Resnikoff’s Parting Shot: Smashing the CD… to Bits

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What would happen if the majors stopped pressing CDs right now, closed down their plants, and wrote off their physical retail networks?

The answer is that they’d lose billions, right off the bat!  The lights would start flickering immediately!

But, they’d also quickly shrink unnecessary overhead, ditch ineffective legacy commitments, assume nimbler stances, and refocus all of their energies towards digital formats and concepts.  And, start building companies designed to survive in the 2010s.

Sounds like sheer lunacy to a major label executive, especially one specialized in physical formats.  But the situation plaguing the traditional recording industry is also dragging the newspaper business as well – and eventually, other forms of media like film.  “You have to kill the print edition, stop the presses tomorrow,” Marc Andreessen recently told Charlie Rose in emphatic terms.  “The investors have completely written off the print editions, there is no value in these stock prices attributable to print anymore, it’s gone.”

Actually, investors of companies like Warner Music Group and EMI Music might recoil at a physical-free shift, and analysts like Richard Greenfield of Pali Capital have been pointing to stabilizing losses on CDs.  Whatever that means, but the best CEOs have never let Wall Street run the show.

So, get smaller, accept lower revenues, and suffer acute pain?  Entrenched companies are usually awful at this sort of thing, especially when the legacy is so lucrative.  Clayton Christensen discusses this at length across numerous publications, including The Innovator’s Dilemma (1997).  If only the CD would stop selling one day, cold turkey, instead of eroding over a decade-plus time period.  That would abruptly force the issue, and demand immediate change, instead of requiring executives to straddle two totally different eras.

Just recently at the Digital Music Forum in Hollywood, executives resisted calls to shrink their footprints and overheads, pointing instead to 360-degree deals and big brand-building partnerships with artists.  Somehow, the concept of a scrappy, smaller business approach was strikingly unattractive.

But wait, labels are already shaving their overheads, cutting employees, slashing big salaries, and decimating promotional budgets.  So, what’s the difference?  The difference is that CDs still require resources, real estate, distribution networks, transportation capital, and relationship maintenance, despite a serious shift towards digital formats.  Meanwhile, parts of the digital riddle are being figured out – some money comes from paid downloads, users are engaging with authorized on-demand platforms, and label groups are getting smarter at marketing their artists online and through mobile channels.

So why not drop the physical overhead, and force the company to figure out a viable digital model, one that signs, develops, markets, and sells acts in a totally different way?  Or, includes smart 360-degree relationships that revolve around the most lucrative and controllable areas of the business, to the extent those can be arranged?

But wait one minute. Actually, dropping the CD cold turkey is too extreme, simply because digital formats allow direct-to-consumer delivery of physical product, for those that want it.  Whoever wants the disc, or vinyl, or cassette, gets the disc, or vinyl, or cassette – based on an actual order.  Classical-focused ArkivMusic is one company playing that model, and, direct-to-fan ‘channels’ like merch tables remain great places to sell collectibles like vinyl in small doses.  So, customize it, play to the increasingly niche-oriented physical buyer, but forget about mass brick-n-mortar foot traffic.

Or, take it a step further, and cater to the biggest outlets, in limited situations.  AC/DC at Wal-Mart, Christina Aguilera at Target, and hey, occasionally a whiff like GnR at Best Buy.  But not the main focus and thrust, simply a more predictable, one-off approach that includes guaranteed foot traffic and well-established stars.  In other words, not a scaled-out, physical machine that requires steady overhead, shipping logistics, and inevitable miscalculations on demand.

But, why give up billions, how does that make sense?  In 2015, labels will have either been forced into obsolescence, or totally reinvented around different formats and consumption habits.  They will either be shells for the catalog that remains licensable, bought and traded, or a meaningful contributor – and profitable beneficiary – of the music experience.  But they will not be minting billions on CDs, opening the uncomfortable question of when a clean break needs to be made.

Paul Resnikoff, Publisher.