NARM refocuses as Internet services take toll on music industry sales - National Association of Recording Merchandisers - Brief Article - Statistical Data Included

DSN Retailing Today, March 25, 2002 by Doug Desjardins

SAN FRANCISCO -- Music retailers and distributors were in a blue mood at the National Association of Recording Merchandisers (NARM) convention March 9 to 12 as they searched for ways to pull the industry out of its slump. Industry leaders acknowledged the need for major changes in a business that's been ravaged in recent years by the Internet and CD burners, but they were hard pressed for answers.

NARM, the association that represents more than 1,000 retailers, distributors and suppliers, saw music sales decline 5% in 2001--the largest drop in a decade--with no signs of recovery in 2002.

"The music industry, now more than ever, needs to create a new value-added format for the consumer," said NARM chairman Peter Cline, president of music and video distributor Handleman Co. "Our consumers have different needs than they had in the past, and we need to understand those needs and adapt to them."

But that's not an easy task in an industry where young consumers have grown accustomed to getting product for free. Cline noted that an estimated 3.6 billion songs each month are downloaded on the Internet and that 40% of music consumers now own a CD burner.

Retailers and analysts hashed out the hot topics at a March 11 seminar titled, "Taking Stock of Entertainment's Future." One analyst criticized the music labels for their initial reaction last year to declining sales. "Their response to the problem was to raise prices, and that's not the answer in an industry where demand is down," said analyst Saul Berman.

The major labels also were chastised for sticking with the traditional CD format instead of testing new ones that reflect the tastes of changing consumers. "In the past, people who wanted to hear only one or two songs on an album went out and bought the album just for those songs," said Harold Vogel of Vogel Capital Management. "But now, technology has caught up and made it possible for consumers to get those two songs without buying the album."

The general consensus was that suppliers will have to bite the bullet and slash prices to get consumers back into stores, particularly in the face of competing entertainment formats such as video games and DVD.

"Our view is that music prices are too high, and they'll have to come down," said Michael Nathanson, an analyst with Sanford C. Bernstein and Co. "If I'm a consumer, why am I going to pay $15 for a CD when I can buy a DVD for the same price?"

The booming market for DVD was one bright note for retailers at the convention. "Music sales account for about one-third of our business right now, but video is in the high 20s [in percentage] and gaining fast [because of DVD]," said John Marmaduke, president of Hastings Entertainment, a 145-store chain based in Amarillo, Texas.

Retailers and NARM executives also were buzzing about the prospect of being cut out of the loop by suppliers. The concern is that the major labels will use new download services, such as MusicNet and PressPlay, to deal directly with consumers and not license the music to third parties, such as retailers.

In his keynote speech, Sen. Orrin Hatch, (R-Utah), touched on the debate. Hatch, who was a key proponent of the Digital Millennium Copyright Act and is a published songwriter, said he "does not endorse compulsory licensing at this time" for music labels, but could change his position if it means keeping the overall music industry healthy.

"It's important for policymakers to ensure that the benefits of the new digital music world are shared equally among everyone in the distribution chain, from the artists to the consumers," said Hatch.

NARM executives said total attendance at the show was about 1,800, down slightly from last year's event.