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the invention of the cd
How did the invention of the CD provide a boom -- and perhaps a false sense of security -- for the music industry? Here are the views of Melinda Newman of Billboard Magazine; Harold Vogel, a media analyst for Vogel Capital Management; Danny Goldberg, chairman and CEO of Artemis Records; and Jeff Leeds, a reporter for the Los Angeles Times.

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Melinda Newman
West Coast Bureau Chief, Billboard Magazine

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Well, one of the absolute best and one of the absolute worst things that can happen to the music industry is when a new configuration comes along. Because what happens is as you move to penetration in households, everyone starts to buy the albums that they had on vinyl, in this case, on CD.

So you have a rush of money coming into the labels because people are buying things that they already had on vinyl. They want to buy them on CD. And in a way it's great for the industry, but it's not reflective of selling new artists. It's not reflective of record growth in terms of breaking new artists instead of in terms of artists sustaining. It's kind of a false indicator. I mean, it's money and it spins like money, but you can't really predicate your books on how long something like that's going to last and use it as a trendsetter.

So what happened as a result of that?

What happens as a result is you have a set amount of time, X amount of years, where you see a huge amount of sales being attributed to catalogue sales because people are buying Dark Side of the Moon on CD. They've had it on vinyl; they've worn it out. They're buying Steely Dan on CD. They're buying their favorite records in this new configuration. So what happens is you see a bubble of where catalogue sales take up a certain percentage of sales higher than they normally would. Because catalogue's always a high percentage of sales and God bless catalogue. But what you see is something that only happens when a new configuration comes along.

So the industry is always looking for a new configuration so they can get someone to buy their sixth version of an album that would have been maybe on vinyl first, on CD, they tried mini-disc, that didn't work. Now SACD or DVD audio, so you may end up buying several copies of the exact same music, but just in a different format that's supposedly been improved.

And the guys who are running the record companies during that time, do they know they're in the middle of a bubble or are they kidding themselves that they are geniuses?

Well, they know they're in the middle of a bubble. … So they understand the business. They're savvy enough to know, hey, X percent of our sales are coming from conversion in the '80s, the conversion from vinyl to CD. And we know that's not going to last forever. We can actually time this out from how other configurations have worked. They can look at this and see how long it's going to last. But they also know that nothing is going to help you as much as breaking new artists is going to help you.

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harold vogel
Media Analyst, Vogel Capital Management

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… There was a lot of resistance in the industry itself to accepting CDs. I remember the complaints of the retailers and the rack jobbers, "Oh we've got to replace all of our shelving. We can't handle these CDs, they keep getting stolen, we have to replace our shelving and it's a big capital investment in 400 stores to replace the shelving, to take CDs. And how do you counter the shoplifting element? Because a CDs a lot smaller, easier to put in [your pocket.] And your customer base is probably interested in doing that if they can get away with it."

So all of those elements came in, but it was recognized by the music industry, that replacement with a higher quality product, higher quality sound, more portability, was going to be inevitable and it was going to raise, not only pricing for that time, but also interest in music. So this was a selling point for the stocks.

And it made it much more attractive as companies?

Yeah there were plays on this in the stock market, as you would expect. People said, "Oh gosh they're going to replace all their catalogue and buy new stuff. And if they're going to buy new stuff, this is going to be very profitable. They'll develop new artists, they'll have--" Michael Jackson and other artists at that time sold millions and millions of records. It was incredible. The Bodyguard [soundtrack], Whitney Houston, Michael Jackson Thriller, all of these were top, top albums, selling tens of millions of copies.

So by your light, did the infusion of capital or cash, as a result of the CD, make a lot of guys in the business kind of lazy?

I don't know about lazy. Certainly it made them very protective of very good positions. And gave them the impression that it would go on forever, that it was not something temporary, just one year or one quarter. In fact, you could argue that they were probably right in the long run because, getting back to my original thesis, music is the most fundamental and widespread, around the world, it's a basic human need and emotion-inducing type of product.

So it cut across cultures, age groups, and countries. And it's worldwide, and for that reason you could say that, "Okay, when the middle classes in large impoverished countries start to grow, India, China, and so on, or Latin America, you would say, gosh, these are great markets. They're going to all turn first to music. They may not be able to afford a fancy DVD player or whatever for $400 dollars, but they can all afford a couple of cents for music."

So the assumptions on which these thoughts were based weren't crazy.

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Danny goldberg
Chairman and CEO, Artemis Records

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The business was saved by the introduction of the compact disc, or the CD, in the early '80s. That reversed the decline, and created another 15 years of growth and profits for the business as, over the course of that period of time, people converted from buying, I don't know, what was then a $6.98 cassette to $13.98 CDs, you know.

And for the first couple of years that most people got a CD player they would actually replace a lot of their collection. So classical sales went through the roof and old recordings went through the roof, and the business therefore bounced back, and had another 10 to 15 years of double-digit growth, as the bean counters at the big corporations like to say. …

Let's talk about technological innovation and the record business' response kind of across the board. I'm sure its apocryphal but I've read things where people say, when sheet music came along, people in the business were saying, "It's going to kill vaudeville," or whatever it is.

I don't know about other business, but I think in the entertainment business in general, people who are successful tend to fear change and fear the unknown. …

The music business is the same. It's nervous about change, and the more powerful people are the more they like the status quo. I was not around when sheet music first emerged, but I'm sure there were people that thought it would hurt vaudeville, and certainly there's been anxiety as new technologies come along. The CD was not embraced immediately, and music television was not embraced immediately. Some companies made videos, many didn't, and in terms of dealing with the Internet it's been a profound challenge for the music business. …

Did you hear people actually say [about CDs], "We've got to stop this. This is horrible"?

No, no. No, no, no. Nobody wanted to stop the CD. It took awhile for it to be clear how attractive it would be. So it became a resource question of, do you make a CD for a new artist or not? There was extra mastering costs, extra manufacturing costs. In the early years, not every artist got a CD. …

But, again, if you're thinking short term, by definition you're not thinking long term. And short term it's better not to invest in new technology. It's better to spend as little money as possible and make as much as possible. But that can end up cutting off your nose to spite your face, in terms of how it affects your business next year or the year after. So the same syndrome that discourages long-term investment in artists also discourages long-term experimentation in terms of new delivery systems, technology, and so forth, because of the enormous pressure to make short-term financial targets.

And when you have executives who themselves may not know how long they're going to keep their job, and they don't have the security that they're going to be there in five years, it's hard to motivate them to think five years out.

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Jeff leeds
Reporter, Los Angeles Times

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I think it's true that from the time that the CD sort of emerged as a new format and became kind of the mainstream format, there was a period when everyone went and tried to replace their LP collections or their cassette collections with this new format that was supposedly higher-quality and offered all kind of other benefits. And that provided this enormous [boom] for a number of years that covered up a lot of problems that were starting to emerge within the business.

When you have these huge piles of cash coming in, it's a lot easier to say, "Yeah, we can afford to make that $5 million video that actually never sees the light of day." There are a lot of sort of problems that [were] covered up and when that period ended, that coincided with a lot of other things that were happening in the world. Radio gradually was sort of consolidating. MTV was kind of drifting away from being kind of a straight music-oriented outlet.

This great boom almost turned inside out, because the very thing that led to it, which was the idea that you could take music and turn it into a digital file and put it on a plastic disk, that became really the unraveling of the business. Because those exact same digital files became something that you could take off of that disk, send to a friend or a million friends through the Internet. And that's why the business has the problem that it does right now.

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posted may 27, 2004

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