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Issue Date: Vol. 46, No. 11, November 2006, Posted On: 11/25/2006


Industry Pros Identify Latest Trends Reshaping The Coin-Op Music Sector


Marcus Webb

U.S.A. — Downloading jukeboxes of all brands continue to sell at a “frenzied pace,” reported Rowe International’s vice-president of sales and marketing John Margold.

Equipment manufacturers and content providers estimate that digital formats represent 90% of commercial jukebox sales. They also agreed that hardware prices are no longer a major obstacle for most operators when deciding to purchase a new jukebox and when choosing CD or digital.

Today’s digital jukeboxes are affordable for big and small operators alike, particularly when purchased in sufficient volume and taking advantage of today’s plentiful menu of aggressive financing programs. For example, the new Ecast-powered Icon from NSM is offered at less than $1,000 when ordered in quantity.

Intriguingly, the industry’s jukebox manufacturers and music platform providers say that the downloading jukebox revolution is better for the operator – and better for the industry – than many realize.

“Now that some operators are beginning to install downloading jukeboxes in B and C locations, they are discovering that they actually have a number of ‘hidden’ A locations on their routes,” said Bob Cooney, vice-president for new business development at Ecast.

Cooney said that as operators explore the effects of digital jukes on profit in B, C and D locations, the more they find A locations they “didn’t know they had.” The reason for poor performance in these locations previously, he said, was “because the CD jukebox wasn’t programmed right.”

When patrons are able to program the music themselves – or at least part of it – the earnings that result can lift a second- or third-tier venue into a prime spot, he said.

“There could be 50,000 more A locations out there that just haven’t been discovered yet,” Cooney believes. “And you don’t have to be a programming genius to realize the extra revenue. Just put out the box and let players choose what they want to hear.”

Other jukebox manufacturers agree, and point out that today’s aggressively priced digital jukeboxes make expansion of networked music into second-tier locations an economically sound proposition.

“Operators have converted all the A locations, but they could make B locations into A locations by installing downloading products,” said John Schultz, president of Rock-Ola.

“With the pricing of the product, you can put it into a location where it only earns $120 a week and pay for it in 14 months,” said Dan McAllister, TouchTunes senior vice-president for sales and marketing.

“Too many operators believe digital jukeboxes will work only in their top 10% of locations, which is crazy,” McAllister said. “The economic reality of operating digital music has still not fully hit the mainstream operator. Otherwise there would already be far more than 30,000 or so downloading jukeboxes on location.”

View Interactive Entertainment president Rick Caviglia agrees with his counterparts: many operators, he says, have not yet realized that digital jukebox kits are not only for A locations.

Caviglia said that operators can often make more money through percentage increases after upgrading a B location from CD to digital (and in the process turning it into an A spot) than by replacing a high-earning CD jukebox with a digital model. The income for a $400 per week location is difficult to improve by more than 10% or 15%, but a location that averages $40 a week can triple its income with the installation of downloading technology, he explained.

Citing a specific example from his own route, Caviglia described the case of a Mexican sports bar that had a CD jukebox that earned $20 a week. The owner asked Caviglia to try a digital jukebox, and music income jumped to more than $100 a week and kept climbing. The location now grosses $200 each week on average.

PIECE OF THE PIE

The very rough consensus of manufacturing executives who spoke with VT is that with some 30,000 downloading jukeboxes installed nationwide, the percentage of digital jukeboxes has only reached 15% of the market. One manufacturer put the figure as low as 10%, while others hazard guesses around 20%.

These manufacturers admit they still have a long way to go, both in terms of market penetration and operator education. “If the percentage is low, to me that’s good news,” said John Margold, Rowe’s vice-president for sales and marketing. “It means we have a long way to go and a lot of sales to make before the market is saturated.”

McAllister agreed, tying the issue to competition between jukebox manufacturers for market share – and naming the number of machines that TouchTunes believes is the crucial threshold or “magic number” that will definitively crown the market leader in the digital jukebox era.

“When you only have 15% of the market covered, there is a lot of growth to go,” he said. “For manufacturers, it is a race to see who can install 50,000 units first. That’s because it means you control not only those locations, but also another 50,000 B and C locations. Those are the spots where your older models are pushed down as you bring out new equipment in the years to come.”

Operators who understand the economics of digital jukeboxes are now approaching 100% digital jukebox routes, said McAllister.

View’s Caviglia confirmed the belief that potential for further market penetration is vast, based on conversations with other operators and experience with his own route in northern California.

 “We believe there are more jukebox locations available today than ever because of the growth of the Latino restaurant market,” said Caviglia. “That is half my route, and in many cases they are performing better than English-language locations. Some are hitting $500 a week.”

Another backyard measurement from Caviglia’s own route: “I have only converted between 25% and 30% of my route from CD to digital to this point,” he said, “simply because it takes time to go through the process. And I am pretty aggressive about changing over to digital. So I know that many – probably most – operators out there are in the same position.”

Getting out the message about the earnings power of digital jukeboxes remains an unfinished task, manufacturers say. “I’m amazed that even today, many operators still don’t realize that digital jukeboxes provide the best ROI in the industry,” said McAllister.

But some manufacturers say the problem is not the message or the messengers, but the audience. “We’re being hurt by the demographic maturity of the market,” said Rock-Ola’s Schultz. “Even some of the leading operators are less interested in growth than in maintenance, and are looking toward retirement or getting out of the business. If more operators practiced a more aggressive strategy of reinvestment, the entire industry would be in better health.”

Despite the perception that income for other tavern staples is either flat or down this year, manufacturers and platform providers say that jukebox income remains strong. “Our most successful operators consistently see earnings as high as $500 a week in their best locations,” said Ecast’s Steve Kellam.

The ability of digital jukeboxes to maintain high earnings even when machines have been on location for years in some cases, comes as a welcome surprise to many operators.

“Some of our accounts go back five years and they still plug along earning good numbers,” said Caviglia. He attributed the long-term success of digital music to its ability to offer customers variety and choice.

“It almost takes out the thought process of buying music,” Caviglia commented. “Even if you misprogram the hard drive, the customers will find what they want and download it.”

The infatuation of younger consumers with all things Internet is another significant factor in the ongoing success of digital music, he said. Ecast’s Kellam agreed, saying downloaded music creates a “sexy” new aura for jukeboxes and revitalizes the relationship between operators and locations.

Based on all these factors – attractive prices, aggressive financing, high earnings and longevity of ROI – digital jukeboxes are now solidly established as the industry’s mainstream music product, Kellam said.

“Just two years ago, many operators would not even think of going digital,” he said. “Today, they are embracing it because it’s so much easier with wireless connections and other options. Even the nay-sayers who were adamantly against digital two years ago are now saying, ‘Yes, we’ve definitely got a place on our route for that type of jukebox.’”

Yet it’s that race for market share that may be decisive for the future of dedicated machines – and the attractive financing that, according to Rowe’s Margold, has sparked the frenzied sales of this year.

Manufacturers and digital music providers are outright subsidizing jukebox sales in their quest for sales, said TouchTunes’s McAllister. “We take a loss on every jukebox sold,” he said. “You can calculate your cost and break even with a $1,000 jukebox. We lose about $1,000 on every juke we sell. With 10,000 units sold a year, that’s a lot of money.”

Other manufacturers are in a comparable position, said McAllister. “The reason we’ve all been so aggressive is because the value of a location is $1,000,” he said. “You’re basically putting a $1,000 bill on every jukebox you sell, so there is a huge incentive for us all to win market share, because we participate in that recurring revenue stream.”

PURPOSE-BUILT AND KITS

Nearly half of digital jukeboxes sold this year are kits rather than dedicated machines. Most of the manufacturers have bowed to operator demand and now offer an extensive line of kits. The question is whether kits will remain a significant factor in jukebox sales long-term, or will eventually fade as the majority of older CD machines are converted.

Manufacturers and platform providers disagree on the prospects for kits. “We’ll see heavy kit sales continue for a while,” predicted Margold. He said that when he visits operators, he observes many old CD machines sitting in warehouses. In many cases it is because “no smoking” laws hit a town and the bottom third of locations closed down, leaving these jukeboxes without a home. These machines are obvious targets for conversion kits, Margold said.

TouchTunes’s line of low-cost kits is designed to convert many NSM and Rowe CD models. These kits are built by Lou Miele of Miele Inc. (Williamsport, PA), and are sold and marketed under the TouchTunes brand.

McAllister reports that TouchTunes business is still dominated by dedicated machines. At present, the company is shipping 1,000 units per month. Of this total, 60% are floor boxes, 35% are wall boxes and the rest are kits. He believes the kit business is “viable,” but will peak sooner and decline sooner than sales of dedicated equipment.

NSM sales manager Geno Giuntoli predicts that operator demand for kits will eventually drop, though he added, “We’ll keep supporting kits as long as operators want them.” He agreed with Margold and others that the low price of today’s dedicated units and the newer components that have a longer lifespan encourage operators to buy dedicated units.

Rock-Ola’s John Schultz believes that kit sales will never entirely end, but that they have already passed their peak and are beginning to decline. He also thinks that tens of thousands of CD jukeboxes will remain on location for years to come, maintained by a class of operators who guard their privacy and independence – and who flatly refuse to take on a third- party partner in the form of a music supplier and platform provider who knows their location addresses and can read every penny of income.

In contrast, Ecast’s Cooney said, “I think kits will keep selling because operators love them.” CD conversion kits have accounted for nearly half of all shipments of Ecast-powered jukeboxes in the past year, he said. The availability of kits has driven digital adoption by operators. “The ROI was so compelling, they could not sit on the fence any more,” Cooney said.

COMPETITION: OTHER MEDIA

The notion persists among many industry members that so-called iPod nights are a big-city phenomenon, perhaps even confined to New York, Chicago and Los Angeles.

This belief contradicts findings published in a survey of the jukebox industry completed in summer of 2006, which was undertaken by two professors from the University of New Orleans at the behest of the Amusement and Music Operators Association and the performing rights societies.

The UNO study found 28% of locations nationwide – including those in rural areas – have some form of digital music competing against the jukebox. These competitors include iPods, digital background music systems and satellite radio.

As the iPod marks its fifth year in the market – with 70 million units sold to date – jukebox manufacturers and platform providers are keeping a careful eye on trends in the larger consumer music field.

“I think Steve Jobs of Apple is one of the most influential people on our industry in a long time,” said Barden Entertainment president Joe Pankus. “He has revolutionized music distribution, and I think dissemination of music in the coin machine industry must also change.”

Rowe’s Margold quoted the words of one operator who admitted, “for the most part, if iPod nights or karaoke or satellite music are eating into jukebox earnings, it’s our own fault. If we’re providing the service we should be by promoting our products, then we’re helping bring traffic into locations and we are not threatened.”

Several manufacturers admitted to some concern about a small but significant trend toward fly-by-night operators using illegal MP3 adopter kits to play unlicensed digital music in converted CD jukeboxes. (See sidebar.)

MUSIC’S MEDIUM

Recent sales statistics from the Recording Industry Institute of America and the International Federation of Phonographic Industries show CD shipment volumes continue to drop 6% to 10% each year, both U.S. and worldwide, while digital music sales continue rising steeply.

But legitimate sales of legitimate music are not increasing enough to make up for the volume of lost CD sales, and some experts believe 90% of all downloaded music worldwide is still “free” (illegal) file-sharing.

Considering that 1,200 music retail stores closed in the last year, VT asked the industry’s jukebox manufacturers and platform providers: Do you expect CDs to disappear?

“Absolutely,” is the uncompromising answer from Barden’s Pankus. This prediction has particular resonance coming from him, since 20 years ago he led the introduction of CDs into the jukebox industry as president of Seeburg.

“What is happening now with CDs is what happened in the late 1980s with 45s,” Pankus said. “At some point I think CD is a format that will ultimately disappear, or at least become collectible items on a shelf – but I don’t know when. I did not expect 45s to disappear as fast as they did. It is a question of the record labels deciding profitability has vanished; once that happens, everything changes.”

Pankus also predicted that once labels stop issuing CDs, some specialists will continue to offer CD content as was done with 45s. But, he said, consumers will not need CDs because they can bring iPods virtually anywhere.

Rowe’s Margold said he does not expect CDs to disappear in the next 10 years because there are too many automobiles and homes with CD players. “ If somebody does buy a CD jukebox today, he’ll be able to update music and put new CD releases on it for the next decade,” Margold predicted.

NSM’s Giuntoli also belongs in the camp that sees a long, healthy future for compact discs. “I don’t think the CD will completely die off,” he said. “Broadband still can’t reach all areas of the U.S. market. When the CD first arrived, it was several years before 45s exited coin-op.”

Rock-Ola’s Schultz is more guarded about the future of CDs. He thinks the major labels possibly could abandon them in the next few years, but said, “I don’t have a real good crystal ball on that.” Rock-Ola ended production of CD jukeboxes as of September 1, citing lack of operator demand.

Ecast’s Cooney said the fate of the CD will be a much different milestone than the demise of the 45 because it represents much more than a shift from one physical medium to another. Instead, he said, the shift from CD to digital represents the disappearance of any physical entity whatsoever.

Based on this fact, Cooney agreed with Margold that CDs “won’t disappear anytime soon,” because the current generation of consumers is still more comfortable with physically packaged media.

“I think it will require a generational turnover before most consumers are willing to give up CDs,” Cooney said. “My sons don’t know music as anything but a digital file.”

Cooney thinks that the generational shift will occur in about five years. “When it finally does take place,” he said, “the CD will be dead. In five years we will see the establishment of mobile broadband supported by WiMAX, which means totally nationwide coverage, available at consumer-friendly prices for mobile phones. That will speed up the day when physical software becomes outmoded.”

TouchTunes’s McAllister foresees that digital music itself is facing a revolution of sorts: a revolution of pricing and the sales model. For once, it appears the jukebox industry is ahead of the consumer market where this issue is concerned.

“Eventually, the sales of iPods and other personal digital music players will fall off,” McAllister predicted. “At that point, the industry will have to make money on sales of digital music, not $500 digital players. The only way I can see it happening is if they adopt the subscription format. That is what we basically are with jukeboxes, even though we do it as a percentage of revenue.”

View’s Caviglia agreed with Cooney that the future of media is largely a generational issue. “If you look into the file-sharing market, it goes deeper by age group as you explore the habits of younger and younger consumers,” he said.

CLOSING THOUGHTS

Facing a troubled music industry in a decade-long shakeout and a jukebox industry that is the healthiest it has been in decades, manufacturers and platform providers offer a carefully mixed assessment of the future of pay-for-play musical entertainment.

All agree that the business model has changed, not just because of technology, but also because labels have demanded song-by-song accounting – and because content providers are thereby obliged to participate in the cashbox.

According to McAllister, this has created a de facto partnership between operators and manufacturers that is good for both. “We still have to do a huge amount of R&D to keep evolving our products and services to keep up with market demands,” he said. “Having the manufacturer as a partner is good for the operator, because never before has the manufacturer had a direct incentive to ensure their product continues to make good money.”

This year, TouchTunes’s music and service revenues will top $40 million, he said. “This is what lets us fund R&D and pay for licenses, which are both expensive,” he said. “We wrote almost $15 million in music service checks this year.”

But even paying high license fees through a single source – the music content provider – has generated a direct benefit to the entire jukebox business, McAllister pointed out. “We are finally on the radar of the music industry again,” he said.

According to McAllister, 45s and CD jukeboxes fell off the music industry’s radar screen for decades because it was too difficult to calculate what percentage of the music label business went into that medium, or how many sales of 45s or CDs were spurred because people heard a song they liked on a jukebox.

“Now, when one company writes them a $15 million check, they pay attention,” he said. The reason that subsidizing jukebox sales works so well for the industry is that we all win. The manufacturer gets a long run of predicable, recurring revenue. So does the operator.”

Rock-Ola views broadband jukeboxes as the heart of a growing suite of products and services that provide audio music, music videos and advertising.

“Today’s jukebox is a revenue producer that brings more people to the locations,” said Rock-Ola’s Schultz. “If more operators fully understood what the digital jukebox does to boost play on every machine in a location, not just the music revenues – and if they understood the potential of the jukebox to become an even more versatile and dynamic platform, building on change-capable technology – then more operators would be as excited as we are about what’s going to happen with jukeboxes in the next few years.”

Acccording to Ecast’s Cooney, the biggest challenge for the jukebox market is generating location demand. “So far, many operators have relied on location demand rather than generating it,” he said. “There is lots of money waiting to be made, but operators must drive the adoption of digital music in more locations. If they don’t, we all risk another digital technology replacing the operator and the jukebox manufacturer alike.”

In an era of rapidly proliferating entertainment media of all types, Barden’s Pankus stressed that operators have a greater need than ever for a committee of “wise men” who can evaluate new technology and assess its potential impact on the industry.

“When we debuted the CD jukebox, voices from the sideline proclaimed that 45s will be here forever,” he recalled.

The industry also needs to pay for and utilize more statistical data about its customers and their habits, said Pankus. He pointed to the recent AMOA-UNO survey that indicated more than 50% of responding operators wanted to put advertising on their equipment.

“But there is no anticipation of any data coming out saying who that coin-op patron is, or where they are, or how many eyeballs might see the advertising,” said Pankus. “No demographics. You’ve got to have that statistical data if you want to get into these new revenue streams.”

View’s Caviglia concluded on a hopeful note, suggesting that digital music could possibly break out of the tavern, bar and lounge location base, where it has largely been confined for decades, and find a new market in locations that serve younger patrons.

“I keep wondering if there is a market for digital music among younger kids, places like pizza parlors that didn’t succeed with CD boxes,” he said. “We’ve seen youth festivals where a rented digital jukebox was very popular with the kids. A $120 per week music account on my route – a pizza joint – is now earning $250 or even $300 a week from a digital jukebox. The employees play it and all the kids think it’s cool because they perceive it as Internet-based.”


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