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Advice for the Record Industry

Sell, Don’t Sue
Who hasn’t heard the recent horror stories about students being sued by the RIAA for downloading music? This tactic won’t work. Suing consumers has gained headlines, but it will not reenergize the music industry. To grow, the record industry must shed its legacy business models and respond to how its customers want to obtain and experience music.

Look what happened with movies. As savvy Hollywood executives capitalized on new consumer technologies, motion picture revenues grew. In the past decade, Americans have rushed to home theater, to DVD and now to high-definition television (HDTV). Hollywood embraced these trends by providing entertainment in the new formats their customers demanded.

As a result, Hollywood has prospered, breaking revenue records and making its customers happy. Although studios share concerns about unauthorized downloading, they have moved quickly to market “pay-to-view” Internet services, cut prices and added new DVD features. Hollywood’s profits are booming.

By comparison, the music industry has not kept pace with technology. Record companies have nearly ignored two new enhanced audio formats — DVD-Audio and Super Audio CD (SACD) — that offer consumers a profound listening experience. These technologies could create a new revenue stream by allowing the labels to re-issue old albums in the higher-fidelity formats. They give customers a phenomenal audio experience that far surpasses the poor quality of unauthorized downloads, a win-win situation for all.

But the recording industry feels threatened by this new market opportunity. After more than five years of market availability, major record labels have issued only 1,500 titles on these formats compared with the hundreds of thousands of titles available today on CD. Compare this with the 30,000 movie titles available on DVD.

The labels also continue to rely on high-priced CDs. As consumers clamor for the convenience of individually downloaded songs, 95 percent of record industry sales still come from CDs that sell for an average price of $15. To make it worse, record companies have increased CD prices, while the prices of CD players, computers and other products that play music have plummeted.

CEA market research shows that consumers, especially teenagers, believe that CDs are way over-priced. Consumers know that a CD costs about 50 cents to make and the artist receives only about a dollar. The perception that the record labels are exploitative fuels the popularity of the unauthorized “free” Internet services.

And rather than lower CD prices or embrace new technologies, the record industry chose to wage a scorched-earth campaign against universities, students and consumers in general. Today, five years after Napster launched, that industry is just beginning to offer options to Americans who want to leverage the Internet to purchase their music for immediate enjoyment.

A Successful Model
Again, look at the movie industry. Instead of suing its customers, Hollywood dropped the prices on DVDs from $22.50 in 1999 to less than $20 today — a 20 percent decrease in five years. The result is that with discounts, consumers often pay less for a DVD of an entire movie than for a CD of the movie’s soundtrack. The studios also loaded DVDs with extra features to further increase the value proposition. The result: DVD sales have skyrocketed along with sales of DVD players.

The lesson is clear. To reverse its declining fortunes, the record industry should follow a few simple rules. Embrace new technologies. Cut CD and download prices by at least half. Understand consumer desires and change to fulfill them.

Yes, the CE industry has new formats to sell. We want the recording industry to work with us to promote new audio formats and focus on the joy of great-sounding music. Working together, everyone wins.

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By Gary Shapiro, President & CEO, Consumer Electronics Association

This material has been adapted from VISION — a bi-monthly magazine of the Consumer Electronics Asssociation

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