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«COUNTING THE NOTES The economic contribution of the UK music business A report by the National Music Council – November 2002 Preface This is the ...»

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The Music Producers’ Guild (MPG), the UK trade association for individuals engaged in the music production and the recording professions, has around 300 members. The MPG is devoted to raising the profile of the producer in a period in which there has been a trend for more and more artists in the rock field to produce their own recordings. It has also made headway after a long campaign to allow record producers to participate in PPL income (collected for the use of sound recordings by broadcasters) which should, in time, generate considerable additional income. However there are no hard published data or research on the economic significance of record producers. Industry sources suggest there are probably around 350 full-time producers. Given the inclusion within this number of a number of exceptionally highprofile and highly paid individuals, our value added estimate for the sector is £20m.

6.4 Manufacturing

The manufacturing sector of the UK music industry comprises the plants in the UK which physically replicate/duplicate compact discs, cassettes and vinyl records, along with the associated component manufacturers such as those creating booklets, boxes and packaging, and brokers who sometimes act as the interface between smaller record labels and the manufacturers.

The most economically significant of these enterprises are CD manufacturing plants. The research company Understanding and Solutions identified 23 CD and DVD plants in the UK in 2002, and an MCPS list from May 2002 covering the much broader definition of “pressing plants”, approved for use by licensees, included 116 companies. The latter list, as well as including cassette and vinyl plants, included many very small enterprises and also brokers. Understanding and Solutions estimated that the total unit output of pre-recorded discs in the UK rose from 578m units in 1999 to 757m in 2000 and to 676m in

2001. However within this overall total which also included CD-ROMs and DVDs, the output of audio CDs remained relatively constant at around the 350m units per annum level. This figure compares to the BPI estimate of CD trade deliveries to the UK market of 259m units in 2001 and 245m in 2000.

In recent years there have substantial changes in the nature of the UK manufacturing sector. The CD manufacturing sector has seen corporate failures, as well as new entrants and consolidation by acquisition, as plants adapt to provide capacity for new formats, for which demand is unpredictable. The most significant recent development has probably been for the major record companies to pull out of manufacturing in the UK altogether. Historically the major record companies were characterised by their high degree of vertical integration, with structures including not only label activities but also recording studios, manufacturing plants and distribution companies. One step away from this, in the UK at least, came when late in 2000 when EMI closed its vinyl manufacturing plant at Hayes and sold the presses.

More significantly two substantial announcements in 2002 signalled the complete end to the majors’ manufacturing activities in the UK, when EMI closed its Swindon CD plant to concentrate European CD manufacturing in the Netherlands, and when Universal Music sold its Blackburn plant to one of the largest independent CD manufacturing groups, Disctronics.

As the compact disc has become the dominant format in the music market, demand for cassettes has fallen dramatically, with the manufacturing plants relying more and more on niche non-music markets such as spoken word and children’s tapes. However after much of the vinyl manufacturing capacity was

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6.5 Manufacture - employment and value added Analysis of the published financial accounts of 10 of the leading manufacturers, including six CD plants, for their accounting period ending in 2000 (Source - Dane - UK Record Industry Annual Survey 2001 as updated) discloses value added of £51.4m generated by 1,569 employees. Based on their relative position in the market and adjusting for the likely proportion of their output which relates to CD-Rom as opposed to audio CD activity, reasonable estimates for the music manufacturing sector overall in 2000 are value added of £98m derived from 2,800 employees.

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(a) Examples include HMV, Virgin, V-shop and MVC (b) Examples include W H Smith and Woolworth’s(c) Examples include Asda, Sainsbury, Tesco and Safeway Data for the sales charts are also collected from some mail order outlets, including those selling via the Internet. In addition to these outlets the music-retailing sector also includes a number of other independent specialists who do not participate in the chart system, as well as outlets such as motorway service stations and corner shops which include music within their product mix. Other sub-sectors not included within the table are market stalls retailing records and second hand and collectors’ record shops.

No adequate data exist on the number of these outlets. The BPI has in recent years used an estimate of 250 “Other” retail outlets, excluding the second hand sector, but the actual figure is probably much higher, given the accounts base claimed by a number of secondary distributors.

Comparisons with historic figures indicate that the number of outlets selling music products has risen significantly over the last decade, largely as supermarkets, and multiples such as Dixons/Currys have joined the industry and now that the mix of outlets within the industry has also changed. Market share is now dominated by specialist music chains, notably HMV and Virgin. These chains have expanded by adding additional outlets, operating bigger stores and extending their product ranges to include videos, DVDs, computer games, books and magazines.

Another sector which has substantially increased in recent years is supermarkets. The wider music offer by such chains as Asda, Tesco and Sainsbury has led to a position where supermarkets now have some 14.8% of the album market (Source - Taylor Nelson Sofres – Audio Visual Trak Survey 2001). Such supermarkets have tended to concentrate on fast-moving chart albums and have made it easier for casual or impulse purchasers to buy CDs. Their price-led offers have however put pressure on traditional music retailers which maintain a much wider product range and employ more specialist staff.

With the growth in significance of multiple specialists and supermarkets, the retail sectors that have become relatively less important in the sale of music products are the independent stores and also the general multiple retailing sector, which includes such chains as W H Smith and Woolworth, and hitherto Boots, who no longer sell recorded music.

Against the background of change, there have been a number of recent corporate casualties in the retailing sectors, such as the NOW and Impulse chains. The US group Sam Goody also withdrew from the market, and Our Price reconfigured around 100 of its outlets as V-shops, which include other product ranges such as mobile phones. There have however been new entrants to the market such as the US

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Other significant entrants to the music retailing market in recent years have been companies selling physical products from Internet sites. Compact discs were soon identified in the Internet boom as ideal products to sell on-line, and new companies arose to exploit this market, notably Amazon, often attempting to build market share by price-led offers. After a period of consolidation and the collapse of a number of new entrants such as Boxman, Internet retailers in 2001 commanded 4.5% of the UK album market by expenditure (Source - Taylor Nelson Sofres – Audio Visual Trak Survey) compared to 3.1% in

2000. Undoubtedly some of this growth has come at the expense of traditional mail order houses and record clubs. Whilst much of the initial attention on Internet retailing was centred around price levels, and some sites do still exist whose appeal is entirely based on low prices, the Internet has also made it much simpler to obtain more obscure and deeper catalogue items, with some online retailers offering a very wide range. The development of e-commerce has also made it much easier for individual record labels to offer their products directly to the public.

With increasing levels of price-led competition, notably from supermarkets and internet retailers, consumers have been able to benefit from falling prices for CDs in recent years. The Taylor Nelson

Sofres “Audio Visual Trak Survey” showed average album prices as follows:

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Price-led deals such as 2 for £22 for chart albums, or 4 for £20 for mid-price products have become a key feature of many retailer promotions.

Consumers have benefited from access to an increasing range of catalogue, assisted by the expansion of retailers such as HMV, Virgin, MVC and Amazon which stock in depth. However there have been significant changes in the mix of formats purchased by consumers. Whereas in 1990, 34% of album units sold were on CD, 50% on cassette and 16% on vinyl, by 2001 these figures had changed to 97%, 2% and 1% respectively. (Source - BPI Surveys). Vinyl, the dominant format by sales value until 1985, has retained a niche position in the market in the dance and collectors’ markets. The audio cassette’s decline has been rapid in recent years but attempts to establish first digital audio tapes (DAT), then digital compact cassettes (DCC) and latterly minidiscs have had little success in the consumer market for prerecorded music products. However recently digital versatile discs (DVDs) have become a significant medium not only for feature films but also for music programmes, and will almost certainly achieve a significance greater than the VHS music videos they are superseding.

Overall, the UK domestic market for recorded music has risen strongly in recent years, as demonstrated in the table below.

Table 7:2 – Value of retail sales 1992 – 2001 £ms

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The 4.8% growth in 2001 was in distinct contrast to the downward trend in most major music markets, and is attributable in part to the balance and development of the UK retail sector, with substantial investment by UK-based specialist chains and smaller independent outlets, supplemented by the widespread availability of music in more general retailers.

Another factor in this growth over the last decade has been the trend towards the replacement of earlier forms of sound carrier such as 12” vinyl albums and cassettes with compact discs, a technological development which has benefited the retailing sector significantly. This conversion is however no longer a – page 44 Counting the notes – the National Music Council report on the economic contribution of the music business key factor in generating growth. Other current advances in technology which now pose a serious threat to future growth are the ability to download music files to computer hard drives and MP3 players and to “burn” or copy CDs onto computer CD-R drives. One way in which the increasingly prevalent practice of CD burning poses a threat to legitimate sales is by broadening the opportunities for commercial piracy, with “copy shops” more numerous, more concealed, more portable and more attuned to local demand than traditional CD plants. The BPI has estimated that commercial piracy in the UK rose by 30% in 2001 to £27.6m. This is still however a modest percentage of the market compared to the situation in many countries. (Sources - IFPI Music Piracy Report 2002; BPI Piracy Report 2001 – June 2002).

More significantly there has been notable growth of private CD burning, either disc to disc or via digital download from the Internet. This has become a worldwide phenomenon that has to date affected sales more in the European mainland and the US than in the UK. However recent estimates by research company Understanding and Solutions, published in BPI’s UK Piracy Report 2001, show substantial recent increases both in household penetration of CD-R/RW drives and in sales of blank CD-Rs used for home recording. Even more rapid future growth is projected.

Table 7:3 – Household penetration of CD-R drives

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The inclusion of a CD-R copying facility has now become a standard feature of typical home computer packages.

Table 7:4 - UK Sales of CD-Rs for home recording (units)

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These estimates assume that 39% of data CD-Rs sold are used for recording music as well as the more expensive audio CD-Rs.

A current technological development which has the capacity to change dramatically the nature of music retailing concerns the availability of technology to allow the downloading of music files to computer hard drives and MP3 players. UK industry sources such as the recent HMV Group plc prospectus have noted that digital downloading has so far not had a significant impact on CD sales, largely because the process is time-consuming. However the increasing availability of broadband internet access could seriously affect sales. The threat to retailers and the music industry overall is currently primarily from unauthorised music files on the Internet which the IFPI estimates represent 99% of music files online. The traditional music retailing sector could also however be affected by the development of legitimate downloading by which record labels sell directly to consumers.

7.2 Employment statistics

The most reliable estimates of the number of employees in the UK music retailing sector are those provided by the British Association of Record Dealers (BARD) which are summarised below. BARD is the trade association representing retailers of entertainment products and has over 225 corporate members.

Within these figures the inclusion of all the employees of the specialist chains, even though these chains sell other products, such as videos, games and books, overstates the numbers in this sector. However the exclusion of the whole second-hand sector, for which no reliable data are available, and a low estimate of “others” probably makes these estimates realistic overall.

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