Rock and the Hard Place
Records Become a Commodity and Face Real Estate Prices and Profit Margins
One of the biggest problems the record business faces, besides letting people know that their product exists at all, is actually getting that product to the people who might want to buy it. The quandaries facing record retailers get more difficult daily. As with so many of the problems within the music business, `doing things the way we always did it` creates far more static than it clears up. Change never comes easily, but failure to change can cause disaster. While retail uses a more recent business model than, say, the record companies, the model has remained largely the same for over half a century.
In the early part of the 1950s, the main buyers for sound recordings weren't stores. Record salesmen made the bulk of their money servicing the owners of jukeboxes. There were over 300,000 of them, each held 50-100 singles, and the machines went through the popular discs pretty quickly.
In those days, before big stores carried large inventories of music, people would buy their records at variety stores, musical instrument stores, appliance stores, and the like. The records would sit in racks—at the appliance store, they'd put them next to the phonographs. This gave the salesmen who serviced these stores their appellation—`rack jobbers.`
Sam Gutowitz didn't even get serviced by a rack jobber. In the years prior to World War II, he ran a novelty and magic shop in downtown Manhattan's financial district. In the 1930s, as radio began its ascendancy as the entertainment medium of choice and the Depression had the world in a choke hold, the record business took a dive just like the bankers in the area surrounding Gutowitz's store—falling from a high of $105.6 million gross sales in 1921 to $5.5 million in 1933. So when a customer walked into the store and asked whether Gutowitz had any records, Gutowitz was surprised. `I thought [records] had gone out with the dodo birds,` he would later recall.
He remembered actually stepping on a glass-and-lacquer 78 in the basement of his Washington Heights apartment building, so he told the guy to come back in a couple of days. He negotiated a deal with the building superintendent—the pile of records for either a can of beer or three cigars (the story would change with the telling)—cleaned them up, and resold the stack for $25. Like so many before him, Gutowitz realized the joys of music. `I said to myself, this is a beautiful business. What am I doing wasting time with toys and novelties?`
Seeing that records were a hot commodity, he got a good deal on some singles that had previously done time in jukeboxes, so he started stocking and selling them. These recordings1 did so well that he moved his shop to Midtown, settled on 49th Street, and opened a store using a nickname he'd acquired as a kid, Sam Goody.
Goody's name now hangs over the front doors of hundreds of record stores around the world. His adventures in record retailing make a good study, as he led the way in discount record retailing and came to epitomize the business. He lived the ups and downs of record retail and the music business in general, as he represented the business's ultimate goal—selling records.
Goody began selling records using merchandising techniques common to the novelty market but heretofore unheard of in record retailing. In the late 1940s, he saw the future in vinyl LPs. One of the staunchest advocates of the LP in retail, he once gave away 40,000 turntables that operated at the new microgroove speeds—33.3 and 45 rpm—one to anyone who bought $25 worth of LPs. He lost money in the short run, but recognized it meant he had 40,000 new customers.
For his next major merchandizing maneuver he marked all his new LPs down 30 percent off retail list price. He could sell a 10-inch long-playing disk that listed for $3.98 at $2.80. Since he bought disks for $1.85, he still made nearly a dollar on everything that he sold. By keeping his overhead to 15 percent, and carrying 300,000 LPs, Sam Goody made his record store into a sensation, hosting 4,000 customers a day. By 1955, Goody's store accounted for 7 percent of all U.S. LP sales, grossing close to four million dollars that year.
Wal-Mart Tippers the Scales
Specialty record stores—even the huge chains such as Tower, Trans World, or Musicland—pale in penetration when compared to Wal-Mart. With more than 2,300 locations around the country, the huge discount department store often represents the only choice people have to buy records within an hour of where they live, particularly in rural areas. Since the mid-1990s, Wal-Mart has sold more pop music than any other retailer in America, accounting for around 52 million of the 615 million compact discs sold per year on average. Not bad for a store that stocks records as a part of a mix that runs from pillowcases to shotguns.
Not only does Wal-Mart sell the most records of any retailer in America, but often it sells them cheapest, too, which makes sense: get a customer into the record department (usually in the back of the store) and maybe he or she will buy a toaster, a tractor, a television, or some towels as well. For a department store, margin cuts both ways—it's willing to gamble on a slight loss on a product to lure customers in to buy higher-margin items. Records are the classic loss leader.
But Brian K. Smith of Value Music Concepts explained the downside:
For the sake of a possible big first-week ranking, some frontpage flier exposure, and power-aisle placement (next to the greeting cards or candle rack), the labels have sold their souls to a sector that has not developed an act, will not develop an act, and has no desire to develop an act. All the [high-volume department stores] care about is loss-leading and add-on transactions, and they do not care where the add-ons come from. In the process, the labels have allowed their product to be devalued in the eyes of the consumer thereby creating a situation where the traditional players look like thieves for expecting the same margin on sales as the [department stores] get—only we have to do it without the benefit of a lawn-and-garden department.
In addition to marketing its store brand as a place for bargains, Wal-Mart takes great pains to promote and maintain an image as a `family` store. In certain areas, the local Wal-Mart serves as a social center. Even where I live, in an exurb-cum-suburb of New York City, one of the larger religious communities in the area uses the local Wal-Mart as a place to get together, schmooze, and, of course, shop. It even has elements of a pick-up bar—I've seen dates made by people who meet there.
`Our customers understand our music and video merchandising decisions are based on a common-sense attempt to provide the type of merchandise they might want to purchase,` a Wal-Mart spokesperson explained.
And what type of merchandise might they want to purchase? The answer is actually more what they don't want to purchase, or perhaps what Wal-Mart doesn't want to sell—entertainment with curse words, nudity, or violence—in short, no CD conveniently decorated with a `Parental Advisory Warning` sticker, otherwise known as `Tippa Stickas.`
Which brings us to a point where we need to back up. The sticker itself is a bit of `self-policing` by the record business; it resulted from an accident that started an avalanche. The controversy over the lyrics in popular music and what's appropriate family entertainment made for some of the most entertaining moments in congressional history, but bloomed into one of the record business's worst cases of agita and angst.
The simple beginnings involved an Ohio family named the Alleys, who liked the song `1999` from the Prince album of the same name. So one day in 1984 (how appropriately Orwellian), Mrs. Alley went to the store and bought a copy. So far, the record business approves and everybody's happy.
A Voyage Down the Amazon.com
Fortunately, there are alternatives for those who cannot get to a record store besides Wal-Mart but don't want the expurgated version of their music. The age of McLuhan has arrived, we live in a global village, and anywhere in the world you can find an Internet connection, you can access one of the dozens of online record retailers and booksellers.
Indeed, CDNow cofounder Jason Olim saw this need for an alternative as the main reason people would come to his online store. `Breadth of selection,` he said of his store that sold a quarter of a million different items, `is the most important thing.`
This wasn't always an option. E-mail and usegroups and other Internet (as opposed to Web) functions had been available generally since 1969, when Compu-Serv (as it was called then) went into business; however not many people were even aware of it. Modems certainly were not standard equipment for the few people who had a home computer before the 1980s, and most people who had modems had them crawling along at about 300 baud (in contrast, a modern home DSL line exchanges information at about a thousand times that rate).
The trend toward personal computers becoming truly personal had only slightly improved by 1998, when home computer penetration in the United States was a mere 42.1 percent, and of those a scant 26.2 percent had Internet access. It took until 1993 and the advent of Mosaic (a forerunner of Netscape) to move the Web out of the hands of solely the geekerati and into the realm of technological early adapters. Where previously navigating the Web involved `knowing the code` of Universal Resource Locators (or URLs), with the hypertext features Mosaic's graphical interface added, new information was just a mouse click away.
Within a year, the number of Web servers had risen from 500 to 10,000, and the number of netizens was doubling every few months. It didn't take long for businesses to smell money and start swarming around the Web like sharks at a chumfest. By the end of 1994, you could tour Graceland, book airline tickets, and see clips from Fox television shows online.
And, of course, buy CDs. In August 1994, 26-year-old twins Jason and Matthew Olim opened CDNow for business on the Internet. `CDNow was founded because of a disastrous search for some jazz albums after I first listened to Miles Davis,` said Jason Olim. `Unable to get good advice on how to introduce myself to the genre, I decided to build a music store that provided customers not only with discs, but also reviews, related band information, personalized e-mail recommendations, and Real Audio samples. I built CDNow to help people discover music.`
By December 1994, companies such as Geffen Records were linking their Web sites to CDNow. In addition to finding information about a record on a company's Web site, visitors could now click a button that said, `I want to buy this now,` and open up a window to that record's page on CDNow. By November 1995, 210,000 people were checking out the Olims' site every month, bringing them monthly sales of about 8,000 CDs, monthly revenues of $325,000, and monthly profits of between $20,000 and $40,000.