Record Labels Ignore Supply and Demand and Kill their Profits
February 2nd, 2009 by Ivan Pena in Bombardier Manifesto
Over the last decade, there has been much talk and figures to support the fact that the heyday of the music industry has passed, or at least shrunk.
For example, the Top 10 selling albums of 2008 totaled 19 million units, including digital sales. In 1988, the 5 top-selling album alone sold over 26 million units (George Michael’s Faith, Dirty Dancing Soundtrack, Def Leppard’s Hysteria, INXS’ Kick and Michael Jackson’s Bad).
Did music lose its appeal? Does Lil Weezy not hold a candle to the King of Pop? Do bands today suck more than those of the 80s? What gives? I am sure there has been some kind of “lack of quality” perception from some old timers and music critics, but for the most part I think its about greed and lack of following supply and demand.
Major labels have been handling digital albums with the same basic strategy as their physical albums. Due to the rampant adoption of digital music, there is a different paradigm for the supply and demand for music that they have not adopted yet. Costs structures are different. Operating costs are different. Distribution is different. So why don’t they get this yet?
Their basic strategy has been: blanket the world with as many quick blitz promotions as we can and try to charge as much as we want for it. 20 years ago, CDs and cassettes were expensive to produce. Also, recording technology was expensive and cost-prohibitive for independent artists. In addition, record stores were specialty shops and not part of conglomerate department stores and MTV spoon fed you the images and rockstar lifestyles. It was a solid formula with a high cost of entry for small players.
Now, CDs are cheap to produce, anyone can buy Pro Tools and digital retailers will sell anything you have. Plus, MTV still sells reality TV lifestyles and they don’t play music videos.
It seems music costs less and — based on the RIAA’s figures of music pirates — is demanded just and much or more than in 1988. So why have CD prices barely dropped? Why have digital album prices mimicked physical prices?
Record labels have been trying out different price points on different online retailers to see what the most is people are willing to pay for a digital album. The defacto rate for a single track has been $0.99 almost everywhere, with slight variations on some Websites based on specials, promotions and popularity. Amazon has been offering special $0.79 singles. For digital albums, you can pay as little as $1.50 and as much as $15.
Digital-album sales continued to gain ground on physical CDs, with sales of 65.8 million downloads accounting for about 15.4% of all albums sold during 2008, up significantly from the 50 million digital albums sold in 2007, which comprised 10% of that year’s overall sales total. CDs, meanwhile, represented 84% of all album sales in 2008 with 360.6 million, down from 90% (449.19 million) in 2007.
Of course, digital music’s most notable growth came in the form of individual-song sales, which for the first time crested the 1 billion mark, setting a Nielsen SoundScan record with 1.07 billion digital tracks sold in 2008. That number is up 27% from 2007’s digital-track sales, which totaled 844.2 million.
Also, the 80/20 rule applies to music purchasing. 80% of money comes from about 20% of the music purchasing population. The thing is that the age of the 20% changes depending on music trends, distribution and the current economic state. So instead of blanketing and having a shotgun approach, focus on creating fanbases and grow them individually. Keep artist rosters small and not bloated for tax purposes.
Even though the RIAA has announced that they will stop suing people over illegal downloads due to being a strategy that “isn’t working for them,” according to a Rolling Stone article and a major-label source, I don’t anticipate people to pirate less albums because of it. But I do anticipate the majors using the piracy as a reason to charge more for music, thus ignoring the basic tenets of supply and demand.
Enjoy. Share.
Ivan
About Ivan
Ivan Pena has an Advertising degree from UF, 8+ years in corporate and consumer marketing, 10+ years in graphic design and promotions. Ivan is also the leader of the group Soulfound and runs his own independent record label, Mohawk Bomb. In 2008, Ivan was named one of the Top 30 Under 30 by the Tampa Bay Business Journal. Check Ivan out on LinkedIn: www.linkedin.com/in/ivanpena
February 2nd, 2009 at 3:33 pm
I would love some feedback on what you think music should cost and why you think could be done to keep the music alive.
February 2nd, 2009 at 5:38 pm
Music will never die.
February 2nd, 2009 at 5:49 pm
Good read!
I think that music is more alive and prospering today, than at any other point in time. As for music sales, I think it’s indicative of the culture. Musicians are just the next in a long line of occupations that have fallen in salary and prestige stature. In the future (perhaps we are already in the future) there will be very few record companies, and even fewer rich musicians. There will be tons of home brewed gigging artists, making a respectable and decent living.
As for record companies right now, I think the idea of marketing a product with a digital download code is the current obvious path that needs to be taken. The music industry is having a marketing problem as much as they are any other, and until they seriously address that, nothing will change for them.
February 2nd, 2009 at 8:55 pm
Nice Article,
I am an indie musician and have been looking for different ways to make money as a musician using these so called Music 2.0 networks. The nature of buying music has changed and it takes a new train of thought.
I remember buying 3 song cassettes in grade school, with no chance of hearing how good the songs sounded. Now with sites like Pandora streaming music and reaching mobile phone audiences, the consumer has the edge in hearing how good songs sound and being pickier. The psychology of selling music has changed, and consumers expect more from their favorite bands.
Great point also Ivan, if you have networks such as MTV abandoning music videos and going towards reality TV, what really is in store for the future of music promotion.
From a record label standpoint I have to agree with fill up where digital distribution is the major player. However the key will be in maximizing the use of social networks and platforms while keeping up with technology.
February 3rd, 2009 at 12:28 pm
In my opinion, music stopped being about quality and more about quantity in 2000.
Dang it, just look at the way Disney works….they take a kid who has a tiny bit of talent, blow them up so they are huge stars and on the covers of every magazine, by giving them their own show, and then, after a few years, they move on to the next kid.
I feel sorry for kids because what band or singer can they follow for their lives? I highly doubt that Miley Cyrus and the Jonas Brothers will be around in 5 years, let alone 10 or 20.
I only listen to the radio at work…on my own, I won’t play it. It’s usually the same, pointless crap played over and over and over again.
I still love having physical CDs in my hands, but will buy individual songs off of itunes, or preview an album before I buy it.
February 3rd, 2009 at 12:53 pm
issues of radio’s innadequacies have been around longer than the jonas brothers. through the 80s the american underground offered more options as far as meaningful music crapping on the cultural experience. this is what i look for.
slumping sales just means that career musicians might get scared off and it’ll leave the airwaves for people who actually give a damn about music. er something
February 3rd, 2009 at 8:46 pm
the mechanical royalty rate has not changed, which is one reason it is very difficult for record labels to reduce price.