DVD takes bite out of music sales - Video & DVD - Brief Article - Statistical Data Included

DSN Retailing Today, April 8, 2002

The runaway success of DVD is proving to be a mixed blessing for music retailers that watched CD sales slump last year, as DVD business soared. The impact DVD is having on the music industry was one of the hot topics at the National Association of Recording Merchandisers (NARM) convention in San Francisco March 9 to 12.

The music industry suffered a 5% drop in sales in 2001 as digital downloads and CD burners hit traditional retailers hard. Music sales also were hurt by the popularity of DVD and video games, two competing formats that have been taking business away from music.

Retailers and analysts discussed the issue at a March 11 seminar entitled "Taking Stock of Entertainment's Future." One Wall Street 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 general consensus was that music suppliers will have to bite the bullet and slash prices to get consumers back into stores, particularly in the face of competing entertainment formats.

"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 & 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."

Analyst Harold Vogel said the perceived value of CDs also has been hurt by digital download services that allow consumers easy access to music they want to hear. "It used to be that if people liked one or two songs on an album, they would buy it to have those songs," said Vogel of Vogel Capital Management. "Now technology has caught up and consumers can get those two songs without buying the album."

Vogel encouraged retailers to focus more on DVD, while the major labels figure out how to renew interest in packaged music. "Music retailers are quickly being transitioned into DVD retailers," said Vogel. "DVD is taking over and it will be half, if not more, of your business in a very short time."

Retailers acknowledged that DVD has helped keep their overall business strong during the slump in music. "Music sales account for about one-third of our business right now, but video [due to DVD sales] is in the high 20s and gaining fast," said John Marmaduke, president of Hastings Entertainment, a 145-store multimedia chain based in Amarillo, Texas. Tower Records & Video chairman Russ Solomon also said sales of DVD helped make up for the slump in music at his stores last year.