Business

Strong CD sales despite Napster

By now, everybody's heard how the music business is under attack from digital piracy and song-swap company Napster Inc.But despite the explosive growth of Napster's free service, which has amassed 20 million users, sales of albums are strong and record labels have even raised prices, which are being passed on to willing consumers.

Written by ZDNet Staff, Contributor July 28, 2000 at 12:48 p.m. PT

By now, everybody's heard how the music business is under attack from digital piracy and song-swap company Napster Inc.

But despite the explosive growth of Napster's free service, which has amassed 20 million users, sales of albums are strong and record labels have even raised prices, which are being passed on to willing consumers.

"We're having a good year. The economy is good. There's a lot of strong releases," said Sue Bryan, general manager of music and video for New York retailer J&R Music World.

U.S. sales of albums are up about 8 percent to 381 million units year-to-date and record labels are poised to ship more than $15 billion in albums this year, industry data shows.

Price hikes, to boot Further underscoring strong demand, music fans are now paying as much as $18.98 for hit albums in major retail stores, up from $17.98 a few months ago. And more and more albums are coming out at these prices, industry sources said.

While new hit releases from superstars like Britney Spears may still be initially discounted at about $13.99, those discount prices are also higher than they were a few months ago, when they averaged $12.99, industry experts said.

These price increases have also come in spite a move in May by the U.S. Federal Trade Commission, which curbed record company deals that restricted stores from advertising discounted CDs. The FTC settled a suit with music companies it said had paid stores money to advertise certain CDs in return for mentioning the list price in ads. The FTC said the settlement would save consumers millions of dollars monthly.

But retailers disagreed. "The FTC's statement could mislead the American public to conclude that CDs should now be sold at or below the cost of what the retailer actually pays for them," said Pamela Horovitz, president of the National Association of Recording Merchandisers (NARM).

Strong year, despite forecasts With industry watchers having all but written obituaries for brick-and-mortar outlets due to the emergence of Napster, which lets fans swap songs by trading MP3 files, a compression format that turns music on compact discs into small computer files, music retailers are in fact having a strong year.

"We are very pleased that strong sales and continued gains in gross margin produced results that beat last year and were well ahead of estimates for the quarter," said Jack Eugster, Chief Executive of Musicland Stores Corp. on Wednesday after the company reported second quarter results.

Musicland, which operates over 1,300 stores including Sam Goody stores, beat analysts' estimates with earnings of $1.7 million or 5 cents a share. Analysts had forecast it to lose 4 cents in the quarter. Sales totaled $402.5 million.

Analyst: Retailers undervalued Bank of America Securities analyst Thomas Tashjian thinks retailers like Musicland are undervalued. Its shares stood at 7-3/4 at the close of business on the New York Stock Exchange, down 1/4 on the day and below the 52-week high of 11-3/16. It's lowpoint for the past 12 months was 5-14/16.

"The company's valuation has been significantly discounted by investor concerns regarding the Internet, and has largely ignored the company's successful repositioning and strong earnings improvement over the past year and a half," he said.

Indeed, results like this may prove pivotal next week at a hearing in U.S. District Court, Northern District of California San Francisco Division, when a judge may rule on whether or not to temporarily shut down Napster.

The Recording Industry Association of America (RIAA), representing all the big record companies, is seeking a preliminary injunction against Napster, which it says promotes piracy, particularly among young people who avidly buy music.

Napster argues its service exposes its users to music and actually helps sales. "In just over a year, Napster has attracted a community of more than 20 million music fans who are sampling music, discovering new artists, buying CDs and sharing their passion for their favorite artists in our chat rooms," Napster Chief Executive Hank Barry said.

Could've been better? For Napster to be slapped with an injunction, lawyers said the RIAA will have to show Napster's users are infringing copyrights and its service has caused irreparable harm to record companies, which may be tricky in the current market.

But RIAA attorney Steve Fabrizio said in copyright cases, once the plaintiff has shown a likelihood of success regarding its copyright claims, the court doesn't need to look beyond that, because irreparable injury is presumed.

"Sales are up, but given the historically strong economy, nobody knows how much higher they would have been without services such as Napster. And among the college demographic, which is both a key buying demographic and a key Napster demographic, sales are flat or down," he said.

The Recording Industry Association of America (RIAA), which represents big record companies, like Seagram Co. Ltd.'s Universal Music, Bertelsmann AG's BMG, Sony Corp's Sony Music and Time Warner's Warner Music Group and EMI , first sued Napster in December.