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Frequently Asked Questions by Mike Wiser
Why are CDs so expensive? How does an artist get a song on the radio? Has record label consolidation affected artist development? Here are the answers to these and other frequently asked questions about the music industry.

Why do CDs cost so much?

When they were first introduced in the early 1980s, compact discs cost about $14 or $15 -- almost twice as much as a tape or LP version of the same music. Record companies claimed that the higher prices were justified because the new discs were more durable and provided higher sound quality. The industry also argued that the high cost was partly due to the need to build new facilities to produce the digital discs and that prices would eventually fall. One 1987 Washington Post article reported that record executives believed that the price of a CD would eventually settle around $10.

Twenty years later, production costs have come down, but consumers are still complaining about the cost of CDs, which now are priced at upwards of $16. The industry's main lobbying arm, the Recording Industry Association of America (RIAA), responds that prices have come down. According to an article published on the RIAA's Web site, "Between 1983 and 1996, the average price of a CD fell by more than 40%. Over this same period of time, consumer prices … rose nearly 60%. If CD prices had risen at the same rate as consumer prices over this period, the average retail price of a CD in 1996 would have been $33.86 instead of $12.75."

Anyone who has burned a CD on his computer for less than a dollar may still wonder why a product that is so cheap to manufacture could cost so much. The answer is that while the cost of physically producing a CD has dropped dramatically over two decades, the costs of marketing that album have grown tremendously. For example, in the early 1980s, music videos were an optional route for the industry to promote their artists. Now labels are expected to spend hundreds of thousands of dollars producing music videos for all of their major artists. Even marketing a major album to radio can costs hundreds of thousands of dollars. And if an album is unlikely to get on radio or MTV, some labels have decided to launch costly television advertising campaigns to gain exposure for their artists.

However, the price of a CD isn't just paying for expensive marketing campaigns; it's also subsidizing releases by other artists that will never sell enough to make a profit. An artist at a major label may need to sell more than a million units before the venture ends up in the black. Most albums never sell anywhere near that. According to the RIAA, only 10 percent of albums ever achieve profitability.

And while the number of new albums released each year has dropped since its peak in 1999, there are still more new albums released today than there were in 1983. In 2002, the industry released more than 33,000 new albums, so successful albums today have to support many more unprofitable releases than they did during the early 1980s.

How bad is the record industry's troubles?

According to the RIAA, sales of recorded music are way down from their 1999 peak. That year the industry shipped $14.6 billion dollars in music. By 2003, that number had slipped to $11.8 billion. Internationally, the International Federation of the Phonographic Industry reports that sales are off 20 percent in the last three years.

Some in the industry are arguing that the worst may be over, citing an increase in sales in the second half of 2003 and the first quarter of 2004, and a growth in the use of services like iTunes, where users can purchase legal music downloads. Still, the signs of a struggling industry abound: In the last year, the major labels have fired thousands of employees, closed struggling divisions, and cut the number of artists on their rosters.

What's been the music industry's response to illegal downloading?

When Napster was first launched in 1999, the music industry reacted by suing the company for encouraging copyright infringement. The labels won that battle when the Internet startup was forced into bankruptcy, but a score of alternative programs arose to take Napster's place, such as Gnutella, Kazaa and LimeWire. The labels had learned from their experience with Napster that the litigation process could be slow. Additionally, these new networks were more decentralized, making legal success far less certain, because the directory of files on the service was not held on a central server controlled by a single company.

Led by the RIAA, the labels have since broadened their attack and begun a multi-front war on illegal downloading. Among the strategies the industry adopted:

  • Suing individual users of peer-to-peer services. Although some critics have called the lawsuits a public relations disaster for the industry, supporters claim that lawsuits against users sharing copyrighted music have helped to drive down the number of people using the services by sending a message to users that the practice is illegal and has severe consequences.

  • Diluting Peer-to-Peer networks with fake files. The music industry hired small independent companies called "spoofers" to dilute file-sharing networks. These companies set up accounts on the major file-sharing networks and share files that are designed to look like actual music. When someone downloads these spoofed files, however, he discovers that they are not what he was expecting. These dummy files might be totally blank or they might have only part of the song that the user is looking for. Randy Saaf, the president of the spoofing company MediaDefender, says the idea is to frustrate users who are trying to download copyrighted songs. "The point is just to give the person something that is not real," he explained to FRONTLINE. "And hopefully over time they download enough of those files that aren't real, they give up and buy the content on iTunes."

  • Providing legitimate options to purchase music. Many in the industry believe the most effective response to illegal file sharing on peer-to-peer networks is to provide an alternative way for consumers to purchase music online in a format that they are willing to pay for. Recently, the industry has begun to license its catalogues to companies like iTunes and MusicMatch in the hopes that online sales will be a growing part of the industry.

How does an artist get a song on the radio?

For a new, unknown artist like Sarah Hudson, getting a single played on the radio can be the most important element to commercial success. Getting spins on the radio starts with choosing or writing a "radio-friendly" song that a label can market as a single. Creating a single isn't easy: a label often hires a well-known songwriter or producer with a proven track record to make sure that there is at least one song that will have radio appeal. Once the album is recorded, labels may use Internet focus groups to gauge reaction to potential singles and to pick the song with the greatest chance for success. With the single in hand, the label pushes the song to local programming directors or to national programmers at conglomerates like Clear Channel, Cox or Infinity.

For a locally-owned radio station, the decision to air a new song might be based on the music director's impression of the single and on reaction to it elsewhere (for example, by looking at the playlists or charts of other radio stations or even how popular an artist is on peer-to-peer networks). Once the song is on the air, the reaction of the audience plays a large role in how often the song is played or whether it fades into obscurity.

At a station owned by a national radio conglomerate, the approach to choosing a single might be more scientific than it would be at a locally-owned station. For the national networks, focus groups and telephone polls can play a significant roll in determining what gets played on thousands of stations. A conglomerate might also test a song in one market before deciding to add it to their national playlist.

For more, see How Top 40 Radio Works from howstuffworks.com.

What is the role of independent radio promoters and why is it controversial?

It is generally illegal for record labels to directly pay a radio station to put their music on the air, but the labels sometimes hire independent promoters to push a single to radio programmers. The independent promoters pay a radio station for the exclusive rights to pitch that station new songs. In turn, the labels pay the independent promoter to get their songs added to a radio station's playlist.

Independent promoters argue that they help unknown artists get airplay at smaller regional stations that might be ignored by national record promoters at the labels. Critics, however, maintain that the practice makes it more difficult to hear the music of artists who aren't signed to a label that can afford to hire independent promoters. "If you're the guy down the road and you just made this record with your friends in your garage or your basement, you're not going to put that stuff to get your music played on the air," says Nic Harcourt, the music director of KCRW, a public radio station in Santa Monica, Calif. "So consequently, independent labels and independent artists have been squeezed out of the process."

Because of the controversial nature of the practice -- and under congressional pressure -- radio giant Clear Channel announced in 2002 that it was ending its relationship with independent promoters. At the time of its decision, Clear Channel's radio division chief insisted that there was nothing wrong with the practice, but that the company made its decision "to eliminate even the appearance of impropriety." In addition to Clear Channel, Cox Radio Inc. also has announced that it will no longer work with independent promoters. Without these major players taking part in the system, the days of the independent promoter may be coming to an end.

How has record label consolidation affected the industry?

In 2002, five major labels controlled 75 percent of the world market for recorded music. In late 2003, Sony and the Bertelsmann Music Group (BMG) announced plans to merge their operations into a joint venture, leaving only four major record labels to sell and distribute the vast majority of music. The merger is pending regulatory approval in the United States and Europe.

As labels consolidate they look for savings by merging operations and cutting staff. Divisions are brought under the control of one executive and the number of staff is cut to create a more efficient work force. Even divisions with major stars are not immune from this corporate belt tightening. In preparation for its merger with Sony, BMG announced in that it was laying off 110 of 170 employees from the conglomerate's Arista label, despite the fact that the Arista team had had major hits and Grammy nominations for artists like OutKast, Avril Lavigne, Sara McLachlan, Pink, and TLC. When Arista's President L.A. Reid was let go earlier in the year, it was reported that the label was struggling to turn a profit. For industry insiders, the move reinforced the message that in the record industry, success is measured by the bottom line.

Even for companies that aren't merging, the decline in the market has meant cutting staff and artists in order to stay afloat. When Warner Music Group was sold to a private consortium lead by Edgar Bronfman Jr. in early 2004, it announced that the new owners were trimming 1,000 positions in the company in order to cut costs. As recently as March of this year, EMI announced that it would cut 1,500 jobs and one-fifth of its recording artists.

Has consolidation and downsizing hurt artist development?

Some in the industry say that consolidation has meant that labels are too focused on the bottom line and quarterly results, and fail to adequately nurture and develop artistic talent.

Musician Richie Sambora explained to FRONTLINE, "Before, they would let an artist find himself and go through a period of making their mistakes and learning from their mistakes. You don't have a margin for that at this point."

Similarly, Los Angeles DJ Nic Harcourt worries about the effect of the business environment on new artists. "It just saddens me that there are people whose careers are, you know, basically put on hold because of the way the music business operates, or who never get an opportunity to really develop artists, because those days are gone," he tells FRONTLINE.

However, not everyone argues that industry consolidation will cause the quality of music to suffer. "I think that great artists are going to find an audience regardless of what the media is and regardless of what the big record companies are," says Danny Goldberg, chairman and CEO of Artemis Records. "There's still enough oxygen in the society to nourish certain kinds of geniuses. The Bob Dylan of the future will somehow find an audience in this era."

What role do stores like Wal-Mart play in the industry?

Wal-Mart and other so-called "big box" retailers like Best Buy and Target have grown into powerful forces in the music retailing because they sell CDs at drastically reduced prices -- a trend that industry observers note has contributed to the bankruptcy of traditional music retailers, including Tower Records.

For record labels, lower retail markup might mean that that labels are able to sell more of the discounted discs. However, these larger chains tend to stock "blockbuster" discs and carry a smaller selection than traditional music retailers,. For record labels, this has been a dangerous combination, because it has meant that it is harder for consumers to find older back catalogue CDs, which have a higher profit margin because they have already been produced and marketed.

For Wal-Mart and other large chains, music is one way to get customers into their stores so that they'll buy other more profitable products. However, music sales only play a tiny role in their overall sales, as David Gottlieb a former senior vice president for marketing and artist development at RCA Music Group told FRONTLINE. "For the big stores -- the Best Buys, the Targets, the Wal-Marts -- who are the bulk of our business -- those three accounts alone are 50 percent of our sales -- we're nothing to them," he explained. "There's a great stat that music is one-tenth of 1 percent of all of Wal-Mart's gross revenues. So we're the smallest tadpole in the Wal-Mart pond, yet they're the most important thing in the world to us. And Best Buy is not much different. I think we're 3 to 5 percent of their overall revenue. So if music disappeared out of some of these stores, they're not really going to feel it. But if we disappeared out of their stores, we would feel it."

What is recoupment?

Recoupment is the practice in which a record label gives an artist an advance to finance the production and marketing of an album, and then keeps royalty payments that would otherwise be due to the artist until it has recovered its investment. Recoupable costs are laid out in the record contract and can include costs related to production of the album, the video, and possibly money advanced to support touring. If an artist were paid $1,000 in advance and recoupable costs associated with producing the album were $9,000, then an artist would only receive royalties after then label recouped that $10,000. The cash advance for a new artist is usually fairly small.

Why is recoupment controversial?

Recoupment has become a controversial practice because artists and some observers have charged that the music industry is abusing the system. Artists groups like the Recording Artists Coalition argue that labels can manipulate royalty statements by inflating recoupable costs and reducing the royalties they would pay artists. Labels respond that the industry does not manipulate its accounting in order to cheat artists out of their royalties. The industry also argues that labels take an enormous risk in financing new albums and that recoupment allows them to bring more new music to the market.

Mike Wiser is the associate producer of "The Way the Music Died."

 

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posted may 27, 2004

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