CAN A THRIVING, VITAL INDUSTRY COMMIT SUICIDE? MEET THE MUSIC BUSINESS

Last week I went to see an underground concert by a band with a nice cult following, Dangerous Muse. They've never been on the radio and they don't even have a CD out-- just some downloads that are available through their MySpace page and at iTunes. They played in a funky, out of the way and irregular venue. The band dedicated their newest song, "Goodbye, Goodnight" to a friend of theirs who had just gone over to Iraq and they had some remarks about the Doofus-in-Chief but that isn't why I'm writing about the concert. In fact, this isn't going to be too political. I'm writing because I ran into lots of old friends from the music biz who I rarely see any longer, people I used to work with.They were a pretty morose bunch. No one seemed upbeat or optimistic. One told me that the number of people working at the company was down by half. Another complained about salaries and benefits sucking. And another guy told me all he thinks about is what his severance package will look like. I knew it was dismal but... wow. All three of these guys work at the crown jewel of the entire record industry, the best and (once) most artist friendly and employee friendly label in history.Thursday the Wall Street Journal published an article about the music industry that is about a step and a half from an obituary: Sales Of Music Long In Decline, Plunge Sharply.

In a dramatic acceleration of the seven-year sales decline that has battered the music industry, compact-disc sales for the first three months of this year plunged 20% from a year earlier, the latest sign of the seismic shift in the way consumers acquire music.The sharp slide in sales of CDs, which still account for more than 85% of music sold, has far eclipsed the growth in sales of digital downloads, which were supposed to have been the industry's salvation.

It didn't have to be that way. The willful disregard for technological developments and the violently negative attitude towards the desires of their customers-- music consumers-- did the music business in. Instead of embracing change, they fought it; you can't fight change. One of the problems is that they failed to understand who their customers were. The sales departments across the labels-- rarely the best, less frequently the brightest-- somehow managed to convince responsible management that the customers were the obviously doomed record stores (whose needs were sharply diverging from those of the end-users, the consumers). I was very lucky. I remembered how the head of sales at my company had dug his feet in and fought previous technological developments-- like the cassette and CD, complaining how the "customers" would never go for it because they would have to change the hardware in the stores.

The slide stems from the confluence of long-simmering factors that are now feeding off each other, including the demise of specialty music retailers like longtime music mecca Tower Records. About 800 music stores, including Tower's 89 locations, closed in 2006 alone.

And if it's marginally more profitable to use the space at Target or WalMart to sell toilet paper, the record companies will have no place to sell their CDs at all. Except to the 100 million iPod users, who record executives are starting to see as part of the future. Shame they're a decade late... and all that bad blood!Once-- far too late-- industry execs realized they couldn't stop digital distribution (a few months ago in many cases), they started creating a fantasy that the rise of digital music would compensate for the catastrophic drop in CD sales. While execs had once bragged that they had never used a computer because it was just a fancy typewriter and isn't that what secretaries are for, a whole generation of music consumers grew up and grew used to getting free downloads. Estimates are that there are a billion free downloads... a month. (Lesson: embrace technology... fast.) Anyway, the recent fantasy hasn't worked out.

Digital sales of individual songs this year have risen 54% from a year earlier to 173.4 million, according to Nielsen SoundScan. But that's nowhere near enough to offset the 20% decline from a year ago in CD sales to 81.5 million units. Overall, sales of all music-- digital and physical-- are down 10% this year. And even including sales of ringtones, subscription services and other "ancillary" goods, sales are still down 9%, according to one estimate.

WalMart, embraced by lazy salesmen-- one stop selling-- now have the power to set prices and have driven the labels' profit margins into the toilet. The Warner Music Group, where I once worked, reported a 74% drop in profits for the make-it-or-break-it 4th quarter. Things haven't gotten better. In fact many think the death spiral has accelerated. If unit sales are down 10%, value sales-- far more important-- are down as much as 25%.Savvy artist managers now see CDs as part of a marketing tool that helps to sell concert tickets, merchandise and, most important, a brand name that can be used in music licensing. Once in the cat bird's seat, the record companies are fast becoming superfluous. Or maybe I should rephrase that. Smart people are fast realizing that the record companies are superfluous.AFTERTHOUGHT: This is probably the very first problem I've discussed in the history of DWT that I didn't blame directly on George Bush's incompetence or malfeasance. The economic hallmark of the Bush era is certainly unalloyed corporate greed and uncontrolled, irrational avarice. The music business' biggest problems are certainly part and parcel of that, but predate Bush. Today the country is being pushed into the post-Enron era marked by a last-ditch, major anti-regulatory offensive from a BushCo that is no longer trusted by the vast majority of Americans.