SIX BY FIVE: WEA'S ESPOSITO, BMG'S JONES, EMM'S QUARTARARO, UMVD'S URIE & SMD'S YARBROUGH
What do you see as the major issues facing retail as we approach NARM 2003?
John Esposito, WEA Inc., President: There are numerous issues that need attention, including piracy, a poor economic climate and increasing competition for the entertainment dollar, among many others. The bigger question is, what we do about them? First and foremost, we need to work hand-in-hand with retailers to address these issues. Now is the time for a truly open and honest dialogue. We need to produce great music, we need to be in step with the realities of the marketplace and we need to get a grip on piracy while providing consumers with attractive, legitimate alternatives. The good news is that music consumption has actually increased. Now we need to work together to commercialize the digital space to ensure that artists, retailers and record companies are properly compensated for that consumption.
Pete Jones, BMG Distribution & Associated Labels President/CEO: The "perfect storm" is comprised of numerous issues, but I rate these the most important (not in any particular order): File-sharing, CD-burning, piracy, consumers’ value perception of music, lenders’ (to retail) perception of the music category, and margin pressure on retailers from product lines (e.g. DVD) key to their diversification strategy.
Phil Quartararo, EMI Recorded Music N.A. Executive Vice President: a) Re-establish music as the best entertainment value to people who’ve lost that message. Games and DVDs are the same or more money. We still pay relatively the same amount for music as we did when we were kids. b) Have a viable configuration (perhaps singles?) to recapture the young music consumer. When we walked from the single, as an industry, we gave up the seeds we used to grow new, young music buyers. Music demand is at an all-time high; it’s up to us to resolve the delivery issue. c) Serve mid- to upper-demos as well in the future as we’ve served kids in the past. As this pond shrinks, the opportunity increases for one player to really get it right: a consumer-led business rooted in better service and added value resulting in a better shopping experience.
Jim Urie, Universal Music Video Distribution President: Obviously, basic survival has to be on everyone’s mind. Issues like copy protection and piracy enforcement are tough for retailers to address and are our responsibilities to handle. Retailers need to focus on assortment, differentiating themselves from their competition and the other channels selling music, and enriching the customer experience.
Danny Yarbrough, Sony Music Distribution Chairman: Unauthorized CD-burning, physical goods piracy, illegal file-sharing and an uneven release schedule continue to be the obvious specific issues facing music retailers. However, attracting consumers back to their stores, websites, and, in general, their brand, is really a central issue for retailers. How they use advertising and marketing to present a compelling message to the customer will be key to their success. Refocusing on the music itself and adding to its perceived value while using the emotion it generates to add to the excitement is the message. How a retailer leverages the consumer’s appreciation and hunger for an artist will be their measuring stick for success and profitability. With a renewed effort by NARM and RIAA to work together, I’m sure we can make major strides in 2003.
Do you see bringing back singles sales as a viable profit center?
Jones, BMG: The will to bring singles back exists among many of our accounts and most of our labels. We will try to find the way, starting with more releases. From my point-of-view, singles are a volume opportunity in themselves and a marketing opportunity for full-length. To put it briefly, if we don’t release a single, bad things happen. We lose a sale, a pirate more often than not gains a sale, we miss an opportunity to market the full-length by including snippets on the single, or we walk a customer out of retail, most often a younger one who may only be able to afford singles. Cannibalization can be a reason to hold back a commercial single, but it should be the exception rather than the rule.
Quartararo, EMI: As the industry decides if we can get the economics of scale to work on the single, we do need some kind of multiple product strategy. Perhaps 1) Single or EP, 2) Full-length CD, 3) CD with value added premiums. Doesn’t the airline industry sell coach/business and premium seats? Doesn’t Chrysler sell to buyers in the $20k, $30k and $75k market? We should be able to drive a multiple product strategy rooted in quality and value added for the casual fan all the way up to the core music consumer; singles might well be part of the solution.
Urie, UMVD: As you know, we were the only distribution company to participate in a singles test last fall (with hats off to the Arista label, who also participated). This limited the scope of our learning. Generally speaking, on a per-unit basis, of course, singles could be viable financially. The problem we recognized (and this could relate back to the fact that the other companies weren’t on board, and the 87 extra singles we released weren’t enough to turn the market tide) is that we have done such a good job in killing the configuration—with per-unit sales now so small—that you’d have trouble justifying the one-time cost (i.e. art work and design) of putting a single out. The Nelly single was a huge hit, yet it sold only a couple of thousand pieces. I guess the whole answer to this question is that the singles configuration would be viable financially if we could resuscitate the market for singles at least back to the level of, say, 1999.
Yarbrough, SMD: We are currently responding to NARM’s request to re-introduce singles into the marketplace with a solid schedule of CD singles and online releases. If the retail community supports this configuration with in-store sections and merchandising, plus online support and promotion, we’re confident the necessary profitability will be there.
Esposito, WEA: Absolutely. We were wrong to allow the singles business to become a profit drain for retailers and music companies. Consumers are willing to pay for singles as long as we give them quality music at a reasonable price and, whenever possible, value-added content.
Are consumers ready to embrace new configurations like SuperAudio CD and DVD Audio? Will the CD continue to be the major format for music sales in the foreseeable future?
Quartararo, EMI: Consumers are ready; manufacturers are not ready. We collectively need to choose the format we can endorse and support, then put a strategy in place that will drive the consumer into the new configuration. We need to commit to critical mass and consistent high-quality releases, including the CD/DVD combo packs that have proven so successful.
Urie, UMVD: Are consumers ready to embrace new configurations? You don’t have to look any farther than the DVD on the video side to realize the answer to that is "yes." I think SACD and DVD Audio are both configurations with a number of benefits, including improved quality both in surround sound and stereo, as well as enhanced content. We also would like them to succeed because of their inherent copy protection. In the end, the market will decide if they are ready to adopt these new configurations.
Yarbrough, SMD: We’re very gratified by the steady sale growth of the SACD software throughout the marketplace. Certainly the tremendous expansion of SACD hardware, especially Dream System home theaters, has created an organic demand that’s been ringing cash registers for a while now. Certainly the recent announcements of superstar and expanded catalog SACD releases by many newly participating labels has spurred sales and vastly increased visibility and consumer awareness. This opportunity is being exploited by a growing number of retailers developing Audio Technology areas in their music software sections, showcasing SACD, DVD Audio and all emerging music configurations. With all that said, we feel the CD has become an icon and the standard by which other offerings are measured. As such, we feel it will be the format of choice for a long time.
Esposito, WEA: While I believe the CD will endure for some time yet, new formats like DVD-A offer consumers a significantly enhanced listening experience and open countless creative possibilities for composers, performers and producers. DVD-A’s can include video, still images, lyrics, photos and web links, providing the consumer with a true multi-media experience.
Jones, BMG: It’s too soon to suggest that there is significant interest or demand for either DVD Audio or SACD. There is now the possibility of adding a second layer to DVD Audio, thereby making the configuration backward-compatible. Maybe that will cause more enthusiasm, though SACD is already backward-compatible. CD looks to be the carrier of choice for the foreseeable future, with copy management soon, I expect.
In your opinion, are shared backroom services between distributors inevitable or unworkable?
Urie, UMVD: It depends on the service and the distributor. Clearly, some of the distribution companies are experiencing more economies of scale than others, and that should be investigated—and has been with pretty much every combination imaginable—but thus far, no action. Draw your own conclusions.
Yarbrough, SMD: It’s an intriguing question and one that we’ve spent over two years looking at and continue to examine from all angles. While it is obvious that there are efficiencies and cost savings built in, in reality, each potential partner brings a unique set of circumstances and obstacles. The issue of consolidating shipments, which is crucial to cost-saving and enhanced productivity, can create a major disconnect for the partnership as well as the customer’s ability to efficiently receive the product and enter it into their systems. We’re still very receptive to potential scenarios in this arena and we continue to investigate ways to make this work. While Sony Music Distribution has handled the physical distribution of Sony PlayStation hardware and games since its launch, we are now in the planning process to incorporate Columbia Tristar Home Entertainment into the same system for all the backroom physical distribution of movies.
Esposito, WEA: Our goal as an industry should be to seek ways to squeeze the costs out of the backroom and eliminate duplications and inefficiencies. As distributors, we have an obligation to our artists and our labels to operate the most effective and efficient organizations possible in addressing the needs of retailers. Nothing is unworkable, and if there ever were a time to check egos and preconceived notions at the door and begin to challenge the way we approach business, this is it.
Jones, BMG: Shared backroom services may be inevitable, are not unworkable and may not be sufficient. Public comments from CEO’s, including Rolf Schmidt-Holtz, suggest full-scale mergers/ combinations among the five majors may be in the offing.
Quartararo, EMI: It’s inevitable. The battle of profit center vs. facilitator is quickly evaporating into who can afford to own vs. outsource this component of their business. Our mutual goal needs to be to drive costs out of the system, specifically non-value added items and redundant cost centers.
What do you see as the future for the music-only retailer?
Yarbrough, SMD: Today’s consumer seems to be in search of an entertainment solution that includes music rather than a music-only destination. A great many retailers that are or have been viewed as "music-only" have, in fact, already widened their assortment to include a variety of entertainment media, while continuing to concentrate on their music presentation. We firmly believe in an optimistic and successful future for service-oriented, consumer-motivated music retailers. The independent retail music community, in particular, is filled with great examples of executives who have made it their business to first personally know their consumer and what that person wants musically. That information becomes the basis of the retailer’s strategy and brand marketing. Surviving and even prospering in a tough marketplace for the last several years, many music retailers and independents especially have established themselves as viable, exciting businesses focused on their customer and product. We’re very confident in their ability to continue this growth.
Esposito, WEA: The music-only retailer which understands its customers, creates a varied shopping experience, is truly knowledgeable of the local music scene and produces an attractive and entertaining environment, is poised to win. While price will always be a factor that draws consumers to some retailers, the reality is this: People don’t go to Starbucks because they sell the most inexpensive coffee. They go there because the environment is welcoming, the product is trusted and there is the consistency of a great consumer experience.
Jones, BMG: It pains me to say so, but, for the last couple of years, I have been encouraging music-only retailers, especially the indies, to diversify. I’d rather lose some music space to other product lines than to lose a location entirely. Also, retailers need more than DVD and games. They need to offer all entertainment software choices and lifestyle items like (yes) bobble-head dolls, if they can sell them. They need to become entertainment destinations that super-serve their customers, and, if they do, I believe they can compete successfully with the mass merchants.
Quartararo, EMI: As this pond shrinks, the opportunity increases for one player to really get it right: a consumer-led business rooted in better service and added value resulting in a better shopping experience.
Urie, UMVD: The music-only retailer will have to be tough and smart to survive the next 12-18 months. After that, a combination of copy protection, on-line marketing, synergy between downloads and physical sales, in-store CD replication and customer service will enable music specialty retail to once again thrive.
Final question: Which will you visit while in Orlando—Disney World or Universal Studios?
Esposito, WEA: I’m contractually prohibited from visiting either. I’m talking to the folks at NARM about doing next year’s convention in Nantucket.
Jones, BMG: I’ll be flying up to the Gold Club to make sure they’ve cleaned up their act.
Quartararo, EMI: Let’s not and say we did.
Urie, UMVD: I hate f***ing mice (whoops...but I love their record company!).
Yarbrough, SMD: No, our lawyers won’t let us go to Universal and sometimes I already feel like I’m working in Disney World.
