CD death is imminent, says music industry

When it was introduced, the compact disc helped bail out the music business: Domestic… When it was introduced, the compact disc helped bail out the music business: Domestic sales of the new technology zoomed from 800,000 copies in 1983 to 288 million by 1990, and continued to surge by the hundreds of millions through the ’90s.

But with March marking the CD’s 20th anniversary, the boom is over. Compact disc shipments in the U.S. plunged nearly 9 percent last year to just more than 800 million, according to the Recording Industry Association of America (RIAA). The statistics confirm a downward trend that has been gaining steam since 2001, and continues this year, with CD sales down more than 6 percent from their already slack 2002 pace.

The ripple effect is only beginning as the music industry braces for a future that will involve the death of CD stores and the rise of wireless, pocket-sized MP3 players that will enable consumers to access thousands of hours of music at the touch of a button. The only real question is how long it will take for those scenarios to become reality.

“You’ll see CD sections in stores decline quickly over the next few years because they will be replaced by technology that provides dirt-cheap storage and the ability to basically access and play any type of music anytime, anywhere,” said Mike Dreese, the CEO and founder of Newbury Comics, a New England record-store chain. “Wireless technology basically will create a world where we can have anything we want all the time.”

The death knell is already ringing for CD stores, some retailers and industry observers say. In January, two major chains – Warehouse Entertainment and Value Music – filed for Chapter 11 bankruptcy protection. And nearly 500 music specialty stores nationwide have been shut down in recent months.

“Brick-and-mortar specialist CD stores are done in five years,” Dreese said. “Stores like Tower or Sam Goody or Virgin are fast becoming anachronisms.”

Not so fast, said Dan Hart, CEO of Echo, a joint venture of retailers (Best Buy, Tower Records, Virgin Entertainment, Warehouse Music, Hastings Entertainment and Trans World Entertainment) that is licensing songs from labels and plans to begin offering in-store downloads this year. Internet retailing was one of the few growth areas for music stores last year, with sales up 8.4 percent to 8.1 million units, according to Nielsen SoundScan.

“There’s no question CD sales are declining, but the phase-out of retail will take longer than people predict – it’ll be more like 30 years rather than five,” he said. “There is a whole generation of people out there educated to using CDs as their primary music format.”

But even Hart says that to retain a role in the marketplace, CDs will have to evolve.

For two decades, record companies bathed in profit, thanks to the compact disc. The rise of the new digital technology prompted many labels to reissue their long-neglected back catalogs on CD: Bands like the Beatles, Rolling Stones, Aerosmith and The Who made millions of dollars for their respective labels simply by having their past albums transferred to the new digital format, sometimes several times over. The shelved work of artists such as Bob Dylan, Eric Clapton and Robert Johnson was repackaged in multi-CD box sets, and sold millions of copies.

But in the last three years, the bottom fell out of the CD market. Why the sudden decline in what had been an industry staple? The RIAA blames Internet “piracy”: File-sharing by consumers is proliferating, with millions downloading free MP3 music files daily through services such as Soulseek and KaZaa. MP3 files are digitally encoded files that can be downloaded from the Internet, posted on a Web site, sent via e-mail or stored on a computer hard drive and then played back or transferred onto blank CDs. KaZaa alone claims more than nine million monthly users. Six of the leading free file-sharing applications were being used by 14 million consumers a month in a recent comScore Networks analysis.

Sales of blank CDs soared past the one-billion mark worldwide in 2000 and increased 40 percent last year. Illegal CDs – often manufactured and copied on personal computers from free Internet downloads – are now routinely sold for a few dollars in school lunchrooms and on playgrounds, and are available on street corners from New York to Hong Kong. “When 23 percent of surveyed music consumers say they are not buying more music because they are downloading or copying their music for free, we cannot ignore the impact on the marketplace,” president and CEO of the RIAA Hillary Rosen said.

But there are other pressing issues: the $18.98 retail price of most CDs, when the industry is phasing out less-expensive options, such as CD singles and cassettes; the dearth of credible acts at a time when the music industry is more interested in quarterly profits to satisfy corporate shareholders rather than long-term artist development; and the rise of a generation of consumers for whom music has become demystified and devalued.

“I wish people would realize what value music plays in their lives and would remunerate artists accordingly,” said singer-guitarist Bob Mould, who now releases his music on his own Web-based record label, “but if people want music to be free, it’ll be free.”

The industry’s reluctance to accept that scenario has cost it dearly, observers say, causing it to fall behind in figuring out ways to exploit the new technology to its advantage. “The relationship between artists and labels has been ruptured over such issues,” entertainment attorney L. Londell McMillan said. “Is music worth $10? Is it worth nothing? Something in between? While the artists and labels are bickering, the money is going elsewhere.”

The industry has belatedly responded to the crisis by introducing a variety of Internet subscription services, which essentially try to induce consumers to pay as little as a few dollars a month for something they can readily get for free through rogue services on the Web. These services – AOL’s MusicNet, Liston.com’s Rhapsody, Pressplay, Full Audio – have gradually expanded their catalogs of available music and loosened restrictions on burning songs to CD or transferring them to portable devices. But they still command fewer than 500,000 subscribers, generating about $25 million in revenue.

“How we compete with ‘free'” is the big question facing the music industry and its nascent subscription services, says Pam Horovitz, president of the National Association of Recording Merchandisers. “The solution is to make something better than free.”

The industry is putting its future in the digital clutches of value-added CDs, replete with so many extras (DVDs, bonus CDs, artwork and graphics) that to download all the data on a personal computer would tax most hard drives.

“People will still want to go to stores to browse and hold the things they are considering to buy,” Echo’s Hart insists. “In addition, stores can provide a faster connection to the Internet, so that consumers can transfer tens of thousands of gigabytes to their iPod player in minutes. It’ll be like going to the filling station for music consumers.”