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Music Industry: Whoops, our bad . . .

Sunday, February 29, 2004 | 08:26 AM


Oh, about that whole "Please help us, our industry is being killed by illegal file sharing? Sorry, our bad:"

"With album sales rising and the phenomenal growth of ringtones and legal downloads, plus record-breaking years for merchandising and publishing rights, it seems the death of the music industry has been greatly exaggerated.

According to recent record industry figures, UK sales rose by 4% in the first half of last year. The Publishing Rights Society reported that performance royalty collections (everything but record sales) in 2003 were the highest since records began in 1914.

In the US, Billboard Boxscore reported that the number of live music events worldwide was up by 25% in 2003 (generating £1.2bn in North America alone). Legal sales of downloadable songs topped 2m units a week for the first time last week. Apple's iTunes service has sold more than 30m songs, and has yet to celebrate its first birthday.

Moreover, the astonishing growth of the ringtone market continues to take everyone by surprise. Estimates as to its true size vary widely from a conservative £600,000 from Jupiter Research to a bullish £1.9m by the ARC Group.

And all this is happening in the age of illegal filesharing.

But hey, this doesn't mean we need to roll back all of that anti competitive legislation, do we? Its all right if we keep extending copyright far far beyond the original intent of the constitutional framers, um k? (Hey, we got a business to run).

Don't blame our legislative affairs department -- they were only doing their jobs. OK, maybe they did it a bit too well. Just because we in the music industry played Congress for a bunch of chumps, getting them to do our bidding doesn't mean that any of that needs to be undone. We bought the Congress fair and square, and are entitled to keep our ill gotten legislative plunder.

That whole P2P thing? Also our bad:

"It also looks as if digital downloads are the saviour of the industry rather than their destroyer. As John Ingham, of O2, pointed out during the debate: "When videotape came out, the film industry fought it tooth and nail. Today, video and DVD outstrips cinema."

So, despite years of executives bemoaning the death of the music industry, we are instead in a situation where people are spending more on music than ever, thanks largely to the music being available in more formats than ever.

If anything is in crisis, it is the record industry. The wider music industry is far from it."

Whoops . . .


Second sight
Sean Dodson
The Guardian Thursday February 26, 2004

Sunday, February 29, 2004 | 08:26 AM | Permalink | Comments (0) | TrackBack (0)
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Going Critical with Niall Ferguson

Sunday, February 29, 2004 | 07:42 AM

Last Summer, while flicking around the dial, I happened across an utterly fascinating Bill Moyers interview on PBS with Niall Ferguson and fellow historian Simon Schama. It was intriguing, and in many was, chilling. What I found so fascinating about it was that these two courtly conservative British scholars were sounding the alarm about the decaying U.S. financial condition, and nobody was paying very much attention.

This was in July 2003. Here it is, 8 months later, and a paper Ferguson (along with Laurence Kotlikoff) published in October 2003 is starting to cause waves. Its discusses many of the same issues which were covered in the PBS interview, only this time, its starting to gain traction amongst economists. Just this week, Arnold Kling of the Library of Economics and Liberty and Alex Tabarrok of Marginal Revolution referenced the Ferguson Kotlikoff paper.

I strongly suggets reading the full text (its only a dozen pages). To put it into richer context, read the Moyers interview with Ferguson and Schama. That frames the overall argument. If you want to read the abridged version, I put a few exercpts up here: The Triumphant Return of the British

Its a fascinating perspective, and one Americans have slowly been coming around to . . .

U.S. Power and Fiscal Over reach
National Interest, October 2003
http://econ.bu.edu/kotlikoff/Going%20Critical.pdf.pdf (PDF)

Niall Ferguson, Simon Schama interview
PBS NOW July 18, 2003 transcript
(about halfway down the page)

Sunday, February 29, 2004 | 07:42 AM | Permalink | Comments (0) | TrackBack (0)
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Radio Consolidation and CD Sales

Saturday, February 28, 2004 | 01:46 PM
in Music

Yet another comment in our continuing series as to the real reason CD sales have been slowing:

I harp on Radio consolidation for a reason. The table below explains why: Consolidation is part of the music industry's woes. Its yet another reason accounting for the slowing CD sales.

According to Edison Media Research, the most influential media impacting music consumers is radio. Amongst consumers who have purchased a CD in the past 12 months, a whopping 75% said their purchase was influenced by what they heard on the radio. Friends and family? A distant second, at 46%. Music television is third -- at least it was, back when MTV was actually playing music.

Source: emarketer

Consider this part 2 of basic lesson in simple math and economics. Radio is the dominant source impacting consumer purchases. They purchase what they hear broadcast. Due to consolidation, today Radio plays a fewer variety of artists, and airs less songs. Consumers hear less music.

You don't need a spreadsheet to figure out what happens next: Consumers buy less music. This phenomena is independent of any economic weakness we have previously discussed.

If the RIAA were smart -- and if you suspect by now I think they are not, congratulations, you've been paying attention -- they would hire a lobbyist to petition against pretty much everything Clear Channel Radio ever requests of Congress.

Perhaps the music industry may find some small salvation in Satellite Radio. This relatively young industry looks to be beyond the reach of both payola and the moralists at the F.C.C.

Of course, the century is still young, and there's plenty of time for either Satellite Radio, the F.C.C., or even the music industry to screw things up . . .

UPDATE March 2, 2004, 1:56 PM
Following our mention last week of Satellite Radio as some small potential salvation for the industry, comes this article from Monday's WSJ:

"Sirius has always touted its "pure music" philosophy and commercial-free format as an important advantage in the battle for satellite-radio dominance. XM suddenly did a U-turn last month, announcing it would make its music channels commercial-free, too. Starting this week, Sirius and XM each plan to launch local weather and traffic reports for a handful of major metropolitan areas, including New York and Los Angeles."

Amid the FCC's Decency Push, Satellite Radio Is Poised to Grow
Sarah Mcbride and Andy Pasztor,
The Wall Street Journal, March 1, 2004 1:28 a.m. EST

Good stuff.

Saturday, February 28, 2004 | 01:46 PM | Permalink | Comments (6) | TrackBack (0)
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What Will Determine the Outcome of the 2004 Election

Friday, February 27, 2004 | 06:59 AM

Simple analysis: the 2004 Presidential election will turn on economic issues -- notably, jobs.

Complex analysis: While a number of other issues will continue to get media play -- the Iraq situation, the National Guard story, Gay Marriage -- I'm not convinced that these are outcome determinative. They will very likely reinforce partisan views, perhaps moblilize one side or the other. They may impact some (but not many) swing voters. Perhaps the negative issues softens up the incumbent up a bit, and distracts his team from pursuing their own media agenda.

But none of these are unequivocably conclusive.

Tactical considerations aside, these are not the strategic issues (and I'm all about strategy) which will swing an election. More likely, these issues offset to some degree the awesome advantage incumbency gives a sitting President. But I remain unconvinced they will swing the election.

On the other hand: Two charts demonstrate where Presidential vulnerability lay. The first, from Thursday's WSJ, shows the increasing job losses in rust belt state Ohio. As much as the Dems would like to blame this on W., its part of a longer term trend going back decades. The past few years do look particularly awful, however:

wsj_kerry_fights_on_two_fronts.gif Source: WSJ

This is not the chart which will swing the election. Manufacturing jobs have been leaving the Mid-West for a long, long time. And while it probably is not a good election strategy to say, "Hey, that's global trade for ya!" -- just ask Greg Mankiw -- this is by no means a new phenomena.


Continue reading "What Will Determine the Outcome of the 2004 Election"

Friday, February 27, 2004 | 06:59 AM | Permalink | Comments (4) | TrackBack (17)
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Reluctant Buyers on Strike at Nasdaq

Thursday, February 26, 2004 | 03:01 PM

Occasionally, we can learn something profound about the nature of rallies by looking at market internals. When combined with other data, this is often revealing. Amongst other things, we may deduce the disposition of large fund equity traders, and whether they are likely to persist in their present behavior of buying or selling.

In particular, it’s possible to garner insight into the behavior of institutional fund managers. Their actions are significant: these large players are responsible for about 75% of the exchange volumes. Its been estimated that the 50 largest funds are responsible for half of all institutional trading. Whatever acuity we may have into the mindset of the professional money manager, it may reveal clues into their future behavior (if only for the short-term). Even the pros can tend towards “herd think” on occasion. The key question is, “are they buyers, sellers or mere spectators?”

A defining characteristic of the rally has been its excellent breadth. This is primarily seen in the advance/decline line, but also revealed through strong up/down volume. Starting mid-January, the character of the rally began changing. Overall volume started falling. By February, the tenor of the markets was notably different than it had been prior.

Consider the following two apparently unrelated metrics: mutual fund inflows, and up/down volume. Both of these have changed conspicuously since late January - not coincidentally when the Nasdaq made its short-term peak. Mutual fund inflows were about $17.5 Billion dollars in December 2003. That inflow spiked to $40.8 Billion dollars during January. Based upon weekly data, fund inflows are back to the sub $20 billion levels for February.

During this same period of weakening inflows, we have also observed a decrease in the day-to-day overall volume - especially on the Nasdaq. In early January, Nasdaq volume was ~1.2 to 1.4 Billion shares daily. That has weakened by 30% to around billion shares a day. This falloff in volume is acutely occurring within the Up Volume.

This suggests to us that Fund managers have gone on a Nasdaq “Buyer’s Strike.” Lighter fund inflows have forced managers to be more selective buyers, steering away from pricey tech stocks, to the benefit of higher quality issues. The new preference is for more profitable, lower P/E, dividend-yielding companies.This change reflects a maturing of the rally, perhaps into something more sustainable over the long run.

We expect the institutions to stay Nasdaq spectators for the immediate future.

This lack of buying, rather than aggressive selling, suggests that this correction is merely that: A short-term interruption within a longer rally. As such, we expect the Nasdaq to find support levels at 2000 and 1860; the SPX at 1125/1070; and the Dow at 10,450 and 9,870.

Thursday, February 26, 2004 | 03:01 PM | Permalink | Comments (0) | TrackBack (0)
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Chart of the Week: Nasdaq Support

Thursday, February 26, 2004 | 01:39 PM

NASDAQ closed right near minor resistance just above 2,020. Secondary and more important resistance for this snap back rally would occur near the 2,050 level.

Nasdaq Composite Daily Chartnasdaq_support.bmp
Source: Technimentals

NASDAQ reversed course right in and around the 2000 level. However given weak momentum and internals we would watch these levels support levels - closely any violation would exaggerate the current corrective activity.

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Quote of the Day:
"Everyone wants to make the same three things: money, a name, and a difference. What creates diversity in the Human race is how we prioritize the three.”
- Roy H. Williams

Thursday, February 26, 2004 | 01:39 PM | Permalink | Comments (0) | TrackBack (0)
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Cyclical bull, secular bear market part II

Thursday, February 26, 2004 | 04:44 AM


Some more excerpts from Technician Walter Deemer from Barron's.

Q: How do we know this is the lower high for the Nasdaq?

We know this is the high for a couple of reasons. No. 1 is that my good friend Ian McAvity of Deliberations Research has done some work comparing what he calls busted-bubble markets with the Nasdaq. The U.S. market in 1929, for instance, was a busted bubble, as was the gold market at the 1980 peak and the Tokyo market from the 1989 peak. His work shows the initial decline bottoms out approximately 2? years after the top. This time around that gave us a low in late 2002 and early 2003. Typically, there is a rally of 50% to 100% from that low. That rally usually lasts nine to 12 months. In terms of amplitude we are in line with the prior rallies and in terms of time we are a little long in the tooth. I lived through the Nifty-Fifty growth-stock era in the early 'Seventies at Putnam Management. Big growth stocks topped out in 1973, went down tremendously in 1974, rebounded in 1975 and then went essentially nowhere for five to six years, even though in the vast majority of cases the growth in earnings still came through. One of my favorite charts is a long-term chart of McDonald's from the 'Seventies and early 'Eighties. McDonald's in 1973 peaked at approximately 75, went down to 22 in 1974, rebounded to 66 in early 1976 and then went sideways for the next five years. Interestingly, the earnings continued growing throughout that decade at a compounded rate of 25% a year and the company never missed a quarter. Despite all that, by its 1980 low, McDonald's was selling at 10 times trailing 12-months' earnings, compared with selling at 75 times trailing 12 months earnings in 1973.

Q: So has this been a sucker rally?
A: In the case of the Nasdaq. But then step back and look at other areas of the market. The mid-cap and small-cap indexes are making all-time highs. They are in secular bull markets. It is like a sailboat out in New York Harbor. The wind is pushing it one way and the tide is pushing it another way. The wind in this case is the technology stocks going south and the tide in this case is the rest of the market going north. And so the tug of war is between the two forces, and how much exposure they have to the wind versus the tide tells you which way they are going.

Q: How long, then, before a break in the Nasdaq occurs?
A: It could occur at any time. I turned negative on the Nasdaq in early November and it has gone up since then. I like to be early but not that early. The question is, if the Nasdaq goes down what will the rest of the market do? I prefer to observe what unfolds from other than a fully invested position, given the fact that when the Nasdaq goes down on a short-term basis of late, the rest of the market goes down in sympathy. The sectors that have done well -- mid- and small-cap stocks have had sensational advances -- could stage a 10% correction and not put a dent in their uptrends.

Trend Spotter: An Interview With Walter Deemer
Nasdaq, which has been pacing the current bull run, is poised to tumble, says technician
Barron's, MONDAY, FEBRUARY 23, 2004

Thursday, February 26, 2004 | 04:44 AM | Permalink | Comments (0) | TrackBack (0)
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CD Sales Rise as Economy Recovers

Wednesday, February 25, 2004 | 06:30 AM
The economy slows, CD sales slow.

The economy recovers, CD sales recover.

If I am going too fast for you with this complex and sophisticated economic argument, please let me know. I can't make this explanation any simpler, but perhaps I can find some crayons or blocks for you to play with.

The simple truism above is well known to everyone outside of the music industry. For unknown reasons, the music industry and the RIAA act as if they are exempt from the business cycle. Most sectors of the economy suffer during recessions -- the exceptions are "interest-rate sensitive" groups, like Autos, Home, and Durable Goods, which benefit from the falling rates which usually accompany economic slow downs.

As we have been discussing for quite sometime now, sales of discretionary entertainment products like CDs are not an exception.

Despite the high, illegally price-fixed costs of a CD, you don't yet need to take out a mortgage to buy one. So there is simply no reason to believe that CD sales have ever benefited from a broader economic slowdown. Yet judging strictly from the public statements of the recording industry over the past 3 years, one would never have even known that a post tech-bubble recession happened from 2000-2003. They simply never mention it. The New York Times, in an article about the continued uptick in music sales ("CD Sales Rise, but Industry Is Still Wary"), never reaches the issue of the economic weakness during the past three years.

As the economy weakened, so have CD sales:

Annual CD sales
Source: New York Times

Not surprisingly, industry sales are running parallel to the broader economy.

Indeed, in the aftermath of the world's greatest speculative bubble, during a recession and a bear market which saw the Nasdaq lose 80% of its value, the sector only saw a 12% drop in sales during the same period. Its hard to undestand why music executives are wringing their hands over this; Most businesses would have been thrilled with "only" seeing their business off by 12% during this period.

Since then, we have seen an improving economy. Although consumer confidence remains shaky -- mostly due to anemic job growth -- we have seen a general improvement in spending. This has been especially true in the second half of 2003, as the hottest part of the Iraq war passed.

As the economy continued to gather strength, sales of CDs recovered. The last quarter of 2003 saw a marked marked uptick in total album sales.

Continue reading "CD Sales Rise as Economy Recovers"

Wednesday, February 25, 2004 | 06:30 AM | Permalink | Comments (2) | TrackBack (3)
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NYTimes on Job Creation: Yes! No! Maybe!

Tuesday, February 24, 2004 | 11:42 AM


In an apparent bid to completely confuse their readers, the NYTimes today has 3 separate stories on lagging job creation and the economic expansion.

The first one, in the Business section, answers the issue with a resounding No:

"Job growth is likely to remain tepid even as the economy moves ahead, according to a survey of professional forecasters by the Federal Reserve Bank of Philadelphia. Indeed, the bank said yesterday, the economists' outlook for employment has grown gloomier even as their predictions of economic expansion are becoming more robust.

Economists have been puzzled for months by the sluggishness of the employment market. The new forecast suggests that they have come to terms with the pattern established in this recovery: fast economic growth being driven by even faster expansion in productivity, with businesses meeting demand by squeezing more output from their current employees instead of hiring more workers."
The second article is decidely more rosy.

Continue reading "NYTimes on Job Creation: Yes! No! Maybe!"

Tuesday, February 24, 2004 | 11:42 AM | Permalink | Comments (0) | TrackBack (1)
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UK Protectionism for Music Retailers

Tuesday, February 24, 2004 | 11:17 AM


We mentioned recently that U.K. had record breaking CD sales in '03 -- up 7% year over year ("UK Albums Have a Record Year in 2003").

For a brief moment there, I thought the BPI (British Phonographic Industry) -- the British equivalent of the RIAA -- might have a better understanding of market forces than their foolish U.S. brethren.

[Sigh] . . . I was wrong. Two recent stories from the BBC makes it crystal clear that music execs in the UK suffer from the same sort of dementia associated with late stage syphillis all too common amongst music execs here in the U.S.

The first, "Amazon investigated over CD sales," notes the article:

"The British Phonographic Industry (BPI) is questioning whether Amazon was “selling CDs obtained outside the European Economic Area, contravening UK law.”

A BPI spokesman said: "This is a standard routine. We look at many websites to determine if the product is legitimate. If we find a net retailer is importing music from outside Europe, then they are infringing copyright law."

Many web retailers have built up their businesses by offering CDs considerably cheaper than high street shops. But there is a concern that products are being brought in from areas such as Asia, therefore bypassing import laws.

The second article, CD settlement forces prices up, notes that "An online music seller has been forced to raise its prices after settling out of court with the music industry in a row over imported CDs."

And here we just were pointing out how the UK had a more vibrant and competitive retailing environment for music than the U.S. I guess they just weren't happy with positive year over year sales increases. Let's smother that baby before sales really take off.

MY PREDICTION: U.K. music sales will do worse in 2004 than 2003.

Amazon investigated over CD sales
BBC, 8 January, 2004, 17:55 GMT

CD settlement forces prices up
BBC, 21 January, 2004, 12:25 GMT

Tuesday, February 24, 2004 | 11:17 AM | Permalink | Comments (1) | TrackBack (0)
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