March 28, 2007

CD == Dead? [12:10 pm]

If the CD is dead, why are so many companies going into the CD business?

What we are witnessing is not so much the imminent death of CDs but the death of the old methods of selling CDs. It’s still possible to make money in the CD business—any business with more than $7 billion in retail sales should allow someone, somewhere, to make a profit. The incumbents are getting killed, but upstarts are thriving, using different methods.

Legacy music retailers and manufacturers now face many of the same difficulties as American auto companies. They built a business infrastructure—national chains, huge outlets in high-profile locations, layers of management—predicated on selling massive and growing quantities of CDs for $15.99 and up. Like the American automakers, they found that new competition—from iTunes, file-sharing, and online retailers—severely cut into their margins, their market share, and their pricing power. In such an environment, companies with significant capital invested in stores and substantial overhead costs get destroyed. And as they fail, they do so loudly, inspiring widespread pessimism.

Yet the new rules open opportunities for upstarts who approach the business of making and marketing CDs in a fundamentally different way. [...]

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