http://www.salon.com/ent/music/feature/2001/12/19/music_industry/print.html

Music industry in the pits!
Record sales are down, no one's seeing concerts, no one's advertising on radio and the stars are revolting!

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By Eric Boehlert

Dec. 19, 2001 | The cover of critically acclaimed rocker Ryan Adams' latest release, "Gold," features the young, scruffy singer in front of an upside-down American flag. The artwork's meant to be Adams' way of sending out a distress signal on behalf of today's rock 'n' roll.

But the truth is, while the music business stumbles to the year's end, destined to post its first sales decline in a decade, that upside-down flag could just as easily represent a distress signal on behalf of the entire music industry.

The music industry is powered by four crucial engines: record labels, radio, the touring industry and retail record stores. And they are all sputtering with a grim array of problems.

Napster is hobbled, but music swapping online remains a gleeful pleasure for millions of computer users who have lost interest in actually paying for CDs. Venerable record chains like Tower Records have been on the verge of going out of business. The alternative-rock/country/rap explosion of the 1990s is over, and few new acts are selling -- even as consumers are turning up their noses at superstar perennials, too.

Major labels have been battered by losses and layoffs, radio station owners are wallowing in an advertising recession, and the concert business lost millions of ticket buyers in just the last year.

Meanwhile, an increasingly large number of usually obedient artists are making noises about staging an unprecedented open revolt, determined to win from record companies what they insist is their fair share of the profits.

"It's not a pretty picture," says longtime music attorney Jay Cooper. "In fact it's an awful picture. This is not business as usual, or a periodic downturn."

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Cooper argues that the current slump represents more than just the latest dip in the music business' familiar cyclical pattern. He says fundamental problems exist that cannot be fixed no matter what new, potent musical trend is lurking on the horizon.

Others disagree. "There's an awful lot of Chicken Little, but the sky is not falling," insists Frank Callari, senior vice president of A&R at Lost Highway Records, home to Lucinda Williams, among others. "I'm pretty optimistic." ("A&R," standing for "artists and repertoire," is the industry's name for the execs who sign acts.)

Even for the industry optimists, the first quarter of 2000, when sales were up 12 percent over the previous year, must now seem like a lifetime ago. By contrast, as the final days of 2001 tick off, music sales are down 5 percent from last year, according to SoundScan, which 10 years ago began tabulating music sales with some exactitude, using scanning technology as albums were purchased. Worse, sales of current releases -- that's not counting older catalog material, just albums shipped out within the last 18 months -- are off 6 percent, year-to-date.

The traumatic terrorist attack of Sept. 11 and subsequent consumer fallout, when the concert business virtually came to a standstill and shopping patterns were disrupted for weeks, only exacerbated what had been glaring music industry weaknesses.

"The business is broke and that just accelerated the decline," says one veteran. "This is not a growth industry." (The one bright spot is contemporary Christian and gospel music; sales have spiked since Sept. 11.)

For instance, the concert business was already off 12 percent through the first six months, according to Pollstar magazine. Worse, actual concert attendance fell 16 percent during the first half of the year. Nobody thinks those numbers will improve when the receipts for the second six months of the year are tallied.

"Lots of promoters have been trying to use the Osama excuse," according to one concert industry pro. "But by Sept. 11 the outdoor summer amphitheater season was basically done."

What's the real reason? Some people say it's high ticket prices. "Weak business has more to do with issues of pricing than the trauma of war," that pro continues. There are both higher ticket prices and expanding ticket surcharges. For instance, a pair of $49.50 tickets to see Britney Spears at the MCI Center in Washington on Dec. 21 come complete with an astonishing $25.40 worth of add-on service fees.

Ticketmaster charges a $15.90 "convenience charge" for the privilege of buying tickets. (Safeway is prevented from demanding a "convenience charge" for shopping in its stores because the customer has alternatives, a state of affairs that does not apply to Ticketmaster, which handles the fare gate for a large part of the concert industry.) There is an additional $3.50 "handling fee" as well. And finally, there is a $6 "building facility charge," sort of a tax to walk into the MCI Center. (Traditionally, venues like the MCI Center also have some portion of the Ticketmaster fees kicked back to them as well.)

Totals like that can give consumers pause. "People don't experiment anymore, not with the tickets $50 and up," notes Ray Waddell, who covers the touring business for Billboard magazine.

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Consumers don't seem to experiment when buying CDs either. The laundry list of underperforming 2001 releases by previously platinum-selling names includes Macy Gray, Michael Jackson, George Strait, Paul McCartney, Snoop Dogg, Jessica Simpson, Tori Amos, Sisqo, RZA, R.E.M., Mick Jagger, Rod Stewart, Lenny Kravitz, Prince and Mariah Carey.

Meanwhile, critical acclaim has not been able to turn the latest, widely hyped releases from Angie Stone, Bob Dylan, Radiohead, Ryan Adams, Pete Yorn, Nikka Costa or Travis into real commercial contenders either.

Accountants looking for a sales boost from a slate of superstar fourth-quarter releases have been disappointed. Labels are rolling out their best shots during the make-or-break holiday shopping season (Garth Brooks, Britney Spears, Creed, Kid Rock, Jewel, DMX, Master P, Limp Bizkit, along with greatest hits from Pink Floyd, Madonna, the Bee Gees, Smashing Pumpkins and Green Day), but to date it's not working.

For the first two crucial weeks after Thanksgiving, album sales were down an alarming 15 percent compared to the same time period last year, according to SoundScan -- despite dramatic efforts to drum up business by national music chains such as Coconuts and the Wiz, which sold CDs for $9 during special holiday promotions, losing money on every disc sold. (Retailers buy top-line CDs from labels for more than $10.)

In an unusual bout of boosterism, the Recording Industry Association of America even commissioned a poll to find out that 79 percent of people consider a CD the type of gift they would "like a lot" this holiday season.

Still, music industry veterans are wondering where their "Harry Potter" is, or at least their "Monsters Inc." -- a piece of irresistible pop product that has consumers reaching for their wallets during the fourth quarter.

This time last year it was the Beatles' "1" along with the since-faded Backstreet Boys and their "Black & Blue." Both were selling at the clip of more than 500,000 CDs a week. Currently only God-fearing rock band Creed and their "Weathered" release is doing truly blockbuster business, having sold nearly 2 million copies in just three weeks time.

"I don't know if there's a companion album for Creed to run with," says Geoff Mayfield, Billboard magazine's director of charts. But Mayfield stresses that whatever declines the business sustains this year have to be kept in context. Last year also saw monster records from Eminem, Britney Spears and 'N Sync, which are difficult to replicate. "In 2000 we had six albums that sold a million-plus in their first week. Before last year we'd never had six albums sell 1 million copies their first week, period. When we're all done this year the numbers will stack up handsomely."

Those on the front lines of music retail, though, aren't so optimistic. "It's the worst year in our history," reports Carl Singmaster, who's been running Manifest Disc & Tapes, now a seven-store chain in the Southeast, for 17 years. He's the type of grass-roots music retailer who's served as the industry's foundation for decades and often enjoyed double-digit growth each year. Suddenly, Singmaster doesn't like what he sees: "I'm very concerned about what kind of future there is for music retails like me."

"I'd say across the board [sales] for mom-and-pop music stores are down 11 percent this year," says Don Van Cleve, president of the Coalition of Independent Music Stores. "It's always been a tough business, but now it's a brutal one."

Just ask the suits at Trans World Entertainment, the country's largest music retailer and the owner of nearly 1,000 record shops, including Camelot, Strawberries and the chain that calls itself "fye." Through the first three quarters Trans World posted a net loss of $17 million. It's never a good sign when an industry's No. 1 retailer routinely fails to post a profit.

At least Trans World outperformed Tower Records. The 41-year-old chain, which started as a Sacramento drugstore and during the '80s championed CDs while turning its enormous catalog-stuffed stores into cultural meeting places, lost $40 million over the first nine months of the year. By contrast, in 1995 the chain pocketed $15 million in profits. A last-minute deal with creditors in October allowed Tower to keep its doors open, at least through next April.

Music retailers have a laundry list of concerns, such as sky-high $19.98 CD list prices set by record companies, the shrinking pool of commercial singles (see related story) and major labels' rewarding mass merchants like Best Buy with exclusive product. (U2's recent DVD concert release was shipped to Best Buy two weeks before any other retailer.) "There's a million things going on and none of them are positive," complains Van Cleve.

The record labels are generally implacable in the face of complaints about rising prices. Decades of experience has shown them that when fans really want a new record -- whether it's Garth Brooks, Madonna, the Backstreet Boys or the hot new band of the moment -- resistance to new, higher prices evaporates. The trouble today is that not as many fans want the new BSB or Garth Brooks, and there is no dominant commercial trend.

The music business is to some extent dependent on the vicissitudes of pop culture; most observers agree that, after a decade of often double-digit growth, driven first by the hard rock band Nirvana and then by record-breaking teenybopper artists like 'N Sync and Britney Spears, the industry is looking for a new focus.

That problem is exacerbated by the continued runaway sales of blank, recordable CDs, or CD-Rs. As Salon reported last year, lots of music retailers find themselves in the awkward position of watching CD-Rs become the bestselling item in their stores, while at the same time realizing CD-Rs could literally drive them out of business. Thanks to CD burners hooked up to computers, the phenomenon of file sharing introduced to the masses last year by Napster, and popular at-home CD taping courtesy of Phillips stereo components, millions of consumers are simply making their own CDs and taking a giant bite out of over-the-counter sales.

For instance, industry observers used to be able to look at a superstar's first-day sales numbers and, based on a reliable formula, be able to project how many copies that album would sell after seven days in stores. Now with CD-Rs, labels often see a big first-day sales number and then watch it tail off over the next six days, falling short of projections.

"We saw that with the last Blink-182 record," says Mayfield at Billboard. "If you looked at first-day sales you'd think it was going to have a huge week. Yet it only ended up having a very good week. Some labels are starting to worry that, you know, Charlie bought one copy and made three copies for his friends."

Industry analysts predict 1.2 billion blank CD-R discs will be purchased this year in North America, an increase of 50 percent over last year. By comparison, roughly 750 million pieces of prepackaged music will be sold domestically in 2001.

It's not just the dirt-cheap CD-Rs themselves, it's the presumption among so many young consumers, radicalized by Napster, that music should be free. "I think it's going to be difficult to recapture people who stopped paying for music," says Singmaster. "According to their value system, they shouldn't pay for music."

That attitude does not bode well for XM and Sirius, two fledgling satellite radio firms launching a service that offers digital-quality, sometimes commercial-free programming. If fans don't want to pay $16 for CDs, will they pay more than $100 each year for something like radio, which has always been free?

Then again, the radio business is hurting so badly right now, in what some veterans are calling the sharpest advertising downturn since World War II, a few station owners might be tempted to charge listeners a fee. According to Radio Advertising Bureau, local advertising in September declined 12 percent compared to last year, while radio's national business plunged 23 percent. This is an industry that, two years ago during the dot-com boom, was facing the very different problem of not being able to put willing new advertisers on the air; station inventories were sold out.

The downturn helps explain why radio's biggest player, Clear Channel Communications, recently lost $232 million in the third quarter. (One year ago during the same period, Clear Channel reported a net income of $449 million.) Earning reports like that in turn help explain why Clear Channel just axed 48 employees at its Los Angeles radio stations.

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In the past, laid-off radio executives often found refuge working at record companies. But anyone pink-slipped from radio recently isn't likely to find many record companies hiring.

For the six months ending Sept. 30, the London-based EMI Group, home to Capitol (Garth Brooks) and Virgin Records (Janet Jackson), posted a net loss of $77 million. It's widely known to be on the selling block; the problem is that EMI has no takers. After all, who wants to enter the profit-challenged music business right now?

Meanwhile, one year ago Thomas Middelhoff, the chairman of the German entertainment conglomerate Bertelsmann, was toasted in the press as a visionary when his BMG Entertainment (home of RCA, Arista and Windham Hill Records, among others) broke with fellow major labels and entered into an $80 million deal with bad-boy file-sharing outpost Napster to help it transform itself into a paid subscription service. Today, Napster remains a commercial nonentity and BMG has had to dismantle its online strategy.

Worse, the company recently posted a net loss of $73.1 million through September, even after laying off 20 percent of its workforce. BMG has slipped from being No. 2 in U.S. music sales last year (behind industry behemoth Universal Music) to No. 4 this year.

Smaller indie labels took hits this year too, when record distributor DNA, the all-important middleman that physically gets CDs into stores, went bankrupt last month. In industry down times, distributors like DNA are particularly vulnerable, and their collapse leaves chaos. Indies have had to scramble to find new means of distribution, and cash flow is immediately affected; more important, DNA closed its doors while owing some record companies tens or even hundreds of thousands of dollars in billings. Smaller labels can find a loss like that fatal. And with fewer labels, there will be fewer chances for new acts to get signed.

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Then again, some acts currently under contract may wish they weren't -- or at least they may wish they hadn't signed the contract they did. A new advocacy group, the Recording Artist Coalition, led by Don Henley, is the first of its kind for artists and is starting to ask pointed questions about how labels do business. Contentious issues include royalties earned from online subscription services, the number of years artists are contractually obligated to stay at one label and who is the real copyright owner of a finished CD.

The topic of artist contracts has always been a swamp of discontent, a seemingly intractable mix of traditional industry exploitation, superstar egos and the natural imbalanced economics of the music business, where nine out of 10 records lose money, and somebody has to pay for the flops. The system is far from perfect, but artists lucky enough to make a handsome living have begged off trying to fix it. Until now.

"The music business is big business and record labels want to maximize their profits. That's OK," says music attorney Cooper, who represents the 120-member coalition. "Artists are simply asking what's fair as far as profits are concerned."

Unfortunately, after the year the music business just experienced, splitting up profits is a luxury that not many industry players will have to worry about.