The Great Music Bubble of the 1990s
Do you remember how music was marketed, bought, and sold in the 1970s and early 1980s? The 1970s had over the top television shows about music like “Dance Fever” and “Solid Gold.” Radio was much better then than now, with stations that understood how to create a playlist. The 1980s had the phenomenon that was MTV. If you heard a song you liked or watched a video that caught your interest, you could march to the record store and buy a “45” single or cassette single of the song for $1.98. The New York Times described them in 1987 as ”inexpensive, widely available, containing nothing but a hit and a flipside.”
So, what’s not to like about the single? Well, not a whole lot if you are the music industry. Jim Fishel, of the RIAA, said in that same 1987 article, “’Singles have always been an important avenue for breaking new artists and individual songs,. . . but in recent years they’ve become a kind of loss leader.’” And that is a problem.
By the time the 1990s arrived, radio was becoming corporatized, music rarely appeared on television, and MTV stopped playing music videos in favor of reality shows. Early in this decade, the record stores began to shut their doors, done in by competition on the internet and big box retailers. If you want a song, you have to buy the whole album on CD. Rather than the $1.98 investment in that hit song, you have to spend $15-$20 for the CD containing that song, plus others that you really don’t care about.
More important for the music industry, in the 1990s there was a format transition from cassette to CD occurring. The music industry has always made money reselling its “back catalog” over and over as formats for playing prerecorded music change. Those who are older than 30 remember repurchasing on CD that album you had in vinyl or cassette. There were even many who had purchased a cassette of an album they already owned in the “LP” format. Sometimes you would have to repurchase a LP or cassette that had worn out from being played over and over (or had been left in a hot car and melted).
In any event, as the CD was being introduced, the music industry decided to do away with the loss leader – the single – and rely upon a business strategy called “bundling.” Prof. Sudip Bhattacharjee, of the University of Connecticut School of Business, says the record companies engaged in this practice to “maximize profits . . .by reaching deeper into customers’ pockets . . .” by grouping songs into albums alone.
The New York Times article previously mentioned said that, in 1986, 125.2 million albums, 53 million compact disks and 344.5 million cassettes were sold. Singles were a mere 6 percent of the $4.4 billion music market. If the math is correct, singles represented $264,000,000 that year. Of course, at $2 a song, that means 132,000,000 individual songs were sold. That is an amazing volume of product. It just goes to show that people want to buy individual songs. But in the mid to late 1990s, a consumer couldn’t find a single to buy that one song – no matter how much you wanted it.
Then Napster debuted and all of a sudden consumers who once couldn’t find a source for “just one song” had one. Napster exploded into the music market consciousness and the music industry panicked. The bundling model had to be protected and they took legal action to shut Napster down (and admittedly there was infringement occurring). Rather than recognize demand for singles, the music industry decided to stay with its “maximize profits” bundling scheme. The record labels refused to meet the demands of its market and decided innovation was not necessary.
However, just like the horse carriage manufacturers discovered with the introduction of the automobile, it is customers that decide how a product is sold and the internet let the genie out of the bottle. People wanted singles and they were going to get them – one way or another. P2P distribution took off and has really never come back to earth.
There was another possible market dynamic occurring in the mid 1990s. The Federal Trade Commission and 43 states went after the record industry for violations of antitrust laws – alleging CD/album price fixing. (The industry settled the allegations without admitting to violations). The FTC alleged that the music industry engaged in acts that unreasonably restrained competition in the market for prerecorded music through the adoption of “Minimum Advertised Price” (MAP) clauses in their cooperative advertising programs with retailers. The FTC stated that a retailer seeking any cooperative advertising funds was required to observe the distributors’ minimum advertised prices for all media advertisements (even those that were entirely funded by the retailer itself). This included in store display advertising. If a retailer breached the MAP severe penalties were imposed on the retailer such that “even the most aggressive retail competitors would stop advertising prices below MAP.” (All of this according to the FTC). A Wired story from 2000, said that the “only place lower prices could be displayed was on a small sticker on the CD case itself.”
The FTC said that, at the time the MAP policies were adopted, a retail price war had broken out “that had resulted in significantly lower compact discs prices to consumers and lower margins for retailers. . . Through these stricter MAP programs, the distributors hoped to stop retail price competition, take pressure off their own margins, and eventually increase their own prices.” The FTC concluded that the MAP policies were effective and that each distributor was able to raise their wholesale prices. (The distributors were BMG Music, EMI Music, Warner-Electra-Atlantic, Sony Music, and Universal Music Group).
The FTC also alleged that, in one instance, new MAP terms were announced publically four months prior to the effective date and that by the end of the year all five distributors adopted MAPs that were virtually identical. However, as stated previously, the industry settled with the FTC and the States. If one were to take the FTC and State allegations as true, then for some time in the mid-1990s, the record industry artificially kept CD prices inflated.
So, in the 1990s, not only were customers forced to buy songs in a bundle; they were allegedly paying more for that bundle than otherwise necessary. The marketplace for prerecorded music was entirely manipulated to the detriment of customers and the benefit of the music industry.
Where are we now?
According to a March 2007 WSJ article, CD prices have fallen as Wal-Mart and Best Buy marketed on price and undercut music chains, while digital sales of individual songs have increased. But remember what the RIAA executive said in 1986 – singles are loss leaders. They are supposed to direct customers to take a risk and buy the album. However, in the internet age, one can sample the entire album – picking and choosing which song to buy and which to skip. The “risk” of buying a suboptimal song is gone with better information and the need to buy the album is gone. The “maximize profits” business plan of bundling has been eliminated and replaced with a marketplace that has close to perfect information.
The music industry will never return to the “good old days” of the late 80s and early 90s making money hand over fist. Even if piracy is stamped out – the industry will never again enjoy the customer who will need to replace his music because of a format change or the media wearing out. The market for the back catalog is much smaller. Also, now that music is in digital form, users can transform the physical format needed for playback themselves – no repurchase necessary. Now you know why the RIAA testifies that ripping music from a CD is a violation of the user license.
In taking a hard look back at the marketplace development for the sale of prerecorded music :
- multiple purchases of the same music was once necessary – but is no longer;
- bundling was used to artificially push product – but can now be avoided;
- there was alleged improper price setting – but settlements and consumer protections are now in place; and
- customers once purchased many affordable singles – now customers have returned to the habit and buy the loss leaders.
It seems to me the record labels are EXACTLY where they should be – in a free market where customers decide the value and a company can make an honest buck. But that takes work – I don’t think the record labels are up to the task.
Sources:
FTC Analysis to Aid Public Comment on the Proposed Consent Order
National Post Article on Digital Gluttony
WSJ Article; Sales of Music, Long in Decline, Plunge Sharply
Wired Article: Labels Fixed CD Prices
© 2008
If you liked this article – hit the Yahoo buzz button!
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
[...] you want to read more – see this article on the great music bubble of the 1990s. Share and Enjoy: These icons link to social bookmarking sites where readers can share and [...]
[...] You may recall how this policy was used by the record labels to control the discounting of music. See The Great Music Bubble of the 1990s. [...]
[...] that singles are not as profitable as albums. Remember what has been laid out in an article here on this site, the RIAA, said in 1987 that, “’Singles have always been an important avenue for [...]