(sponsored by the AMM Music Group )
According to a study of the European Community, the overall music industry in Europe is bigger then film and video business combined - and was about 23.8 billion US-$ in 1995.
This can be separated in the following income sections:
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Sales of CDs and other records |
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at end-user prices; the share of retail stores is about 5 billion of this. |
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Income from radio, TV, publishing etc. |
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does not include publishing income from CD sales, since this is included in the CD fiigure - about 40% of this go to record companies and performing musicians, the rest to composers and publishers |
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Concerts etc. |
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probably higher, since a lot of small shows are not declared |
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Subsidies and sponsorship |
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90 % of this went to classical music; mainly state subsidies |
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Musical instruments |
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included by the EU, but problematic to include, since it does not contribute to the income of musicians, record companies or anyone else in the core business. |
These figures look impressive on first sight, but can easily
reveal some of the problems in the music market place, especially
when compared to the number of jobs - or freelance workers
involved.
There are about 45,000 people employed at the record companies and
about 80,000 musicians-"full time equivalent" jobs (which means that
there are probably about twice as many people trying to earn their
living as musicians, but the jobs as record artists, live musicians,
studio musicians etc. are actually just enough for about 80,000
people). Ther are about 23,600 composers (many of them being
musicians at the same time) and about 13,000 poeple working for music
publishing companies (including over 2000 owners/self-employed
publishers). In the live music business, there are about 60,000 or
more people sharing about 23,500 "full time equivalent" jobs.
Click here to jump to some of the specific areas:
Of the overall sales income from CDs, about 5 billion is the
retail margin. The real music retailers have about 80,000 employees
working for them in Europe and probably sell about 80 % of all the
CDs sold in Europe (the rest is sold by Supermarkets, electronics
supermarkets, gas stations etc.) - which results in average margin
income of about US-$ 50,000 per employed person in this field. Since
this amount is already less then what an average worker costs in the
EU, it is easy to deduct that most stores can not be profitable -
since the stores do not only have to pay for their workers, but also
have to pay the rent for their rooms, electricity, telephones, some
marketing money and other expenses (even if they do not need any
financing).
This resulted in the bancruptcy of many stores mainly in France,
Germany and the UK during the last few years. Some retailers tried to
react by having only the best selling albums in store (which is
exactly what the supermarkets, gas stations etc. do) - only to
discover that this leads to even less sales, since a customer will
not come back to a store when he discovers that he regularly can not
find the album he is interested in. And musical taste is extremely
varied today, so a store can only survive if he has a broad choice on
offer.
A lot of stores try to avoid some of the costs by three common actions:
The obvious reaction to the situation - which would be raising prices - seems to be impossible from their point of view because they fear that they will loose business to discounters (supermarkets etc.) or their direct competitors. In some countries there is a tendency to raise prices though - Italy is agood example. These rises - in line with inflation in general - could bring the chance to avoid enormous price rises at some point in the near future. If this does not happen, the music retail market will be so concentrated, that the surviving retailers will at some point raise profit margins very strongly - and with this CD-prices would climb out of any normal proportion.
Another problem for the record stores results from their policy of burdening the record companies with more and more costs (see above actions). At one point a record company will decide that it does not make a lot of sense to support retail organisations anymore (especially if they do not have most of the albums in store that the company offers). In this case the larger companies will almost automatically decide to either operate their own stores - or sell through different sales-channels like the WWW , direct mail order or their own record clubs. EMI, one of the five main record companies, already owns and operates a retail chain - HMV, which has stores in the UK, USA, Germany and Japan as well as several new stores and a mail order division. Several of the other major companies have their own mail-order companies - and more and more companies are selling through the Internet.
On problem is that retailers tend to blame the record companies for their troubles. The real problem is that a lot of retailers are just unable to provide a good service (which is also the case in many other fields of retail) by providing the coice people want - and the access to the products that people want.
One problem area is the number of available CDs - even though this is exactly what is necessary for a good cultural szene to survive - and to give a real freedom of choice. The problem seems to be though that most people do not want to pay the price for this freedom of choice and cultural diversity.
Let's use Germany as the third largest CD-market as an example:
Of course these figures are not directly significant - because a lot of CDs (except for the ones sung in a local language other then english ) are usually sold in several countries.
Since both Jazz and Classical albums are often released internationally in many countries, they have on average higher sales figures overall. In contrast, most pop albums are often only sold in a few countries, because they need more marketing expenses (advertising, promotion, posters, artist visits and showcase concerts) to even have a chance at selling more then a few hundred copies in any country. An unsupported pop album can expect to sell less then 50 copies in the BeNeLux, France or the UK - and less then 300 copies in Germany. A jazz or classical album can sometimes benefit from the reputation of an artist and from "word of mouth" propaganda or the attention of specialist magazines or radio shows.
A lot of albums are compilations, which are often sold a low or midrange prices. Originally they were seen as a chance to make musicians more known - but this usually does not work well. These compilations are often bought instead of normal price artist albums - and rarely reach decent numbers when not supported by expensive TV-advertising campaigns. Exceptions successfull compilation albums which sold reasonably well without heavy TV-advertising in Germany came mainly from the Jazz field - or they were soundtracks from movies. The jazz-compilation success stories were either thematic or dance-jazz/lifestyle oriented. They include: the "Jazz For Lovers" series by Polygram/Motor music (mainly old jazz recordings from the "Verve" label ), the "Blue Moves" album ("erotic jazz", mainly funk-jazz from the "Lipstick"-label) or the acid-jazz compilations from "Talking Loud" and similar UK-labels. Usually the jazz compilations are only marketed in a few countries, because they definetely need some advertising support and retailers and distributors are often insecure regarding the chances of these products in most european countries.
The figures above do not include CDs being produced, manufactured and sold by musicians themselves. Since musicians playing original music hardly have a chance to even play live concerts without having a CD on the market, a lot of amateur or semi-professional musicians are recording and selling their own albums. In record stores, they hardly make adifference, since the sales are rediculously low - but they take spending power from the consumer - without resulting in acceptable income for the musicians. A lot of these records are inspired by "vanity record labels" - labels, usually associated with small studios, which try to sell a musician the idea that he is good enough to record an album and compete. The studios as well as CD-manufacturers (and sometimes some studio musicians) make money from this, while there is usually some money lost by the pseudo-"stars" involved. Even some of the releases with the large companies are done this way - they sometimes are "vanity releases" with no marketing budgets, ridiculous sales - and arranged by associated labels.
The retailers problems and a big number of available CDs being on the market has negative effects for the record companies and their employees too.
Even many of the big companies had lower profits in 1996 then in 1995 and the outlook for the near future is not exactly great in most cases. The typical profit as a percentage of sales is in a region way below 10 % at the big, vertically integrated (meaning they have several fields of business including production and distribution) companies known as "major record companies" (EMI Music , Sony, BMG, Warner, Polygram-Universal). The main problem in this field are the high distribution and transportation costs.
These companies do own big music publishing companies as separate fields of business - and this is where most of the profit came from until recently, because in this field the profits are usually more then 50 % of "sales" - since a publisher has no manufacturing costs and the promotion and marketing costs were mainly the responsibility of the record companies. The situation is changing in this respect and the income starts to be more balanced. In the USA the situation is still problematic though - here only the publishers and composers are getting income from radio broadcasts, which robs performing musicians and record companies of a lot of their income.
Modern computer systems have helped a lot in keeping costs for administration and collection fo money from radio, record companies, TV and live performances low. Overall music "sales" (income form record sales, record airplay royalties in some countries plus publishers income from radio, record sales etc.) and operating income (probably before capital costs necessary for the investments, but after "write-offs" (for the loss of value) at three companies were in 96:
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Polygram |
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Warner |
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EMI (first 9 months only) |
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EMI as the only pure music company that is publicly traded and has a balance sheet showing only music-oriented operations, still has operating profits of about 15 % of sales - including their very strong music publishing operations. The profitable areas were mainly:
Within the music industry, many people believe that the relatively low market-share EMI has in the USA has helped to reduce US-losses in the record business, because the US-business was especially bad.
Warner also benefited very much from it's large music publishing operation and from extremely high continuing sales of a label owned by Madonna which released a very lucrative album by singer Alanis Morisette.
At all of these companies , profits fell between 4 and 18 % in 1996 - even though they cut their operating costs enormously by reducing their workforce and reducing some investments in advertising for new albums.
Since the sales figures of a record company are not based on the final price an album costs in a store, but on the price they get from a retailer, the actual profit from a CD sold can be realistically estimated at about 5 % of the final price to the consumer.
This figure is low in comparison with a lot of other fields of any business, but especially of a software business (which music is in effect) - and suggests strongly that prices would have to be raised significantly. With the current situation, the music publishing operations usually support the recorded music operations - which can not continue indefinetely.
Even more problematic is the situation for the smaller recod comapnies. Many small and mid-sized companies in Europe and in the USA have reported in private talks that they have aprofit margin of below 2 % if they produce (finance and own the recording and market it) and distribute an album completely. The main costs are usually marketing costs for print advertising etc. - but even storage and administration can be a huge burden. In a lot of cases though, these record companies go bancrupt because of a lack of sufficient capital and "critical mass" (the minimum size they need to operate).
Pure distributors, which just sell finished, manufactured CDs by record companies without their own distribution, often have profit margins around 2 to 4 % of their sales price (which is about 60 to 70 % of the final price in a store. Today most of them have enough problems with their basic administrative costs and costs for their sales representatives as well as wharehousing and can not finance the product flow. Because of this, they often pay their suppliers (the record labels) only after several months - since they often have trouble getting paid by the record-stores. The stores will only pay when they either desperately need a new album only available from the distributor or when they can not dispute that they have sold a specific album (see above).
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Author: Alex Merck
Last Updated: 28.April 1997