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The major labels won’t survive the death of the CD

Mark Cuban reminds us in this post that CDs are a doomed format and that with the explosion of sales of mp3 players, the rapid decline of the CD is imminent. We totally agree up to that point.

I think Mark is off-track in the second half of his piece: he thinks the transition to digital can be good news for record labels (presumably major labels, since he’s referring to mall music) if they are willing to allow DRM-free mp3 kiosks to replace ever shrinking racks of CDs in stores. But I doubt that very many people will take their mp3 players to a store to get music, when they already connect their mp3 player to a computer every few hours to charge it. Maybe in-store downloads could be a decent niche for a while, but it just doesn’t make very much sense in the long run.

What really matters is that CDs are about to hit a tipping point: stores like Best Buy and Walmart keep shrinking the rack space they give to CDs and when it gets too small, people won’t be able to find what they’re looking for. They’ll be forced to go online (with either iTunes or p2p) and they’ll quickly lose the habit of buying any CDs, even the hits that are still available in stores. This will accelerate the shrinking CD shelf space, which will accelerate people switching, and things will get faster and faster until mail order is the only way to find any real offering of CDs. This could happen even if a huge chunk of people still want CDs– at some point it’s just not profitable to stock them anymore. In as little as a year and a half from now, the corporate music industry could be overwhelmingly dependent on digital distribution (a popular iPod phone would be the real death knell for the CD).

To survive, the major labels need to keep people in their clutches as everyone makes that transition from CDs to audio files. But that’s a tough task– first, once you’re online, there’s a long tail of indy content that people can choose from. When you have limited money for music and a big selection to choose from, you’re less likely to buy major label. The monopoly starts cracking.

Second, when you’re online, any audio file is as good as any other, and there’s not much incentive for fans to pay for major label music since they know that hardly any money gets to musicians, and that the industry has been screwing over music culture for decades. Why not spend your music dollars where they’ll do some good?

Third: there will be a population of people that can’t get CDs the way they used to, but still aren’t ready to switch to mp3 players. It’s a much more complicated transition for people than it was from vinyl to CD. Those people could just drop out of the market.

And fourth, the industry is alienating key tastemakers and tech adopters like Mark Cuban by insisting on putting DRM on all their files. From the selfish standpoint of the major labels, we think DRM on CDs is probably a money maker because it stops 90% of people from being able to make a CD-R copy– but they haven’t made that kind of DRM really work. DRM on downloaded audio (which they did make happen) is a much bigger gamble: people who get frustrated by the restrictions will just find the files for free. When people want to switch mp3 players or mp3 stores, their old stuff is unplayable and they won’t pay to replace it. But on the plus side for the major labels, they will keep a lot of people from dumping their whole iPod onto a friend’s iPod. Lots of commentators think the major labels are screwing themselves by putting DRM on audio files. I think it’s a toss-up as to whether they’ll make more money with or without it– damned if they do, damned if they don’t. But either way, they’ll lose a certain number of people, and that’s another blow to their reign.

All of this, of course, is good news for people who care about independent music finally getting a chance in the mainstream. Remember, as always: don’t buy major label music in any form and do buy music from independent labels. You’ll help ensure a brighter, more vibrant music future.

Update: CD sales starting to tumble.

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