CD pirates forcing down the volume

While music sales fall, stars are demanding more money. Can the biz survive, asks Edward Helmore

Until Michael Greene, president of the Recording Industry of America, took to the stage at the end of the Grammy awards ceremony last week, the proceedings had all but managed to ignore the elephant in the room that everyone was pretending not to notice.

In an address almost as startling as Bob Dylan's otherworldly performance, Greene only partially addressed the foremost concern of the industry chiefs in attendance: the survival of the business in its present form.

'Many of the nominees tonight, especially the new and less established artists, are in immediate danger of being marginalised out of our business,' he warned the audience in Los Angeles. He might have added that the loss of young artists would ultimately ensure the collapse of the music industry itself.

The specific threat to which Greene was referring is rampant electronic music swapping - now estimated at 3.6 billion songs a month - among consumers, most of whom no longer need to pay for their pleasure.

Worse still, the spread of CD-burning technology allows unlimited copies to be made of copyright material. A recent survey found that sales of blank CDs now exceeded those of recorded ones, and that most were bought by people in their teens and twenties, traditionally the largest group of music buyers.

But few people think illegal copying fully explains why music sales dropped by more than 10 per cent last year, making them worth a staggering $1.5 billion less than those in 2000.

The top 10 albums sold 60 million copies in the US in 2000. Yet last year, the total was was only 4 million. In January, US album sales were 9.5 per cent lower than in the same month a year earlier.

The industry says the effects of the 11 September atrocities and the economic recession have compounded its woes, but many argue that the sales slump is a sign of a deeper malaise. Industry analysts point to a series of problems: a grassroots rebellion by artists against recording contracts; the soaring costs of marketing and promotion; and competition from other forms of entertainment, such as DVDs and video games.

Yet the analysts say the most pressing concern is the industry's failure to adapt its business model to new technologies.

'They're still fighting technology, and as long they're fighting it they're going to lose,' says Michael Goodman, media and entertainment analyst at the Yankee Group. 'Technology causes business models to evolve. Either you evolve with it or get left behind. The consumer says no, and the technology allows them to say that. It's as simple as that.

'The labels can say they want control, but they've lost it and it's not coming back. Until they recognise that and come up with a new model, whereby the consumer has the control, they're going to continue to see sales decline.'

In a business in which only about 5 per cent of artists and groups are successful in the marketplace, the margins for error are slim. The head of one major record label told the New York Times last week that in 1994 the profit margin on a successful artist was 30 per cent. Spiralling costs have cut this to around 8 per cent.

Moreover, the sales cushion that sustained industry profits during the Nineties is disappearing. Throughout that decade, consumers were replacing their old vinyl albums with CDs, providing the labels with a cash cow. These catalogue sales are down by between 20 and 30 per cent.

As a result, labels are slashing their staff numbers; this is particularly true at Sony, and at EMI/Virgin, where the label is being taken to pieces. Fewer new bands are being signed, and older stars such as Mariah Carey, David Bowie, Sinead O'Connor and Rod Stewart are leaving or being dropped.

Not everyone, however, believes the music industry's claim that it is the innocent victim of technology. Many fault it for valuing quick profits on instant but unenduring hits over the importance of nurturing high-quality acts for the long term. The result, say the critics, is a legion of one-hit wonders.

'Everyone wants quick profits; the talent is not given time to mature,' said John Marx, an agent at the William Morris agency. 'Often you get single songs, not great albums. Everyone wants results right away. Talent doesn't grow and blossom that way.'

Consumers are not alone in being fed up. A rebellion against the industry is being launched by some of those that have profited most from it. The evening before the Grammys, a series of concerts featuring Beck, Courtney Love, the Eagles, Billy Joel, Stevie Nicks, Sheryl Crow, the Dixie Chicks, No Doubt and Pearl Jam's Eddie Vedder sought to promote a burgeoning battle to change the structure of record contracts. Angry artists complain that they are little more than indentured servants to labels that hold them to restrictive, seven-album deals and short-change them on royalties. The artists, backed by senior California congressmen, want to change the state's contract laws.

In one sense, it's a luxury problem: few artists now have careers lasting for seven records. The record companies say holding artists to long-term contracts is the only way they can afford to develop untested talent, and if the law is changed they will move away from Los Angeles, with the loss of around 25,000 jobs.

In the current atmosphere of recrimination and counter-recrimination, some record company executives argue - with good reason - that the rebelling artists, along with the majority of the recording industry itself, are fighting the wrong battles.

'Instead of arguing about contracts - which only affect superstars - or technology, they should be fighting independent promotion costs,' says one well-placed executive.

The problem, they say, is not recording contracts or piracy, but the expense of marketing music to the consumer. Beyond the cost of signing acts, recording their music and making their videos, the labels' biggest expense is getting a song on radio, the medium that is still king when it comes to making a hit. One firm, San Antonio-based Clear Channel Communications, owns 1,225 radio stations, about 10 per cent of the nation's total, plus the country's biggest live-concert promotions firm, 19 TV stations and 770,000 poster sites. It also owns SFX, the nation's biggest concert promoter.

To get a song added to the playlist of a single radio station, just to see whether it even has a chance of being a hit, costs around $1,000 in independent promotion fees. There are thousands of stations across the US, so it costs at least $100,000 to get a song a limited hearing, and more like $500,000 for it to be played throughout the country. One record executive calls this 'payola dressed up'.

Unless some of these problems are solved quickly, the business's economics will become even worse. Whether there are good songs that the public doesn't get to hear, or bad ones that they can listen to, the effect is the same: no sales.

'The greatest issue the industry faces is coming to terms with developing artists,' says Don Gorder, a music business academic. 'It goes to the heart of why record sales are down. Artists say the reason there is not a lot of good music out there is because large corporations are calling too many of the shots. Record labels say it's because everyone is stealing our music.'

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