Unbundling’s Curse On Profitability

According to reports from NARM 2010, held this year in Chicago May 15-17, there were a number of outspoken comments and speakers. NARM (National Association of Recording Merchandisers) is a non-profit trade association that attracts music distributors, retailers, record labels, tech companies and more. One of those opinionated speakers was Big Champagne’s Joe Fleischer.

HitsDailyDouble.com reports that Fleischer convincingly argued that unbundling the single from the full-length album has caused more harm to the record industry than piracy and in his opinion has made the current kinds of label deals unprofitable. “The LP isn’t dead; it’s just optional,” Fleischer was quoted saying. “Producing albums, but marketing singles makes for an enormous business challenge.”

Fleischer’s idea was also echoed last November in a thoughtful interview published on the Harvard Business school’s faculty research website, Working Knowledge. HBS Associate Marketing Professor Anita Elberse summed, “Record labels have depended on album sales to boost profits. But in the digital music era, consumers prefer single songs over music ‘bundles.’ The result? It is time for the industry to rethink its products and prices.”

Elberse, using data from Nielsen SoundScan analyzed a sample of over 200 artists from Jan. 2005 to April 2007. “I analyzed the data using an econometric model that related the growth in online music buying to the revenues per bundle,” she explains.

“My research shows that when consumers start buying music online, they switch from buying full albums to cherry-picking their favorite songs on those albums. On average, each album no longer bought is ‘traded in’ for one, perhaps two, individual songs. And because song prices are relatively low—labels typically have to sell 8 to 10 digital songs to generate the same kind of revenues as they do with one digital album—this causes a sharp reduction in revenues over time.”

The Q&A article discusses a variety of factors including the effect that iTunes has had on the record industry, piracy, and the impact of strategic pricing. Find the interview HERE.