A 2006-2007 Market Perspective

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This is Celia Hirschman with On the Beat for KCRW.

I hate to tell you but it's starting to get ugly out there in the record business and it's going to get a lot worse before it gets better.

Major labels are struggling to resolve how to keep their traditional record business healthy without getting bought, or going broke, in the process. The reality is, you can't solve the problem and keep things the way they were. The numbers just don't add up. The only way to create an economically healthy environment is to change.

You see, record companies operate on huge sums of debt. The cycle of signing an artist, recording an album, and taking it to market can easily last several years and the costs are extensive. The label fronts all the money up front in the hopes of recouping their investment on the back end. Everyone gets paid before the label. Even record stores buy their stock on credit.

Benchmarks and algorithms are used to estimate how many records should be shipped to stores, based on the amount of radio, promotion and marketing involved. But that's where things start to fall apart. A colleague of mine, Scott Perry, runs trade magazine called the New Music Tipsheet. Scott met with 30 labels in the last two weeks, and he felt their pain first-hand. Much of the traditional marketing no longer works. Without the punch of commercial radio, and with so many media outlets competing for consumers interest, it's impossible to create a tipping point.

When a superstar artist like Jay Z can sell over 800,000 copies of his new CD in the first week, but find sales dropping off to less than 200,000 copies in the second, it's a problem. The decline of 80% in one week signals fear in the hearts of record stores owners. With that kind of downturn, stores will begin returning excess copies for refunds on their debt owed and the record label will have to adjust to lower profit expectations. Now days a marketing plan for a big artist can be killed very quickly after a few poor sales weeks.

Another significant factor is that consumers have shifted buying practices sharply.

Rather than walking into their local record stores, many folks have taken to purchasing a song or two online (that's the good news) or not purchasing music at all (that's the bad news).

All of this means, a lot of records are sitting in record stores, without buyers and the economy of the major label business does not allow for so much downturn.

The good news is that next year, the digital world will offer a lot more than just 12 tracks and an album cover. Expect to see content grow exponentially from artists online for additional fees.

It may not resolve the brick-and-mortar sales down-turn, but it will help the record business economy overall. The only way for physical retailers to compete with the online arena is to create unique shopping environments, offer added value for the CD purchase, and prepare to join the online revolution. Trying to stay the course in this changing environment is ignoring all the signposts ahead.

The other piece of good news is that 2007 will bring some great music into our lives, including new releases from Arcade Fire, Bloc Party, Norah Jones, Bright Eyes, Air, Clap Your Hands, Say Yeah and much more.

This is Celia Hirschman with On the Beat for KCRW.