The Recording Industry's Dirty Little Secret

[Jeremy Charette]

http://www.digitalmediathoughts.com/images/greedy.gif

In recent weeks, shots have been fired across the battlefield of profit by Steve Jobs and various recording industry executives. Using words rather than bullets, Jobs has accused the recording industry of being greedy, and they have fired back that profits from online music sales have been too low, and prices need to go up. Here's the dirty little secret no one is talking about publicly: recording studios make more money from online music sales than they do from CD sales.

Let's look at the numbers. Recording costs, production, artist fees, etc. average approximately $2-3 per album. The cost of pressing a compact disc, the case, liner material, and other associated manufacturing costs run approximately $2 per disc. Wholesale prices run from 50-80% of manufacturer's suggested retail prices, so a wholesale price of $8 per CD would be fairly typical. Subtract the manufacturing, production, and shipping costs, and gross profit to the recording studio is only $3-4 per album.

iTunes, on the other hand, pays recording studios between 60-70% of gross revenues (60 to 70 cents per 99 cent song). For each $9.99 album, that's a gross profit of $6-7.

There are other advantages to online music sales. The recording studios incur no manufacturing, distribution, or delivery costs. The downloaded music files are copy protected, so consumers can't make unlimited copies of the songs they purchase and hand them out to friends (or resell them for a profit). The recording studios make about twice as much profit through online sales as they do through conventional CD sales, and the content delivery system is instantaneous and (virtually) free.

So who's kidding who? The recording studios claim they aren't making enough money off of online music sales. The facts say otherwise. I've never seen an industry work so hard to justify greed. :?

[Pony99CA]

I've never seen an industry work so hard to justify greed. :?
You've never heard of the tobacco or oil industries? :lol:

Tobacco: "Our products don't kill people. Those lung cancer deaths are all coincidences."

Oil: "Prices are increasing at the pumps because a mosquito coughed in Uzbekistan."

Steve

[Doug Johnson]

How many people buy entire CDs worth of music online? Do most buy entire albums or just their favorite tracks? This could have a huge impact on how much profit is made.

[mjhamson]

Actually, the behaviour of the industry has not changed at all. What has changed is the public awareness and voice. The industry is responsible for adding tax to audio capable recording media.... even if used for other purposes. Why do people forget about this?

By the way, if you want to really show a true difference in revenue... I still like to tout this idea as (IMHO) it is a more honest analysis. Compare the recorded bit-rate of the audio for CD (1400+/-) and valuate that against the price ratio of what is being sold (128 - 192).

Why is this an important aspect? you have to remember that there is a difference is price point for various hard media. We do not pay the same for audio cassettes as we do for CDs. Why is this? I remember the days past when it was explained that the Audio CD provided for a better and more accurate listening experience. You also have to factor in, as was stated... the cost of resources and delivery. It was always said that cassette manufacturing was less costly then CDs. But I have always doubted this... especially today.

In the end, the truth is that the industry is as bad as the other two aforementioned. I would love to see all 3 abolished (yes I would give up smoking... for that...)

sorry... just a topic that I am very passionate about.

[Jason Dunn]

How many people buy entire CDs worth of music online? Do most buy entire albums or just their favorite tracks? This could have a huge impact on how much profit is made.

Yeah, that's very true - I do have to wonder what the ratio of singles to full albums is. I've only ever purchased a few full albums online.

[Felix Torres]

How many people buy entire CDs worth of music online? Do most buy entire albums or just their favorite tracks? This could have a huge impact on how much profit is made.

That is precisely at the heart of the debate.

Accusations of greed aside, the studios have found that flat-rate pricing means folks pay a buck each for the hits on an album and don't even bother with the rest of the tracks; they never get to sample them to even see if they're any good or not.

So, from their point of view, they're losing a $10-12-sale in favor of one or two $1 sales.

Hence the desire for variable pricing; hit singles at $1.5 and album cuts/older tracks at a lower rate, to try to incentivize the purchase of the full album or at least get closer to the $4 per album profit mark.

For me, since I don't much go for hit singles, variable pricing might actually mean significant savings if hit singles go up and obscure albums come down.

<shrugg>
The whole thing is a tempest in a teapot, anyway, as long as CDs remain the dominant (by far) means of music distribution.

[Jeremy Charette]

Consumers do have the opportunity on Amazon, iTunes, and nearly every other online music service to sample songs for 30 seconds or more before purchasing them. I agree that consumers probably buy more singles than they do albums, and therefore the studios are probably disappointed by the lower revenue per album vs. compact disc delivery. Regardless, the profit margins are higher, and the total profit per album produced is probably about the same as or more than compact disc distribution.

[Jason Dunn]

I wonder if we'll see a move towards studios producing albums with ONLY singles - i.e., a four song EP where all four songs are planned singles on the album. If people only buy the "hits", maybe music production will shift towards that way of thinking.

[Phoenix]

It's true, someone may not buy an entire album at once as often as they might buy singles from a variety of albums. But once they buy ten or more singles from a huge selection of artists from the same big record company, they've purchased the equivelant of an album and so the record companies are going to profit just the same and perhaps more as it would be more profitable for someone to buy, say, twelve singles at 99 cents a piece, rather than an album with twelve songs for $9.99.

The average person who's into purchasing music from iTunes, from my understanding, tends to download quite a bit of it. So whether it's albums, or the equivalent of albums over a short period of time, either way the record companies are lining their pockets with a hefty sum of gold.

[mcsouth]

I'm not sure that I buy the whole "You just bought a few singles instead of a complete CD so we lost profit opportunities" argument. I have personally bought more music in the last 6 months simply because I COULD buy singles. I am so sick and tired of buying a CD, only to find out that over half the music is lame - repetitive, lacking heart and soul, and just generally boring. How many of you have ended up ripping only a few songs from a CD, rather than load up your PC hard drive with music you're not interested in listening to? As a result, I had literally stopped buying CD's over the last few years, other than from favorite artists that I had confidence in (Sarah McLachlan, for one).

Since I've started shopping at on-line music stores, I've started buying music from other artists that I previously had little interest in - I've often spent an hour or more just browsing and listening to the samples, and then impulse-buying songs - hey, they're only a buck apiece! And yes, I have bought those radio hits, but that's often how you notice an artist in the first place - the opportunity to sample their other songs lets me know if they are more than a one hit wonder.

So from my perspective, on-line music and singles sales has only increased the profit potentials for the studios. I've got to believe that I'm not alone in this behaviour.

[Felix Torres]

I wonder if we'll see a move towards studios producing albums with ONLY singles - i.e., a four song EP where all four songs are planned singles on the album. If people only buy the "hits", maybe music production will shift towards that way of thinking.

It is; a couple weeks ago one of the studios announced a plan to do just that. The idea being to release clusters of songs a couple times a year...

[Doug Johnson]

I don't understand people that only buy those hit songs that make it to the radio. That same album often has plenty of other songs that are just as good or even better! Talking about posers following whatever is hip. :lol:
My experience buying CDs in recent years has been the opposite... One or two songs that get played on the radio are good, the rest are terrible! A decade back, the other songs on most CDs were at least decent, if not good. A lot more CDs had multiple hit songs on them, whereas now "one hit wonders" pop up all of the time.

I buy a lot fewer CDs these days simply because the content isn't as good and I feel like I have wasted my money when I buy a CD, not because of the shift toward downloadable music.

[Pony99CA]

I don't understand people that only buy those hit songs that make it to the radio. That same album often has plenty of other songs that are just as good or even better! Talking about posers following whatever is hip. :lol:
My experience buying CDs in recent years has been the opposite... One or two songs that get played on the radio are good, the rest are terrible! A decade back, the other songs on most CDs were at least decent, if not good. A lot more CDs had multiple hit songs on them, whereas now "one hit wonders" pop up all of the time.
I don't know if fewer CDs today have mostly good songs. One-hit wonders have always been around.

However, I agree with the basic point. For those of us who get most of our music by listening to the radio, the first problem is that we only hear what the stations we like play. Yes, I could spend hours browsing the Internet listening to clips of music, but I prefer to spend my time on the Internet doing other things.

The second problem (at least for me) is that I usually won't buy a CD unless it has three songs that I really like. So if I don't hear three songs on the radio that I like, I won't buy the CD. Yes, I could try to find the album on Amazon and listen to clips of the rest of the songs, but many radio stations don't tell you the artist, much less the album, of every song they play. I could search the Internet for the lyrics (and have done that), but that's only if I remember to do it when I arrive where I'm going (I listen to the radio mostly in my car).

There are exceptions to my three-song rule, of course:

If I really love a song, I might consider buying the CD just for that, but I try to resist that impulse.
If the CD is on sale at a really good price (under $10), I might buy the CD if it only has one song that I like.
If the CD is by an artist I really like, I might buy it without hearing any songs -- at least until they disappoint me.

For the most part, though, I stick to the three-song rule.

Steve

[Lee Yuan Sheng]

They're possibly trying to protect the infrastructure they've built and nurtured. Disruptive technology has a way of total change that really upsets everyone involved in an industry they have invested a fair amount in.

[Pony99CA]

Heavy Metal albums are either entirely awesome or entirely suck, with an extremely rare song as the exception.
Maybe that's because all the songs sound alike. :lol:

Just to make a random list of Heavy Metal bands with at least 90% kick ass songs/albums: Apocalyptica, Dope, Kittie, Korn, Marilyn Manson, Metallica (Pre-Load Album), Nine Inch Nails, Pantera, Rammstein, Slayer (Extremely Heavy Metal), and System of a Down.
To use a couple of your examples, I have System of a Down's "Toxicity", but I certainly don't recall liking almost every song on it (but I haven't listened to it in a while). The same is true of NiN's latest album, which I bought for my daughter and we listened to in the car -- I didn't care for most of the songs ("The Hand That Feeds" is good and one other that I can't remember). Of course, I'm not a heavy metal fan boy, but I do like some of the songs; I'm more into alternative -- Blink 182, Sum 41, etc. -- and metal rap -- Linkin Park, Kid Rock and so on.

I think most genres follow Sturgeon's Law -- 90% of everything is dreck. :-D

Steve

[Crocuta]

It's true, someone may not buy an entire album at once as often as they might buy singles from a variety of albums. But once they buy ten or more singles from a huge selection of artists from the same big record company, they've purchased the equivelant of an album and so the record companies are going to profit just the same and perhaps more as it would be more profitable for someone to buy, say, twelve singles at 99 cents a piece, rather than an album with twelve songs for $9.99.


I completley agree. If I ever found an online system I could live with, I would buy much more total music by being able to pick and choose than I ever have under the CD system. I think there are a lot of people out there who would do the same.

[However, I agree with the basic point. For those of us who get most of our music by listening to the radio, the first problem is that we only hear what the stations we like play. Yes, I could spend hours browsing the Internet listening to clips of music, but I prefer to spend my time on the Internet doing other things.


This is where I think they're all still missing the boat in failing to see the opportunities of this new market paradigm. Right now, you have to go around and click on songs to trial them. That means you can't be doing something else at the same time. With radio, you listen to whatever they give you and you notice the ones you like and then go buy them. So why don't the online services provide customized Internet radio. You would log in and they would use your existing purchases to profile the type of music you enjoy. (You could also, perhaps directly affect it through your account settings.) Then let it stream entire songs to you as you work on your computer. When you hear a song you like, you have a little icon that you can click on to put it in your review box. Later, you can go back and listen to those again before making a purchase.

[Pony99CA]

Right now, you have to go around and click on songs to trial them. That means you can't be doing something else at the same time. With radio, you listen to whatever they give you and you notice the ones you like and then go buy them. So why don't the online services provide customized Internet radio. You would log in and they would use your existing purchases to profile the type of music you enjoy. (You could also, perhaps directly affect it through your account settings.) Then let it stream entire songs to you as you work on your computer. When you hear a song you like, you have a little icon that you can click on to put it in your review box. Later, you can go back and listen to those again before making a purchase.
That's a great idea, but there will probably be a couple of issues.

First, you know somebody would likely figure out a way to capture the audio and strip any DRM.

Second, I wonder if each label would want their own station. Maybe not, as they don't seem to have a problem (in general) having their music available along with other labels' songs on services like iTunes and Napster and the labels don't each have their own download service (or do they?). But there's a difference between searching for music, where the user is in control, and having a station play the music, where the station is in control.

Steve