The CD is having a terrible fourth quarter. Album sales, already far lower than the previous year, suddenly slipped even more in September. Circuit City announced today it will close almost 20% of its U.S. stores. Now the country's largest brick-and-mortar music retailer is scaling back shelf space.

Wal-Mart is replacing some floor space given to CDs with additional Blu-ray stock and electronics products. The company's chief marketing officer told analysts last week, according to the report, that packaged media such as CDs would be scaled back. Wal-Mart cited a 23% drop in CD sales in the first four weeks of the fourth quarter.

The CD has life left in it, but declining sales are having a multiplier effect. A decrease in demand, coupled with fewer major releases, induces retailers to either go out of business (e.g., Tower Records) or cut back on inventory (as mass merchants have done). September's sharp drop in album sales appears to have coincided with Wal-Mart's decision to reduce CD inventories further.

For Wal-Mart, the trend is obvious. It will put its focus on gaining exclusive rights to albums and generate sales from related items (DVDs, catalog titles, merchandise, spicy corn chips). Between the souring economy, increasing adoption of digital music and the company's desire to emphasize growth product categories, the old ways of selling CDs at Wal-Mart are out of style.

Posted by Glenn at 9:05 PM | Link
|Wal Mart|

Wal-Mart announced its new MP3 download store this morning. The new site, mp3.walmart.com, has over three million tracks. Starting in mid-November, Wal-Mart will allows CD buyers to get a free download of any album purchased at either a physical Wal-Mart store or the online music store...which one could interpret as an indication that the retailer has no intention of following through on its occasional threat to get out of the CD business.

Tracks start at $0.74 each. Wal-Mart says it will price the top 25 songs at the low $0.74 price (currently the MP3 stores' top 30 songs are available at $0.74 apiece and beyond #31 cost $0.94). A typical album price is $9.22. The site works with Mac OS, Linux and Windows as well as multiple browsers (a big improvement over previous versions of the download store). Purchased music an be downloaded directly to an iTunes or Windows Media folder.

Posted by Glenn at 9:31 AM | Link
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Guns N' Roses' long-delayed Chinese Democracy, reported Billboard.biz today, will be sold exclusively at Best Buy and will be released before the end of the year. And so the debate about retail exclusives continues. And it continue after the next exclusive, and the one after that. It will continue because exclusives offer artists and labels (if involved) less risk, greater album sales and, on occasion, the ability to secure buys for other CDs, DVDs and merchandise. The deals work well for older artists less concerned about image -- their images are already well established -- and more concerned with money. No business-savvy manager or label would pass up such a deal.

Guns N' Roses is managed by exclusive-friendly Front Line Management. The Eagles, also Front Line clients, have done very well selling Long Road Out of Eden exclusively at Wal-Mart. AC/DC's new Sony Music release, Black Ice, will be released exclusively through Wal-Mart stores in the U.S.

Exclusive deals with retailers goes against the standard advice of selling just about anything: put it in as many places as possible. For the average artist, that strategy still stands as the best. For those handful of rare, superstar artists that can successfully negotiate a retail exclusive, it's hard to turn down. AC/DC's deal with Wal-Mart, for example, gives the retailer an exclusive on an album and video game. In return, the band and its label get the royal retail treatment: a special area in the store with the band's back catalog as well as merchandise. And then there's what can be called "the Wal-Mart Effect." The publicity surrounding the release of the album has been nothing short of incredible.

The cost of getting CDs into retailers is an incentive to take an exclusive if a deal can be reached. Just as grocery stores charge slotting fees for the products its carries, entertainment retailers charge for prominent placement and related marketing. A spot on stores' end racks and an ad in a weekend circular costs tens of thousands of dollars for a national chain. An exclusive at Wal-Mart comes with in-store merchandising and external marketing that is worth far, far more than the typical national marketing campaign. In a nutshell, the label is transferring much of the risk to the retailer. That alone is incredibly valuable.

Finally, when traditional CD distribution bears a certain amount of risk that product will be returned, an exclusive can guarantee a minimum amount of guaranteed sales. According to a report on "60 Minutes," Wal-Mart's initial purchase of three million units of The Eagles' Long Road Out of Eden was non-returnable and the retailer pledged to spend millions to promote it. It has been reported that Wal-Mart has guaranteed AC/DC sales of 2.5 million units.

A parallel debate on exclusivity surrounds decisions not to sell individual tracks or not sell downloads at all. As we saw with Estelle's Shine, which Warner Music Group took off iTunes in hopes of encouraging CD sales and did not get good results, only a select group of artists can deviate from traditional sales and distribution strategies. For every Kid Rock that can have a hit single without the album on iTunes, for every AC/DC that can forgo digital sales for a well distributed catalog of CDs, there are hundreds, if not thousands, of artists without enough fan capital to narrow the choices for where and in what format their music will be sold.

Even though retail exclusives are being denounced as harmful to the industry, the issue is not one of the more serious within the industry. Retailers and fans can live with a few high-profile exclusives per year. Previous exclusives have provided more bark than bite. The irony is that retailers predict a consumer revolt but reduce the chances for a revolt by re-selling exclusive albums at their stores. A revolt will come when consumer frustration reaches a dangerous peak, and that is less likely to happen unless retailers keep other retailers' exclusives out of their stores.

A precious few, the cream of the music crop, are in a position to either land an exclusive retail deal or withhold their catalogs from digital retailers. Digital distribution leveled the playing field for all artists, but it has also lead to greater revenue inequality. The payoff for the most successful artists, it turns out, is now retail exclusivity. Exclusives to Best Buy, Target, Wal-Mart and others are not likely to end any time soon. It's all about money, and the money is too good to pass up.

Posted by Glenn at 4:46 PM | Link
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Wal-Mart, says a report at Engadget, has reversed its earlier decision to cut its DRM servers and thereby rendering useless tracks with Microsoft DRM purchased at the store.

"What this means to you is that our existing service continues and there is no action required on your part," Wal-Mart told customers in an email sent to music buyers. "Our customer service team will continue to assist with DRM issues for protected windows media audio (WMA) files purchased from Walmart.com."

Posted by Glenn at 10:17 AM | Link
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The use of the word "still" in the title really isn't necessary. iTunes isn't going to lose enough market share in just a few months to Amazon.com to drop below Wal-Mart. From today's NPD press release:

1. iTunes
2. Wal-Mart (Walmart, Walmart.com, Walmart Music Downloads)
3. Best Buy (Best Buy, Bestbuy.com, Best Buy Digital Music Store)
4. Amazon (Amazon.com, AmazonMP3.com)
5. Target (Target and Target.com)

Amazon.com moved from up one spot to #4 for two reasons: Online CD sales are stronger than brick-and-mortar CD sales, and the performance of its MP3 store. NPD used only the words "successful introduction" to describe the performance of the MP3 store, which is the subject of frequent guessing games about its share of the download market.

NPD bases its rankings on unit sales, not dollar value (no doubt a far easier way to do it). Given the higher sales prices of physical product compared to digital downloads, ranking retailers by revenue could lead to a different outcome. In addition, NPD converts individual tracks to albums at the rate of 12 to 1. The average album may have 12 tracks, but ten tracks have the same wholesale and retail value as an album download. Using a conversion factor of 12 rather than ten results in lower numbers for download stores.

Posted by Glenn at 4:15 PM | Link
|Amazon||Research||Wal Mart||iTunes|

When Napster launched its six-million-track-deep MP3 store earlier this week, I wrote that depth of catalog is important but only to a point. The marginal value of the million least-popular songs is far from the value of the second million or the third million. People rarely get that deep into the catalog. Even with my out-of-the-mainstream tastes, I probably have no interest in much of any store's tracks and rarely want an album that a store does not have.

Just how often would I delve further than five million tracks into a download store's catalog? To find out I selected 16 albums to compare at five stores: Amazon.com MP3, eMusic, iTunes, Napster and Wal-Mart. The albums were a mix of titles I recently purchased (both CD and digital), CDs randomly pulled from a rack next to my computer and a couple local artists from Nashville that have independently released EPs.

The results show there is some difference between the stores' selection but a considerable difference in prices. What eMusic lacks in catalog it makes up for in price. Napster and iTunes had the best selection (just barely) but also had higher prices than eMusic and Amazon.com.

iTunes had 15 of the 16 titles, the best ratio of the five stores, but only five of those are available in MP3. Napster had 14 out of 16 and Amazon.com had 13 out of 16, and all of them MP3s. eMusic had 12 of the 16 and the lowest price by far. For the four albums not found at eMusic, the lowest prices can be found at Amazon.com.

The titles I picked are not Top 200 stuff but aren't the slowest-moving tracks in the stores. Cinema Verite is ranked 20,475 at Amazon.com. Fresh Pair of Eyes is ranked 17,522. The Bruno Pronsato EP is not at Amazon.com, but his Silver Cities album is there and has a ranking 117,036.

Napster deep catalog was missing one relatively popular album and one that is slower moving. It did not have Orbital's Live at Glastonbury, which is ranked 23,987 at Amazon.com. Nor did Napster have Justin Earle's The Good Life, which is ranked 657 at Amazon.com. To put those rankings in perspective, Amazon.com currently lists 445,176 albums and 5,230,187 songs.

A few notes about the titles. It's a small sample that represents only my own listening preferences. Somebody else would most certainly get different results based on their purchases and preferences. I lean toward music that is a bit out of the mainstream. Some of the titles have major music group distribution while some are distributed by companies such as IODA, Iris, Finetunes or CD Baby. I acquire a good deal of tracks at eMusic (65 per month) but included only a few albums in the survey that I acquired there.

And a couple of things about prices. I pay $15 a month for 65 tracks at eMusic. Because it's a subscription store, tracks and albums do not have assigned prices. For the sake of this exercise, I divided the $15 monthly fee by 60 (instead of 65 because I sometimes do not use all of my alloted downloads) to get an average track cost of $0.25. Album prices equal $0.25 times the number of tracks on the album. Lastly, Napster charges $9.95 for every album or EP regardless of the number of tracks. Rather than use $9.95 for every title Napster stocks, I calculated the cost of downloading each track individually at $0.99 apiece.

The above chart compares the prices of the albums that two stores have in common. For example, Napster and Amazon.com have 11 titles in common from this sample of 16 albums. For those 11 titles, Amazon.com's average price is $8.12 and Napster's average price is $8.67. eMusic's prices are by far the lowest. Of the stores that carry major labels, Amazon.com had the lowest prices, followed by Napster, iTunes and then Wal-Mart.

A combination of eMusic and Amazon.com nets 16 titles (100%) in stock. When thinking about getting an album, the best way to shop is to first visit eMusic and then go to Amazon.com. In only one case did Napster have a lower price than Amazon.com. That was Johann Johannsson's A User's Manual. Napster lets you download the tracks individually, Amazon.com does not. Since the album has only five tracks, Napster's price is far better (but far higher than the cost at eMusic, which also allows for individual track downloads).

Posted by Glenn at 3:39 PM | Link
|Amazon||Napster||Wal Mart||eMusic||iTunes|

I'll post a link to this today since tomorrow's posts are going to be dedicated to only physical formats. (So much talk about digital and mobile, yet CDs are still king and vinyl is making a sort of comeback. Yes, tomorrow will be Physical Friday.)

An NPD memo reportedly has iTunes overtaking Wal-Mart as the top music seller in the U.S. NPD has been tracking a "sharp increase" in downloads over the past several months. (Oh, you mean that "sharp" 28.7% year-over-year increase in single track sales, which pales compared to 51.9% at this point last year?)

What a perfect storm: iTunes overtakes Wal-Mart, and Wal-Mart is pressing for improved wholesale prices. The transition to digital is natural, expected and inevitable, but labels need to protect their cash cows during the transition. My advice is to play ball with Wal-Mart. Any lost shelf space, any reduction in inventories, will take away potential sales to those tens of millions of Wal-Mart shoppers who still prefer to buy CDs.

Posted by Glenn at 12:54 PM | Link
|Wal Mart||iTunes|

Billboard's Ed Christman recently wrote about Wal-Mart's push for lower CD prices and a tiered pricing plan. In a nutsell, hits would be $12 and different levels of catalog at $9, $7 and $5. A proposed promotional program would put the top ten or 15 titles at $10.

We've heard of this sort of thing in the past (though not with these specifics). In October 2004, Rolling Stone had an article about Wal-Mart's push for $10 CDs (retail, not wholesale). The situation was described as tense...and this was three and a half years ago.

In Christman's article, a quote by a Wal-Mart merchandise manager stuck out:

When you look at sales declines with physical product, and you have a category declining like it is, you have to make decisions about what the future looks like," he said. "If you have a business that is declining and you want to turn it around, it really takes looking at it from all angles."

The decline of the CD gives Wal-Mart greater leverage to make a serious push for the sort of lower prices it has publicly wanted for years. But does anybody really think lower CD prices will turn around the format? I don't. While I have no evidence to offer, I'd wager CD purchasers are less price sensitive than those who have moved on to downloads. (They're certainly older, and older consumers tend to have higher incomes.) In dropping prices, consumers save a few bucks while labels give away margin to consumers who are more likely -- because of their price sensitivity -- to have bought the CD anyway.

What's so wrong with lowering prices? Nothing, if you're a consumer. But if you're a label, you have to understand the margin you're going to need to make up with increased volume. Here's an example, with totally hypothetical numbers. Let's say a CD's wholesale price is going to be dropped from $8 to $6. To maintain the same level of revenue, a label needs to increase sales volume by 33% (($8-$6)/$6). And let's say the gross margin on that CD is $4. To maintain the same level of contributed margin, sales volume needs to increase by 100% (($4-$2)/$2).

Let's be honest...sales aren't likely to double under the new pricing and promotion scheme. So labels are looking at the two options faced by so many of Wal-Mart's vendors: Find cost efficiencies or lose Wal-Mart's business. Said one executive, "The decision might come down to: Do we give up 20 percent of our business in order to not lose the entire business?" Yes, that's exactly what you do. Look at Rubbermaid's rare defiance of Wal-Mart demands as a good example of what happen if labels lose Wal-Mart's business. Wal-Mart dropped Rubbermaid products when it passed along cost increases. A few years later, Rubbermaid was acquired by a competitor.

Posted by Glenn at 8:47 AM | Link
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• Album sales climbed 11% last week, buoyed by the inclusion of first week sales of The Eagles' Long Road Out Of Eden of 710,000 units.. Sales were 13% lower year-over-year. For the year, album sales are down 14%. Digital track sales rose 4% last week and were 49% higher than the same week last year. For the year, sales of digital tracks are up 46%.

• The Eagles' Long Road Out Of Eden was included in Billboard's Top 200 album chart after the magazine changed its policy which now considers an album that is sold exclusively by one retailer. That policy change came after Wal-Mart, the exclusive distributor of the album, agreed to release its sale numbers. Good move. There are going to be more album exclusives in the future. They should get the same billing as other albums. Too bad this policy wasn't in effect when Garth Brooks' Wal-Mart exclusives were released. (AP)

• Even though Wal-Mart gave Long Road Out Of Eden a good online push, digital downloads accounted for about 0.5% of total sales. The rest came from sales at physical Wal-Mart stores.

• Universal Music Classics & Jazz is selling unprotected MP3 downloads at its official site, www.classicsandjazz.co.uk. (Billboard.biz)

• Sony Erikson is planning an Internet music portal and has all four majors on board. The updated PlayNow service is set to launch in the Spring. According to the WSJ article, some (I assume not all, though it is unclear) tracks will be available in MP3 format. (Wall Street Journal)

• Red Bull, the energy drink company, is "pushing a serious music initiative" and has hired executives and built a studio at the company's Santa Monica headquarters. (Digital Music News)

Posted by Glenn at 8:29 AM | Link
|Wal Mart|

• Missy Elliot's Doritos campaign looks like the future of hip hop: A multi-platform campaign (including an exclusive track) created by Goodby, Silverstein & Partners and managed by Violator Management. In June, Warner Music Group created a joint venture with Violator called the Brand Asset Group. Hip hop may still have some pop culture influence -- less than a few years ago, I believe -- but sales are falling faster than pop, rock and country. Touring isn't much of an option, so corporate advertisers are looking very attractive. This kind of campaign is the best way to extract value from artists. (Billboard.biz)

• Wal-Mart's download store may have cheap MP3s, but it's still an inconvenient way to get music onto an iPod. (The Macalope)

• U.K. venture capital firm Ingenious Media is backing albums by heritage artists like UB40, Peter Gabriel and Travis. The firm has raised $79 million in part by attracting investors with tax benefits. U.K. tax law allows the fund not to pay taxes on any profits. Ingenious receives an annual fee for managing the fund plus 20% of any profits. (Wall Street Journal)

• Just as NBA star Ron Artest did when he was suspended, NFL star Adam "Pacman" Jones is promoting an upcoming release on his record label. National Street League will release Posterboyz's album on Tuesday. Posterboyz consists of Jones and producer Spoaty. (NewsChannel5.com)

• Oops. The headline of this Forbes article says, "Sony BMG Spent $240M Lobbying in 2007." The correct number, $240,000, is given in the body of the article. (Forbes.com)

Posted by Glenn at 12:49 PM | Link
|Marketing||Wal Mart||Warner Music Group|

• RealNetworks, MTV and Verizon are teaming up for a mobile music service called Rhapsody America. MTV's URGE music service will join with RealNetworks' Rhapsody subscription service to create a music service that can be accessed via PC, mobile phone or (compatible) portable media device. Verizon's V CAST will be the service's mobile platform. (Press release)

• Wal-Mart has announced the launch of $0.94 MP3 downloads and $9.22 MP3 album downloads. The catalogs of EMI and Universal Music Group are available in the MP3 format at 256 kbps. The original, 128 kbps WMA tracks will also be available. The first things I noticed at the music download page were links to $3.88 MP3 albums (which are all EP's and singles), $5.88 MP3 albums (catalog titles like Bon Jovi's Slippery When Wet) and $7.88 MP3 albums (Norah Jones' Come Away With Me, for example). Unfortunately, Wal-Mart's updated digital store does not support Firefox. (Press release)

• Solange Knowles, sister of Beyonce, has signed a worldwide co-publishing deal with EMI Music Publishing. Knowles is currently promoting Baby Jamz, a hip hop-oriented toy line created by Planet Toys and Music World Entertainment, her father's company. (Press release)

• Another Madonna-to-LiveNation? article, but this one has some numbers and word of a rival. "One source estimated the value of the Live Nation offer to be $180 million, with the touring giant potentially licensing the recording rights for roughly $30 million. ... It is doubtful that WMG, the only label Madonna has ever been signed to, would give up the Material Girl without a fight. Sources say that the company has made a counter-offer to Madonna that also includes a touring component that could be helmed by rival promoter AEG Live." (Billboard.biz)

• Said the CFO of Emmis Comminications about satellite radio, "The people that utilize satellite radio often toggle between AM and FM and satellite radio, and it really hasn’t caused a measurable effect in our business yet. ... Satellite radio is a niche business focused on people willing to spend 13 dollars per month for the radio. Which for long-haul truckers or people who are advocates of a music format which may not reach a mass market – if you’re a passionate Blue Grass listener in New York City – it probably makes sense for you. But I think they’re still challenged. It’s a challenging business model to launch a billion-dollar asset in space and try to build up a mass-market audience quickly. And with 15 million subs it’s tough, which is why they’re trying to get the merger done. In large measure they’re trying to work with the government to solve a business model problem." (Radio Ink)

• Verve Music Group has named Mitchell Cohen as its VP of A&R. Cohen was previously SVP or A&R at Columbia Records. (Billboard.biz)

Posted by Glenn at 11:37 AM | Link
|Mobile Music||Publishing||Radio||RealNetworks||Rhapsody||URGE||Wal Mart|

• Universal Music Group took the lead in cutting CD wholesale prices, and it's doing the same (in Europe) with digital albums. Catalog titles, though, not new releases. The initial group will consist of 1,500 titles by such artists as Bob Marley, R.E.M. and Stevie Wonder. Prices are dropping to £6.99 from £9.99. Some UMG catalog titles are already sub-$9.99 at U.S. iTunes, though they are not part of an organized program as in this case. (Read article at Reuters)

• EMI Music Publishing is really getting into joint ventures. (See link yesterday about joint ventures on Broadway musicals.) Billboard reported EMI Group has offered a joint venture to Marty Bandier, who resigned as chairman of EMI Music Publishing yesterday. "Bandier said he would have an equity stake, according to the source. The venture would be under the EMI Group umbrella, but separate from EMI Music Publishing." If a joint venture beats a licensing fee, it can certainly beat a salary. (Read article at Billboard.biz)

• Found in an article about record label Thrill Jockey and its almost reluctant forays into digital music: Thrill Jockey is about to launch a new download store that will also host tracks by Rune Grammofon, Touch, Smalltown Supersound, Mosz, and Morr Music. The site will sell albums only, for $10 each. Read the article for a look at the other side of the industry, those labels that would prefer to stick to physical product but are being forced into digital sales. (Note: A late-night blogging session produced a fantastic typo. The original post referenced Touch & Go. The article is about Thrill Jockey. Thanks for reader Sam for pointing out the error.) (Read article at Chicago Reader)

• They may not have a ton of street cred, but the big portals can sure help make a career. Yahoo! Music will produce a music program that will be sponsored by Nissan. The show, titled "Nissan Live Sets on Yahoo! Music," will be broadcast on both the Internet and a high definition TV channel to be named later. Christina Aguilera and Incubus will be the first guests. (Read bits and pieces of an article at press release)

• Sonific announced a widget for Typepad that will allow users to post free music players on their blogs. Sonific pulls from a catalog of over independent 50,000 songs. Unlike Snocap's Linx widget, which can be placed on blogs and MySpace pages, the Sonific widget does not allow for purchases. (Read press release)

• MySpace has licensed technology from Gracenote to block unauthorized uploads of copyrighted music. Wrote Louis Hau at Forbes.com: "Perhaps the most curious aspect of the MySpace-Gracenote pact is that it took so long for the News Corp. unit to put a serious filtering system in place. ... Frustration over MySpace's failure to implement a satisfactory filtering system prompted Universal Music Chairman Doug Morris to lash out at the site during an investor conference in September." (Read article at Forbes.com or press release)

• Not mentioned yesterday: Garth Brooks' five-CD, Wal-Mart exclusive CD set is out this week. Given that fact, the retail giant certainly had good timing when it declared Brooks has sold 20 million CDs in the first year of his exclusive arrangement with Wal-Mart. Oh please, Wal-Mart, become a Soundscan reporter. (Read post at Hits Rumor Mill)

Posted by Glenn at 8:26 AM | Link
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• The Eagles follow in Garth Brooks' footsteps by creating a "long-term strategic marketing agreement" with Wal-Mart. The Eagles' stated reason for being attracted to Wal-Mart is the company's position on sustainable business practices. While Wal-Mart is indeed getting serious about its responsibility to stakeholders, I'm sure The Eagles were attracted to the control and expected revenue from the deal. (Read press release)

• Australia's music download tally is predicted by one research company to double next year. Analyst Marc Ganz of Ibis World sees the CD now going past the maturity stage and into the life-cycle's decline phase. I don't agree with one thing he said, though. Ganz thinks the lower price of digital music will drive down CD prices. All I've seen from labels -- other than Universal Music Group -- is extra content and stable prices, not less content and lower prices. Next year, EMI will add content to every CD. Do you think it's going to drop prices? I don't. Not in the next year or two. (Read article at ABC.net)

• Orange Country emo-ish band Midnight Hour has signed with Interscope Records. (Read post at Punknews.org)

• Not a surprise, but it's nice to have it in writing: JupiterResearch predicts the iPod's market share is safe from Microsoft's Zune for 12 to 18 months. (Read article at Digital Trends)

Posted by Glenn at 11:06 AM | Link
|A&R||Research||Wal Mart||Zune|

Country legend Garth Brooks, who has an exclusive agreement with Wal-Mart, will release a five-DVD box set through the retail giant. The Entertainer will be out on November 1st with the low, low price of $19.96.

Four of the discs have entire concerts (one from 1991, one from 1993 and two from 1997). The fifth disc is a collection of videos spanning the years 1989 to 2005.

Nearly a year ago, Wal-Mart released a Brooks CD box set titled The Limited Series. The company claims it sold over 500,000 units on the first day of release. Since Wal-Mart does not report Brooks' sales to Soundscan, the title never appeared on the U.S. charts.

Posted by Glenn at 1:50 PM | Link
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