Plunge in CD Sales Shakes Up Big Labels

NYT
May 28, 2007
Plunge in CD Sales Shakes Up Big Labels
By JEFF LEEDS

“Sgt. Pepper’s Lonely Hearts Club Band,” the Beatles album often cited as the greatest pop recording in music history, received a thoroughly modern 40th-anniversary salute last week when singers on “American Idol” belted out their own versions of its songs live on the show’s season finale.

But off stage, in a sign of the recording industry’s declining fortunes, shareholders of EMI, the music conglomerate that markets “Sgt. Pepper” and a vast trove of other recordings, were weighing a plan to sell the company as its financial performance was weakening.

It’s a maddening juxtaposition for more than one top record-label executive. Music may still be a big force in pop culture — from “Idol” to the iPod — but the music business’s own comeback attempt is falling flat.

Even pop’s pioneers are rethinking their approach. As it happens, one of the performers on “Sgt. Pepper,” Paul McCartney, is releasing a new album on June 5. But Mr. McCartney is not betting on the traditional record-label methods: He elected to sidestep EMI, his longtime home, and release the album through a new arrangement with Starbucks.

It’s too soon to tell if Starbucks’ new label (a partnership with the established Concord label) will have much success in marketing CDs. But not many other players are.

Despite costly efforts to build buzz around new talent and thwart piracy, CD sales have plunged more than 20 percent this year, far outweighing any gains made by digital sales at iTunes and similar services. Aram Sinnreich, a media industry consultant at Radar Research in Los Angeles, said the CD format, introduced in the United States 24 years ago, is in its death throes. “Everyone in the industry thinks of this Christmas as the last big holiday season for CD sales,” Mr. Sinnreich said, “and then everything goes kaput.”

It’s been four years since the last big shuffle in ownership of the major record labels. But now, with the sales plunge dimming hopes for a recovery any time soon, there is a new game of corporate musical chairs afoot that could shake up the industry hierarchy.

Under the deal that awaits shareholder approval, London-based EMI agreed last week to be purchased for more than $4.7 billion by a private equity investor, Terra Firma Capital Partners, whose diverse holdings include a European waste-conversion business. Rival bids could yet surface — though the higher the ultimate price, the more pressure the owners will face to make dramatic cuts or sell the company in pieces in order to recoup their investment.

For the companies that choose to plow ahead, the question is how to weather the worsening storm. One answer: diversify into businesses that do not rely directly on CD sales or downloads. The biggest one is music publishing, which represents songwriters (who may or may not also be performers) and earns money when their songs are used in TV commercials, video games or other media. Universal Music Group, already the biggest label, became the world’s biggest music publisher on Friday after closing its purchase of BMG Music, publisher of songs by artists like Keane, for more than $2 billion.

Now both Universal and Warner Music Group are said to be kicking the tires of Sanctuary, an independent British music and artist management company whose roster includes Iron Maiden and Elton John. The owners of all four of the major record companies also recently have chewed over deals to diversify into merchandise sales, concert tickets, advertising and other fields that are not part of their traditional business.

Even as the industry tries to branch out, though, there is no promise of an answer to a potentially more profound predicament: a creative drought and a corresponding lack of artists who ignite consumers’ interest in buying music. Sales of rap, which had provided the industry with a lifeboat in recent years, fell far more than the overall market last year with a drop of almost 21 percent, according to Nielsen SoundScan. (And the marquee star 50 Cent just delayed his forthcoming album, “Curtis.”)

In other genres the picture is not much brighter. Fans do still turn out (at least initially) for artists that have managed to build loyal followings. The biggest debut of the year came just last week from the rock band Linkin Park, whose third studio album, “Minutes to Midnight,” sold an estimated 623,000 copies, according to Nielsen SoundScan data.

But very few albums have gained traction. And that is compounded by the industry’s core structural problem: Its main product is widely available free. More than half of all music acquired by fans last year came from unpaid sources including Internet file sharing and CD burning, according to the market research company NPD Group. The “social” ripping and burning of CDs among friends — which takes place offline and almost entirely out of reach of industry policing efforts — accounted for 37 percent of all music consumption, more than file-sharing, NPD said.

The industry had long pinned its hopes on making up some of the business lost to piracy with licensed digital sales. But those prospects have dimmed as the rapid CD decline has overshadowed the rise in sales at services like Apple’s iTunes. Even as music executives fret that iTunes has not generated enough sales, though, they gripe that it unfairly dominates the sale of digital music.

Partly out of frustration with Apple, some of the music companies have been slowly retreating from their longtime insistence on selling music online with digital locks that prevent unlimited copying. Their aim is to sell more music that can be played on Apple’s wildly popular iPod device, which is not compatible with the protection software used by most other digital music services. EMI led the reversal, striking a deal with Apple to offer its music catalog in the unrestricted MP3 format.

Some music executives say that dropping copy-restriction software, also known as digital-rights management, would stoke business at iTunes’ competitors and generate a surge in sales. Others predict it would have little impact, though they add that the labels squandered years on failed attempts to restrict digital music instead of converting more fans into paying consumers.

“They were so slow to react, and let things get totally out of hand,” said Russ Crupnick, a senior entertainment industry analyst at NPD, the research company. “They just missed the boat.”

Perhaps there is little to lose, then, in experimentation. Mr. McCartney, for example, may not have made it to the “American Idol” finale, but he too is employing thoroughly modern techniques to reach his audience.

Starbucks will be selling his album “Memory Almost Full” through regular music retail shops but will also be playing it repeatedly in thousands of its coffee shops in more than two dozen countries on the day of release. And the first music video from the new album had it premiere on YouTube. Mr. McCartney, in announcing his deal with Starbucks, described his rationale simply: “It’s a new world.”