Your Music Lawyer :: Views ... On My Mind (Off My Chest)

Sales Rise, but Industry Is Still Wary
By Chris Nelson
The New York Times

For the last three years, bad news about the music industry has been as steady as a synthesized drumbeat. But a turnaround that began quietly last fall has become unmistakable with the success of Norah Jones's new album, "Feels Like Home." The CD, which recently sold more than a million copies in its first week in stores, helped extend a nearly consistent five-month string of industry growth, as measured by weekly sales compared with year-earlier periods.

So why are so few people in the music world ready to celebrate an industry comeback?

"The past four or five months has turned the predictive ability of all of us on its head," said Michael Nathanson, an investment analyst with Sanford C. Bernstein & Company who specializes in the music business. "I think people are holding their breath."

Although executives at some music labels and retail outlets are proclaiming a turnaround, much of the industry remains clouded by uncertainty. The planned merger of the music divisions owned by Sony and Bertelsmann is awaiting regulatory approval, for example, while Time Warner's music group is still ironing out details of its sale to an consortium of private investors.

And certainly the uptick in music retail sales since last September has not been enough to keep the parent company of the 93-store Tower Records chain, MTS, from filing for bankruptcy protection. Meanwhile, while song sales on iTune and other licensed downloading services are growing, unauthorized song swapping on the Internet still outnumbers paid downloads more than a hundredfold. Last week the recording industry's trade group sued 531 additional computer users, accusing them of illegally trading music files.

"We're still suffering as an industry," said Monte Lipman, the president of Universal Records, whose artists include the rapper Nelly and rock group 3 Doors Down.

And yet, it has been hard to ignore signs of a rebound. First-week sales of Ms. Jones's new album were only part of the industry's good news for seven-day period that ended Feb. 15. Through that period, the most recent for which data are available, album sales for the beginning of 2004 were up 13 percent from the comparable period of 2003, according to Nielsen SoundScan, which tracks music sales.

It was the biggest Valentine's Day sales week since SoundScan began operating in 1991. And it was also the first week ever in which downloaded song sales topped two million.

Several factors are at work in the rising sales figures, Mr. Nathanson said. For starters, by the end of 2002 and the beginning of 2003, CD sales had dropped so significantly that they were easy to top. This year's growth of 13 percent for the first six weeks compares with a decline of 3.6 percent in the corresponding period last year.

Last fall also benefited from a strong release schedule, with albums that became hits from the rappers OutKast and Ludacris; the pop singers Ruben Studdard, Rod Stewart and Josh Groban; and the rocker Sheryl Crow. Price cuts have also helped; some major-label albums now sell for closer to $10 than the nearly $20 that was formerly the industry standard.

Artists who appeal to music-buying baby boomers - like Ms. Jones; Mr. Stewart; the former Doobie Brother, Michael McDonald; and the retro-crooner Harry Connick Jr. - continue to contribute a significant portion of overall sales. And Universal, for one, is hoping boomers flock to CD's due this year from Stevie Wonder and Elton John.

The success of "Feels Like Home" by Ms. Jones, the follow-up to "Come Away with Me," her 2002 debut album, which sold eight million copies, bodes well for the industry, said Bruce Lundvall, the president and chief executive for jazz and classics at EMI Music, which owns the Blue Note label on which Ms. Jones records. Until recently, "there's been an awful lot of trash out there,'' Mr. Lundvall said, "and I think a lot of people are disenfranchised."

While the music labels have tended to blame Internet music sharing and CD copying for the slump of the last three years, the industry's critics have cited high CD prices and substandard music as the real reasons that annual album sales fell to 687 million units by last year, down by almost 100 million units, or 12.5 percent, from 2000.

Whatever caused the slump, it has forced the industry to try new marketing tactics, said Will Botwin, the president of Sony's Columbia Records Group. Columbia, for instance, sought to stoke demand for Mr. Connick's recently released "Only You" by first issuing a Christmas album, "Harry for the Holidays," in October. That was a reversal of the time-honored strategy of issuing Christmas collections to ride the success of recent hit albums. In the first two weeks after its Feb. 3 release, Mr. Connick's "Only You" sold 360,000 copies in stores.

The industry's big challenge, though, is still unauthorized online trading of music files. Even as download sales through Web stores like as iTunes are increasing, so is the number of people who illegally share music files, according to BigChampagne, which tracks file swapping. At the end of 2003, the most popular services for unauthorized file sharing had 5.6 million users, compared with 3.93 million a year earlier, a spokesman for BigChampagne, Eric Garland, said. Those users are now illegally trading about 250 million songs each week.

Although there is no hard data to support their view, music labels and retailers say that legal action taken against computer users accused of illegal song swapping has helped drive people back into stores for music. When the Recording Industry Association of America filed its first round of suits in September, it received a raft of bad publicity. But two rounds of litigation so far this year against more than 1,000 computer users have prompted little public outcry.

"People are over this, 'I should get my music free,' " said David Munns, the chairman and chief executive of EMI Recorded Music North America. "I think there's a tide turn in the American psyche on that." With the industry insisting that piracy remains a serious enough problem to warrant lawsuits, it might not make good public relations sense for executives to crow about a turnaround in sales.

And music specialty retailers, for their part, know that general merchandisers like Wal-Mart and Target are cutting into their earnings. Michael G. Spinozzi, the senior vice president and chief marketing officer at the Borders Group, the big record and book retailer, acknowledged the effect the big discount retailers were having. But he added that record companies could drive sales up across the board if they devoted more resources to developing new talent instead of relying on back catalog sales.

Recording executives realize that it will take more than a Norah Jones album to bring stability back to the industry. That is why, in the months ahead, executives will be closely watching the public's reaction to albums from Janet Jackson, Avril Lavigne and the Beastie Boys, among others.

"The sense from both labels and retail is a desire to be cautiously optimistic," said Rob Sisco, the president of Nielsen Music, which operates SoundScan. "And I can understand that because we're coming off of very severe times."