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Issue Date: Vol. 43, No. 8 August 2003, Posted On: 8/26/2003


Music Industry, Operators Adapt To Dueling Formats, CD And Online


N. Montano
nick@vendingtimes.net

U.S.A. - The three most important numbers in the music industry right now may be 800 million , unit sales of CDs in America in 2002; $44 million , the estimated size of today's paid downloading music market; and one million , the number of songs sold by Apple's "iTunes" online store during its first week of business.

 

These numbers, and the market trends behind them, add up to a music industry that's in transition. Under pressure from consumers, the major labels are shifting from a stance that "CDs are the only legitimate format," to a stance of finally coming to terms with downloading. According to a study released in June by market research firm PriceWaterhouseCooper, legitimate online music sales in the U.S. are expected to skyrocket 165% annually over the next four years, reaching $1.7 billion by 2007.

 

Two watershed events for downloading music occurred this year. In May, Apple launched the above-mentioned "iTunes" enhancement. In July, Billboard began publishing a chart to track sales of downloaded singles through legitimate, subscriber-based providers. What all this means for the long-term future of the jukebox industry is anyone's guess. But for the moment, most coin machine experts seem to agree that the day of the dual-format jukebox market has arrived.

 

"Rowe has some operators who are buying both downloading jukeboxes and CD jukeboxes," reported Rowe executive vice-president of sales and marketing John Margold. "This contradicts the conventional wisdom that one product or the other must totally prevail. Our sales in both niches clearly indicate that it's not either-or; it's not black or white. There are certain applications where one technology is best, and other applications where another is best." Rowe plans to keep making both online and CD jukeboxes for at least the next four years, Margold said.

 

A similar sentiment is heard from Rock-Ola president John Schultz, who projects his company will continue making CD machines "in some form or fashion" for five or even 10 more years.

 

"Downloading jukeboxes clearly work very well in some locations, but far from all," Schultz said. "But the music labels have not figured out how to make money with downloading yet. Until it makes financial sense for everybody, downloading will not be the future of our industry. The CD phenomenon will not go away."

 

A year ago, jukebox manufacturers were saying that market uncertainty had created pent-up demand as operators remained in a wait-and-see mode, wondering which format would prevail. Today, manufacturers say these operators can stop waiting to upgrade their jukebox inventory, because both formats , CD and online , have found a viable role in the industry.

 

CD jukeboxes represent the vast majority of jukeboxes on location today , anywhere from 80,000 to 150,000 units, depending on whose estimate is used. Meanwhile, downloading jukeboxes have established a smaller but growing place in the national location base. Approximately 8,400 online jukeboxes (all brands) are now installed in the U.S., manufacturers report. The figure may represent roughly 5% to 8% of the total installed base.

 

IN THE FIELD

 

Several leading jukebox operators strongly agree with manufacturers that it's both safe and smart to buy new music equipment, whether traditional or new technology.

"This industry is stuck in the mud, but it's not because manufacturers failed to give us the proper tools , it's because operators don't stay with the times in terms of technology and pricing," asserted 36-year industry veteran Tom Zepperi of Taz Amusements (Mechanicville, NY).

 

Zepperi operates 11 Rowe "NetStars" and 80 Rowe CD boxes. "Is a downloading jukebox right for everyplace?" Zepperi asked rhetorically. "No, but it's definitely right for your best places. It's for the aggressive operator who installs top-quality speakers and who insists on no competition from live entertainment, TV or other recorded music. Under these conditions, it's a huge success."

 

A more cautious assessment comes from the chairman of the Jukebox Promotion Committee of the Amusement and Music Operators Association. Russ Mawdsley of Russell-Hall Inc. (Holyoke, MA), who has served as committee chair for the past year,   believes the jukebox market is in a state of confusion today, and as a result has suffered needlessly slow growth on both the manufacturer and operator levels. Mawdsley agrees that some operators have indeed failed to update their music routes.

 

"Those operators who are happy to nurse along old machinery are sticking their heads in the sand," he said. "Old jukeboxes have reliability issues, and it's important to introduce machines to keep locations happy and create customer excitement by drawing people to the machine."

 

Mawdsley, however, places much of the blame for the softened jukebox market on the complexity of America's larger music industry. He pointed to overlapping and competing rights structures, licensing arrangements, content sources and technologies. Given these factors, he said, it's understandable why many operators are perplexed today.

 

"The jukebox industry is very confused right now," Mawdsley said. "Operators who have tried downloading jukeboxes are getting more comfortable with that technology. They have a more optimistic outlook about the future, although they have reservations about the current equipment and business models. But operators who have not tried downloading are less optimistic and more uncertain; they are just not sure where to go with it. They are afraid to get caught in a long-term deal they can't get out of, if conditions change."

 

One of the most important solutions to market uncertainty, Mawdsley said, is to make available third-party sourcing of downloaded music. Such sourcing, he said, would provide operators with the assurance of market stability that is needed to unleash pent-up demand.

 

"There's some great technology out there, but we all need to work toward the same goal so we can progress as we should," he said. "In order for the industry to grow properly, I think it's very important to get a blanket license for public performance of downloading music under the auspices of AMOA, like we have for CDs with the Jukebox License Office, rather than individual manufacturers having to obtain individual licenses."

 

Seeking to create such a blanket license, AMOA has been negotiating with the Performing Rights Organizations that control music copyrights. But these negotiations have been stalled for at least a year, Mawdsley told VT.

 

"We are still talking with the PROs, but haven't made much progress," said jukebox committee chairman, adding that the PROs have been willing to consider a flat rate per jukebox rather than a per-song payment structure, but declining to identify other points of contention. It's no secret, however, that money , payment rates , are a major issue.

 

"It seems that everybody, including the PROs, believes that most jukeboxes earn a lot more than they really do," Mawdsley pointed out.

 

(Editor's Note: Should AMOA obtain a public performance right for downloaded music, mechanical and publishing rights would still need to be negotiated with individual music labels and publishers.)

 

Despite the coexistence of local storage CD and remote digital music in the jukebox industry, the larger public debate about the future of music formats has, if anything, grown more intense in recent months. Compact disc technology is 20 years old this year. This past spring, when the Recording Industry Association of America released its annual report on music sales, some observers pounced on the 8% decline in CD sales from 2001 to 2002, claiming it foretold the imminent death of the compact disc.

 

Not so, according to amusement industry experts and objective market analysts like PriceWaterhouseCooper, which projects CD sales will continue to decline, but only at the compound annual rate of 3.5% per year. By 2007, $10.29 billion in global CD sales are expected , hardly the measure of a dying format.

 

"There's no question CD sales are declining, but the phase-out of retail will take longer than people predict , it'll be more like 30 years rather than five," according  to Dan Hart, CEO of Echo, a joint venture of leading music retail chains. Hart recently told the Chicago Tribune: "There is a whole generation of people out there educated to using CDs as their primary music format."

 

As for the impact and implications of Apple's "iTunes," opinions vary sharply. The success of this service has convinced some top label executives that 99˘ per-song online purchases could be profitable on a mass-market basis, and that less zealous control of intellectual property over the Internet may be in their best interests.

 

But other music label executives caution against reading too much into "iTunes'" early performance. The "iTunes" service is only available to the tiny fraction of the computer market that uses the "MacIntosh" operating system. "Windows" users who comprise 75% of the computer market, have to make do with services like  Liquid Audio, Pressplay and other services that charge monthly subscription fees.

 

So far, according to most observers, these services are barely profitable, if at all. And while some music executives , like Ecast CEO Robbie Vann-Adibé , predict that labels will rush to approve the "iTunes" model for the larger PC market, others say the music industry will continue to move slowly, reluctantly and cautiously into the brave new world of downloading.


Topic: Music and Games Features

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