If the CD is dead, why are so many companies going into the CD business?

Commentary about business and finance.
March 27 2007 4:01 PM

The CD Is Dead!

Long live the CD!

Stack of CDs.
Are CDs really dead?

Mozart wrote only one Requiem, but in recent years, music journalists have written about 80 requiems for the compact disc, mostly in the key of boo-hoo major. Data from the Recording Industry Association of America show that between 2000 and 2005, the number of CDs shipped fell 25 percent to 705.4 million, while their value slipped 20 percent, from $13.2 billion to $10.5 billion. During the first six months of 2006, CD sales dropped 14 percent more. And as Ethan Smith wrote in the Wall Street Journal  (subscription required)   last week, CD sales are down another 20 percent in the first quarter of 2007. On Monday, Jeff Leeds, writing in the New York Times, penned an obituary for the CD, which has been driven into oblivion by consumers' preference for digital singles over albums. Last year, hundreds of music stores closed, among them the 89 outlets of the greatly missed (subscription required) Tower Records.  

Conclusion: The CD is dead!

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Except, it's not. Last Sunday, Paul de Barros of the Seattle Times chronicled the growth of Silver Platters, a local chain of CD stores that just took over an old Tower Records space. Meanwhile, savvy new-era businesses are jumping into the CD business. The same day Smith's piece appeared in the Journal, Starbucks announced its record label would issue its first CD this summer, from Paul McCartney. Earlier this month, Amazon launched a classical music retail outlet, capitalizing on the genre's impressive 2006 comeback, which was driven by massive CD sales from the unholy trinity of cheesy, nonclassical classical artists: Andrea Bocelli, Josh Groban, and Il Divo.

Clearly, it's trickier than ever to make, market, and sell CDs. It's an industry in crisis. But CDs are still a significant business. All the kids, and many adults, have iPods. But plenty of baby boomers still buy the shiny discs; CDs account for three-quarters of all music sold.

What we are witnessing is not so much the imminent death of CDs but the death of the old methods of selling CDs. It's still possible to make money in the CD business—any business with more than $7 billion in retail sales should allow someone, somewhere, to make a profit. The incumbents are getting killed, but upstarts are thriving, using different methods.

Legacy music retailers and manufacturers now face many of the same difficulties as American auto companies. They built a business infrastructure—national chains, huge outlets in high-profile locations, layers of management—predicated on selling massive and growing quantities of CDs for $15.99 and up. Like the American automakers, they found that new competition—from iTunes, file-sharing, and online retailers—severely cut into their margins, their market share, and their pricing power. In such an environment, companies with significant capital invested in stores and substantial overhead costs get destroyed. And as they fail, they do so loudly, inspiring widespread pessimism.

Yet the new rules open opportunities for upstarts who approach the business of making and marketing CDs in a fundamentally different way. Unlike fallen chains such as Tower, boutiques such as Silver Platters and Rasputin in San Francisco don't spend on expensive national advertising. They're more like art-house theaters. Since they cater more to music aficionados than to the masses who used to flood into HMV for the latest Mariah Carey CD, the demise of the blockbuster CD doesn't put a crimp in their sales.

In the age of file-sharing and iTunes, people simply aren't willing to pay $16 for a collection of songs they may not want. That proved to be fatal for Tower Records. But for Amazon.com, such price pressure doesn't really matter. The company has built up a commercial infrastructure that enables it to sell and deliver all sorts of cheap objects, from books to toys. Blogger Barry Ritholtz noted in January that the most of the top-selling CDs at Amazon.com sell for less than $10. For Amazon, which already has huge investments in warehouses, software, and its Web site, carving out some extra space for classical CDs doesn't require a huge incremental investment. What's more, since its inception, the store has been designed to run on very low margins.

In the case of Starbucks, the economics of selling CDs are even more compelling. With its 14,000-odd outlets, the company already has a massive, highly profitable retail channel that generates immense foot traffic daily. Each store is conveniently outfitted with counters, which are ideal for stocking a variety of noncoffee products that have mass appeal: chocolates, books, and CDs. Both Barnes & Noble and Borders may be having a difficult time making money selling wide selections of books in huge retail spaces. But when Starbucks decides to stock a single book, say Mitch Albom's For One More Dayor Ishmael Beah's A Long Way Gone, it can easily turn a profit on every sale. Starbucks found the same sort of success with the Ray Charles album Genius Loves Company in 2004. Starbucks has also invested in building its Hear Music concept, where customers can buy coffee, buy CDs, or download music, into a small chain.

Is the CD dying as a commercial product? Sure. But it's got a lot of dying left to do. And in the meantime, there's still money to be made selling discs loaded with the music of Josh Groban, Alban Berg, and Rod Stewart.

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