CMU Trends Labels & Publishers The Great Escape 2016

Trends: The physical market in 2016 – who the hell is buying all these CDs?

By | Published on Monday 20 June 2016

Physical Market

In the final CMU Trends report based on presentations given by CMU Insights at The Great Escape this year, CMU Business Editor Chris Cooke looks at the physical market, and why CD sales remain healthier than we might have expected by 2016.

For years now, the conversation in the recorded music market has been dominated by the growth of digital, and of late the specific growth of the subscription streaming services. This is unsurprising, given that record companies need to embrace the business models that will dominate in the future, while the industry at large wants to be seen to be innovating, putting behind it the ‘luddite’ reputation that the sector – and especially the majors – got themselves in the early days of the digital revolution.

Yet, this narrative sometimes gives the impression that record industry revenues are now wholly digital, and have been for some time. When, in fact, on a global basis it is only in the last couple of years that digital has started to out perform physical overall, and a stand out figure from the 2015 stats from the International Federation Of The Phonographic Industry was surely that 39% of income is still coming from physical.

It is tempting to assume two things about that stat. First, it’s all about the vinyl revival. Second, it’s all about Japan and Germany. Yet the vast majority of those physical sales are not vinyl records, but compact discs. And while it is true that the Japanese and German markets – which are 75% and 60% physical respectively – do skew the global figures, CD sales remain significant in many other markets too. Including the UK, where physical accounted for 44% of revenues last year.

Now, there are some other things to note about these stats. First, when the record industry reports its physical revenues, the figures tend to include the income that is immediately passed over to the music publishers in mechanical royalties. Whereas with digital, because – with just a few exceptions – the digital platforms rather than the labels pay the publishers their cut, the monies reported are just the labels’ share. And, of course, these are revenues rather than profits, and digital is more profitable than the sale of CDs and vinyl.

Nevertheless, physical sales remain significant in multiple markets. And while download sales tank, the decline in CD sales is actually softening in many countries. For those in the industry who long rejected physical formats as consumers themselves, these stats pose the question: who the hell is buying all these CDs?

Again, it’s tempting to make an assumption here. It must be old people, right? Though, while it is true many of the big physical releases are from mainstream pop or heritage artists, research from the Entertainment Retailers Association suggests it’s not as simple as saying its just ageing consumers that are helping CD sales stay higher than many would have expected by this point in the digital revolution. And most retailers will confirm that there are CD buyers among younger demographics too.

So who is buying CDs and why? For The Great Escape this year, we considered a number of factors which seem to be helping physical sales and then asked: will these factors remain in play for the long-term or are they now on the wane? Meanwhile, how can the record industry better manage the decline of the CD to assure all opportunities are pursued, and what is the long-term future of physical products in the recorded music market?


In-car listening
Most people agree that in-car listening has been a key factor in CD sales in recent years. The car industry is, of course, now embracing the digital entertainment experience, installing net-connected dashboards and proprietary digital platforms into higher end vehicles as standard.

However, innovations in the car industry take significantly longer to roll out compared to home and portable entertainment devices, with consumers replacing their vehicles relatively infrequently, and a significant portion of the population buying second-hand.

Indeed recent research done by SBD for the BPI and ERA reckoned that new car sales typically represent less than 10% of vehicles on the road, meaning it will be some time yet before these in-car digital entertainment systems have decent market penetration.

Of course, there is the middle ground of smartphones being plugged into in-car stereo systems, which means consumers don’t need to afford to buy vehicles with the latest digital entertainment platforms in order to listen to MP3s or streams in their cars.

However, the simplicity of the compact disc in-car remains attractive to many, to the extent that – according to the aforementioned SBD research – CD players are likely to continue being installed into at least 50% of new cars for at least the next five years, and “the compact disc is likely to remain part of our in-car listening experience for many years to come”.

In-car listening may also explain why some younger consumers – who you might otherwise expect to be fully digital in their music consumption – are still buying some CDs each year, given that this demographic is much more likely to be driving older, cheaper cars where the trusty CD player is more attractive.

It’s probably fair to say that, for many, digital gifting remains an unsatisfactory proposition, though possibly more in the eyes of the giver than the receiver.

Nevertheless, there is definitely a segment of consumers who prefer to give and/or receive physical entertainment products for birthdays, Christmas and other special events, rather than vouchers, emails or a verbal promise of digital good times to come. Which is why Quarter Four continues to be so important for the entertainment industry at large, and especially entertainment retail.

Some digital services have attempted solutions here, by providing physical cards or print-out certificates that gifters can hand over to receivers on the special day. Though there is probably more that could be done here, for example high-quality artwork, books or other merchandise linked to digital content, unlocked with some sort of code, or indeed similar physical products that come with a streaming subscription attached.

CDs as box of MP3s
One of the reasons why people could continue to gift CDs to digital music fans was the ease with which content could be ripped from disk onto digital device – which is to say, for digital consumers a compact disc could be viewed as a box of MP3s.

At the outset of the digital revolution, the ease with which CDs could be ripped (even though, in the UK, such ripping is technically copyright infringement) was one of the big challenges for the record industry.

In the past, new music formats had been good news for the music industry, because they meant labels could re-sell catalogue in the new format. But in the early days of MP3, many people built digital music collections by simply spending a weekend ripping their entire CD collection, handily deleting any of the tracks they were never that keen on.

The flipside of this, though, was that it didn’t matter if a digital music consumer was given a CD as a gift, because they could quickly convert the music into their format of choice. Meanwhile, some digital music fans continued to stock up their MP3 collections by buying and ripping CDs, especially where discounting made this a cost efficient way of acquiring music.

Though, you have to think, this factor has to now be on the wane. Partly because people are now buying computers without CD drives, or relying more on smartphones and tablets which never had them. And partly because, as the digital market shifts from downloads to streams, and from sales to subscriptions, then less consumers will be interested in acquiring a box of MP3s.

There are more high street sellers
This is definitely true in the UK, where figures from the ERA in recent years have been impressive. According to the retail trade group, 14,727 stores are now selling CDs and/or vinyl in the UK, and the number of sellers of physical entertainment products is at all-time high.

Of course, these impressive stats are because there are now many more non-specialist retailers selling CDs and DVDs. Although there does seem to be a little more stability in entertainment retail now than during the 2000s, there was a huge downsizing of specialist music sellers during that decade. And, unlike the specialists, the supermarkets, fashion retailers and others who now sell CDs will generally stock a much smaller selection of releases.

But, for more mainstream consumers, and therefore for more mainstream artists and heritage acts, the fact there are more shops than ever stocking CDs – and promoting impulse buying – will be contributing to the healthier than expected physical sales.

The aesthetic and the attraction of permanence
It seems fair to argue that, while all the above-mentioned factors may be relevant in 2016, they are probably going to become less significant as the years go by. However, this one could be a more long-term factor.

For many consumers, the aesthetic of physical music formats – which is to say, the wider product and the way it looks and feels – is attractive, especially where [a] the packaging is visually and/or intellectually stimulating and [b] where the consumer feels a close affinity to the artist and/or the music.

There is also the attraction of permanence. Even more so as digital consumption moves to streaming over downloads, physical gives the consumer the feel that they have the music they love for life, and not just as long as their current subscription is valid. While research generally shows ownership and permanence are more important to older consumers, many retailers report that with core music fans, many younger customers find these features attractive too.

These factors are in no small part responsible for the vinyl revival, though they also apply to CDs as well, and could be key to the future of the compact disc as a format. Which means labels should probably be thinking much more about the look and feel of their physical releases – artwork, photography, liner notes – things that some record companies have put a lot less effort into since the rise of digital.

Multi-channel listeners
One final factor behind the continued success of physical is that consumers are not necessarily either/or when it comes to CDs and vinyl versus digital. And this is all the more true as the digital market itself shifts from downloads to streams.

Which is to say, research suggests that a portion of subscribers to streaming services continue to buy CDs or vinyl, and they are much more likely to do this than they are to buy downloads alongside their subscriptions.

In recent AudienceNet research for BPI and ERA, 66% of those surveyed considered themselves ‘multi-channel’ listeners, which is to say they are both subscribers to digital services and purchasers of physical releases. And 69% agreed with the statement: “I stream to discover music and see what’s popular, but when I come across something I love, I like to buy it”.

No one expects the physical-to-digital shift to suddenly stop or turn round. However, it is clear that – in a number of key markets – CDs sales remain much stronger than we perhaps would have expected by 2016. Which means labels shouldn’t assume that there are no longer any opportunities in the physical market, for new as well as catalogue releases. Though it will, of course, depend on artist and fanbase.

Now, if physical increasingly becomes a complementary product – so consumers are buying CDs and vinyl as well as subscribing to streaming platforms – you might wonder why bother with the physical, given the costs, hassle and risk that come with such formats. But vinyl has become a premium product with a decent profit margin, despite the higher production costs, and CD will likely follow suit.

Which means in the short-term labels need to do a tricky balancing act. Some clever pricing strategies could result in extra sales now – of both new and catalogue releases – to those for whom CD is attractive for gifting, in-car listening and/or as a box of MP3s, or who may impulse buy from the large number of non-specialist retailers selling CDs on the high street.

But the future is likely more about selling higher-end physical products to core fanbase, where the aesthetic and permanence is the attraction. This will require more investment in artwork, packaging and liner notes, but with the kick back of higher profit margins.

Direct-to-fan channels – which may increasingly require labels to treat artists as retailers – are almost certainly key here, as are pre-order campaigns which can reduce the risk. Though, there is another tricky balancing act to be perform here, in that specialist record shops remain key partners for reaching core music fans in general – rather than the core fanbase of a specific artist – and for those retailers direct-to-fan is fast becoming the biggest threat.

But what seems clear from the stats and the research, is simply giving up on physical releases would mean a lost opportunity for the record industry which – if able to perform these balancing acts – could assure a healthy second income stream from CDs as well as vinyl even as subscription streaming services become the dominate revenue generator overall.