Will retailers continue to support copy-protected CDs?

By Richard Menta- 11/20/01

The big news that came the other day was that BMG Entertainment was backing off a little from its test of copy-protected CDs. With so many consumers who listen to music on their computers, it's no surprise there were a significant number of complaints. The emergence of Web sites like Fat Chuck and the Campaign of Digital Rights take it a step farther as they expose those CDs so encumbered, further threatening sales.

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BMG confirmed that it has set up a hotline for consumers who can not play Natalie Imbruglia's latest CD and said the disc will be replaced by retailers or by the label with non-security-enabled versions.

The question is how many times will someone want to replace a CD they bought at the store before they say the hell with it and avoid all CD purchases for a time? CDs will become devalued in their eyes if consumers come to expect that they will only work "sometimes". Unless some form of reassurance comes their way, many consumers will choose to spend their money on other things.

Do you know who is in the middle of all this? The local record store (or chain as the mom and pop establishments have mostly disappeared). This is the first place consumers will complain to as they hold that crippled CD in their hand demanding a refund. Since many stores don't give refunds, only replacements, there is a very real opportunity to establish bad blood between store and patron here, especially if a moody teen clerk is behind the counter.

Selling records is a record stores business and copy-protected CDs threaten that business should patrons reject it en masse. Complaints from just a few titles have already forced BMG to blink (see Customers put kibosh on anti-copy CD). As we are in unsure economic times, what will happen to record store revenues if a significant number of CDs become PC-disabled over the next several months? Right now that is the plan as Universal Music Group (UMG) has committed to protecting all of its CDs with anti-copying technology by mid-2002.

I'll tell you this, if I were the CEO of a record chain I would take myself out of this fight very quickly. That's because CEOs are expected to increase revenues and profits every year and his job is contingent on company growth. PC-disabled CDs threaten that growth and if sales drop, he will end up taking the blame for the acts of others. These are powerful people and they don't cotton to being made the fall guy. Realizing what is going on, I as CEO would publicly yank all copy-protected titles and tell the record labels why.

The record companies will counter that copy-protection protects my chain from the scourge of Napster and its clones, but sales only went up when Napster was in full swing. Furthermore, the record labels have not been very eager to let the record chains in on their online music plans, services named PressPlay and MusicNet, which effectively cut out the middleman, i.e. the record stores. They are hardly working in my best interest here.

Even when the label is a parent to the record chain, as with the Virgin Megastores, there will always be pressure on the chain to sell more goods. If they can't sell something as onerous as copy-protected CDs to the public it is the chains own fault and upper management must not be doing their job properly (as a veteran of the corporate infrastructure I know).

Of course, even a CEO not worth his salt knows how to fight back. As soon as they recognize what can happen here I suspect many will consider pulling copy-protected CDs from shelves before it becomes standard practice. That or start hiring a lot more customer support people to handle all the complaints and returns, labor costs few want to take on with the economy on hold.

If you were a record label exec handling Imbruglia's "White Lilies Island" and a record chain says it was pulling your CD from the racks, your first reaction would probably be to panic. This is an industry whose executives go through great effort and expense to "fudge" sales and radio play data (see Damn Lies and Statistics by Dave Marsh and Fighting Pay-for-play by Eric Boehlert). Banishment from the racks is as good as a trip to industry Siberia and the exec would do everything in his power to get those CDs back on the racks, the easiest being to burn the PC-disabled versions and replace them with unencumbered ones - at great expense.

Under such pressure, the record labels would probably back off. But, if the record chains wait and do nothing until after UMG had encoded all of their CDs then the record chains may be in for a rough road. Consumers will get that bad taste in their mouth as CDs they put into the tray do nothing. This will not only affect those who use computers to listen to music, it turns out many DVDs and some older CDs will also refuse to play them. That is a sizable percentage of the music buying audience.

Facing CDs that are nothing more than overpriced coasters, many more will turn to their friends the Napster clones for their music, services that will not only give them the sun and the moon, but do it for free. The record chains can blame these services if things get so bad they are forced to close stores, but right now CDs are viewed by the masses as being superior to MP3 music, which is why even the most hardcore file traders continue buy them.

That is why sales went up when Napster was in business, not down. Napster just served as another supplemental source of music like radio and MTV whose effect promoted CD sales more than they took from them (read 6 CDs a Year for the full argument on this).

PC-disabled CDs violate that perception of superiority and if record buyers no longer see any added value over what they can trade for online, MP3 files become their equal if not their superior. That gives consumers less reason to walk into a store.

That is why the record chains need to look at this very carfully. As they may soon find out the hard way, it will be them who will bear much of the burden.


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