What music oligopolists really worry about

Here's a smart blog article

What music oligopolists really worry about

Here's a smart blog article  on the troubles of the recording oligopoly. The article “RIAA Enemy #1: Wal-Mart, Not Kazaa” illustrates well my point that the problems of the music industry are not about downloading (though that doesn't help), but because of a set of factors that together are disrupting the business radically. The author, industry consultant Kevin Laws, finds that the big disruptor is – Wal-Mart, the source of so much disruption in other industries.

As he writes:

Previously, I wrote that the music distribution companies could not sustain their monopoly power (or Oligopoly as one alert blogger wrote) without the giant contracts they give to big stars. The direct implication of this observation is that Wal-Mart and other big box retailers have changed music industry structure far more than file sharing, despite getting less attention.

Laws shows how music companies use long-term contracts with big stars to leverage their power over retailers and distributors. New artists are carried so retailers can carry the sure hits, and so MTV and other promotional channels can be manipulated.

The dynamics of a new act are particularly important. Often, a great new act goes undiscovered for a long period of time, and then starts to generate buzz in a few markets. Given how social a phenomena hits are, this buzz has to be nurtured and exploited by having enough product on the shelves. Only a big music distributor can guarantee that.

In other words, the big recording companies are playing the game so to increase the odds of a tipping point arriving, and then being instantly satisfied before the fans move on to the next big thing, To that purpose, they flex their power over the retailers. But, as Laws writes, “Wal-Mart is destroying that capability.”

Drop by any Wal-Mart and you'll see the problem the labels have: you will only see the top 200 hit albums. This means two very bad things for the music industry. First, they carry no back catalog beyond wild successes like the Beatles. This shortens the total time on the shelves of an act, reducing lifetime profits for the music company.

More importantly, they carry very few new acts, and don't accept money to feature new acts in prominent locations. This is destroying one of the big advantages of the music companies when signing new acts – the ability to push the new acts to discerning tastemakers who frequent the music stores. They can still do top-down buzz (MTV, concert tours), but have lost their ability to affect bottoms-up buzz from people discovering great new artists. Additionally, it removes their incentives to pay for the top-down buzz since they aren't on the store shelves at the moment a new fan tries to buy it.

In addition, he explains, Wal-Mart (And Costco, Target, Best Buy, etc.) are hurting the big record chains (Tower, Sam Goody) because they are selling the “bread-and-butter” big hits, by undercutting the record stores' prices. That means the music stores are left with slow-moving CDs. The result, dwindling sales and closing stores.”Most recently, Tower Records is offering itself up for sale to avoid bankruptcy.”

So, paradoxically, Wal-Mart is ” a huge customer as well as being a huge threat to their way of business.” Wal-Mart has oligopsony power that far exceed the oligopoly powers of the Big Five record companies. They negotiate the lowest wholesale prices, just as they do in every other area. Plus they can't be threatened: ” Unlike music stores, which rely on having the Rolling Stones in stock when you ask for it, Wal-Mart just cares that they have some of today's top hits on the shelves when you walk by. That means that if they don't get the price they want from the music company, they don't carry the product.”

All this has made it very hard for the record companies to create big new hits, the next Britney Spears or Eminem. They have to take bigger risks than ever, and they get a lower return because of discounted wholesale prices. (Not to mention UMG's proposed price drop.) And this is the problem that really may spell death for the music oligopoly.

Big music has to figure out a better way of establishing hits. Ironically, the likeliest way, Internet downloads, they have fought tooth-and-nail. That, of course, will cause its own disruption, as the industry goes back to selling songs, not albums. And there too, the big studios don't necessarily have an advantage over possibly new independents. Expect a big restructuring in this industry soon, and more than just mergers.

Thanks to fellow blogger Terry Frazier for bringing this to my attention. His site is a good source for, among other things, the evils of the RIAA (the music trade association) and copyright follies.  [Oligopoly Watch]

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