Someone’s making money in the record business

What classical music can teach the rest of the industry

K.W. Jeter

Check out this recent quote from a music-recording executive: “When I talk to people in the industry, everybody’s making money.”

Living in a fantasyland? Music-industry observers, familiar with both the accelerating decline in recording revenues and the notorious pharmaceutical/recreational habits of the suits at the top, might conclude a comment like that was generated by overindulgence in nose candy.

And they’d be wrong.

The gentleman talking is actually Klaus Heymann, the Austrian-born, Hong Kong-resident head of budget classical-music label Naxos. Celebrating its 20th anniversary in business this month, Naxos has gone in that time from the feisty underdog retailing the bread-and-butter repertoire (Brahms, Beethoven, Tchaikovsky) performed by obscure (and often surprisingly good) Eastern European orchestras, to the heavy hitter in the classical world, outselling every other label and picking up international awards for a good number of its CDs. Granted, Naxos’ top position is due at least in part to the major labels, who once dominated the business, abandoning their classical-music divisions or paring them down to a shadow of their former selves—but those once-big labels (Deutsche Grammophon, Sony Columbia) did so, more fools they, at a time when Naxos was rapidly increasing its total sales and revenues.

But then, so were a lot of other independent classical-music labels—if not to the same numbers as Naxos, then at least well enough to make the classical niche just about the only healthy segment of the recording industry. For everybody else, the numbers are pretty bleak: The Recording Industry Association of America reported in April that total CD revenue was down 13 percent in 2006, a bigger one-year drop-off than any during the so-called “Napster era” of 2001 to 2004, when the then-unlimited file-sharing service (and online clones such as Kazaa and Grokster) allowed users to help themselves to free music downloads. Rock and pop music (lumped by sales tracker Nielsen SoundScan in its “Alternative” designation), a category that once posted big sales gains every year, was down more than 9 percent, making country music look good by comparison, with only a 1 percent drop in 2006. Hardest hit was the one-time leader category of rap and hip-hop, hammered by a nearly 22 percent drop in CD sales. (Though even rap insiders attributed the fall to its audience getting jaded from a surfeit of increasingly tired booty-shakin’, Glock-wavin’ songs and videos.)

For the classical-music recording industry to post a 22.5 percent increase in CD revenues while everyone else is hemorrhaging sales—well, Heymann and his indie-classical colleagues must be doing something right. Granted, even with that kind of a jump, classical is still relative small potatoes compared to other categories—by RIAA numbers, classical sales are about a fourth of country’s and a 10th of rock and pop’s—though that might change if the others continue their headlong dive into bankruptcy.

The industry’s decline in CD sales hasn’t been offset by an increase in online revenue, either. The RIAA reported a 103 percent increase in 2006 for revenue from Internet downloads, but that still amounted to only 16 percent of total music sales for the year. But even in the online world, the classical category is beating the others’ time, with download revenues representing nearly 20 percent of its total sales, double or even triple the average sales percentage for other categories. No wonder Heymann and his buddies are rolling in cash: Online sales have a profit margin just about twice as large as CD sales.

So what is it that Heymann and the other classical recording guys are doing right? Naxos has an advantage over a lot of the other classical indies, with a marketing strategy hinged on moving a lot of units at a budget price-point of less than nine bucks, straight retails. But even the full-price classical independents such as Hyperion and Chandos have profited from the decision to concentrate on repertoire rather than the big-name, high-price superstars with whom the so-called major labels have rendered their corporate balance sheets with enough red ink to look like the script from the latest Rob Zombie flick. It was one thing to pay out the big bucks to the late Luciano Pavarotti; he earned ’em with his sales. But the majors squandered a lot of precious capital on overhyped, under-performing “stars” plodding their way through the labels’ umpteenth cycle of the basic repertoire, none of which came close to breaking even. Bottom line: It’s hard to turn a profit when you’ve got more than a dozen expensive, recently recorded versions of Vivaldi’s Four Seasons in your catalogue, all swiping sales from each other.

The other thing the independent classical labels have going for them has more to do with their customers than their own internal strategies. Basically, classical-music customers are honest. The market for online classical music never got ravaged by people looking for free—and illegal—downloads. The classical audience doesn’t mind paying for what it wants, as long as it gets exactly what it wants. But there’s a reason for that as well, rooted in the technology itself. Most of the Napster-era and post-Napster “pirate” downloads are hyper-compressed MP3 files, of the audio-quality level that classical mavens sneer at. Of course, you can squeeze a Justin Timberlake or Madonna track down into a digital fraction of what it was, and it’ll probably sound about as good as it did in its original format. Do the same to a classical track and all of a sudden a full-bore symphony orchestra swimmily wheezes and flanges as though reproduced by a $79 Casio sampling keyboard. It might be mere snobbery on the part of classical downloaders to prefer the high-priced spread to stepped-on audio margarine, and some of them might not even be able to tell the difference—but by God, they’re willing to pay for that difference. Which means more money in the coffers of the independent classical recording companies, who, with their lean operating margins, roll most of it over into more recordings, resulting in more sales, ad infinitum.

Las Vegas styles itself as something of a media town, so anything that affects the bottom line of any sector of show business is worth our attention. A good case can be made for casinos investing in pop-music venues such as the Palms’ recently opened Pearl, as there’s still money to be made in live performance shows. (Plus anything that draws in customers helps pump up the casinos’ other operations.) But if Las Vegas’s public sector—or private sector—wants to make its mark in whatever will be left of the recorded-music industry, it might want to make sure that the big auditoriums coming online, whether it’s the Smith Center Downtown or CityCenter on the Strip, are fitted out with the kind of high-level recording gear that’s more suited for Bach than Britney.

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