Disruption in the music industry

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Everyone is aware that sales of music CDs have been falling steadily for some time. Sales figures for physical albums in 2012 reveal a drop of 20 per cent, compared with the previous year. Digital sales, on the other hand, continue to grow. Despite this, CDs, DVDs and video games still represent 75 per cent of the market. This situation raises a number of issues for record labels trying to transition between the two.

The music industry is not the first sector which has been thrown into disarray by the emergence of new technologies. Newspaper publishers, for example, also found themselves stuck in limbo when switching their focus from print to online.  The challenge is balancing the declining revenue generated through the physical market with the growth of digital. Many of the business models currently employed by record labels fail to compensate for the loss of revenue from CD sales.

Optimising Supply Chain and Transforming Costs

The current scenario has created a number of challenges for both independent and major labels. One issue relates to CD jewel cases, the industry standard since 1982. These ugly cases have been in use for more than 30 years and highlight the severe lack of innovation in the industry. With polystyrene and pulp prices rising, the jewel case retails for roughly 10p per unit, making it difficult to obtain a shop ready album for less than a pound.

In addition, retailers are continuing to struggle to generate CD sales and are consequently demanding lower prices and volumes. This issue was recently highlighted by HMV announcing it was going into administration.

In these conditions how can any label hope to continue making a profit from selling CDs? The simple answer is that drastic measures need to be taken. With much of the supply chain talent and attention being shifted to the digital side of the business, there is an opportunity to make fast sweeping changes. Labels need to focus on reducing inventory costs and enticing customers to purchase margin-friendly, special packaging CDs.

Working with Suppliers

As the quantity of CDs being produced diminishes, the price for each additional round of orders continues to creep up.  A partial solution to this issue is leveraging the fact that the companies involved in the various stages of CD manufacturing are keen to develop a sustainable market. Record labels can work to cut costs through initiatives such as linking initial order quantity to reorder pricing and negotiating specific campaigns.

Making the most of inventory is another key element for labels to tackle. Innovative cost transformation procedures, including stocking components instead of finished products to increase flexibility, can greatly reduce costs. Significant savings can be also be generated by selling scrap materials and optimising packaging to reduce logistics expenditure.

Physical Sales Still Matter

With three quarters of revenue coming from physical CD sales, record labels are not in a position to overlook the format. While it is true that digital sales are increasing, CDs remain very much at the forefront of the industry and there is still a lot to be gained by investing resources and effort in developing original cost transformation practices.

While it may be farfetched to say that the unchanged design of the jewel case is the reason for the industry’s decline, it certainly underlines the lack of originality which has characterised the medium. By introducing radical, cost saving initiatives, starting with a redesign of the ugly, expensive case, record labels can build a sustainable market for the future.

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