”

Mr. Urie of Universal, though, says that both the soundtrack and Eminem’s greatest-hits package have done as well as the company expected.

After a generally soft year in which it lost several percentage points in market share, Sony and Bertelsmann AG’s Sony BMG Music Entertainment have fielded some strong year-end releases by Shakira, System of a Down and R&B newcomer Chris Brown. Warner Music Group Corp. has also had a mixed year, with standouts that included Green Day and several strong rap titles released in partnership with small regional labels.

EMI Group PLC’s Capitol and Virgin labels have struggled to field hit albums, although the company’s Nashville operation has been strong. And this week Virgin, which is not affiliated with Virgin Megastores, scored the No. 3 position on Billboard’s album chart with hard-rock band Korn. The company also says that it has aimed to keep album sales for various artists, including Gorillaz and Joss Stone, strong for the long run, rather than concentrating on huge opening-week numbers. Additionally, the company recently installed as the new chairman of Virgin Records Jason Flom, an industry veteran with a strong track record in finding and developing artists.

Ron Werre, president of EMI Music Marketing, notes that while music sales overall are down, sales of so-called catalog titles — which have been in stores for more than two years — have actually improved slightly in the past two weeks. “There is still a viable, interested music buyer,” Mr. Werre contends. His company has recently seen strong performances by older titles from the Beach Boys, Dean Martin and Keith Urban, among others.

Some retailers say that hot videogame consoles and titles have had a negative impact on some unexpected genres of music. “Often Mom and Dad are the ones buying the Xbox 360″ for the kids, says Bryan Everitt, director of music operations at Hastings Entertainment Inc., which operates 153 stores in 20 states in the West and Midwest. “So country, easy listening, classical, and jazz are affected. Even the Rolling Stones, Paul McCartney, Neil Diamond — Boomer artists — they’re affected.”

Mike Dreese, co-owner of New England entertainment chain Newbury Comics Inc. and a board member of the National Association of Recording Merchandisers, says that pricing remains a major problem for the music industry, especially compared with DVDs. “The new Harry Potter movie came out and they’re offering $7 videos from the previous movies,” he says. “You don’t see any $7 Beatles albums.”

Universal Music has cut its wholesale prices by as much as 25% in recent years, but its competitors haven’t generally followed suit, and some retailers have complained that what cuts there have been haven’t been aggressive enough. Eminem’s new greatest-hits collection, for instance, sells for more than $10 wholesale, according to retailers. But to compete effectively with big chains, such as Wal-Mart Stores Inc., which sometimes sell CDs for less than what they pay for them, retailers say they need to sell hot new titles at $9.99 — which Mr. Dreese calls “the magic price point.”

The big question now is whether this year’s slide in sales will continue into next year. EMI’s Mr. Werre anticipates what he calls a “gift-card effect” after the holidays, when consumers redeem certificates for music both online and in stores. With iPod sales expected to reach new heights this holiday season, music executives say that digital gift certificates for downloads are also expected to do brisk business. The music companies don’t count sales from those cards until they are redeemed.

Many music retailers aren’t taking any chances and have begun adding products other than CDs. Virgin Megastores, for instance, are being reconfigured to emphasize “music-lifestyle” items, such as clothes and memorabilia, over music itself. In the locations that have been overhauled, music now accounts for only 40% of sales. “If we’re dependent on music, then we’re going to be vulnerable to the ebb and flow,” says the stores’ Mr. Wright. “And the fundamental trend in physical music is downward.”