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Ex-BMG Exec Predicts Boon For Manufacturing Sector
December, 15 2001

Billboard, 12.15.01
Brian Garrity

NEW YORK - While the music manufacturing industry finds itself in flux amid stagnant CD sales, the rise of Internet piracy, and uncertainty over what the next physical music format will be, former BMG Entertainment CEO Strauss Zelnick insists that pre-recorded music remains vital and that the rise of digital distribution will create a host of new opportunities for manufacturers and related companies.

"The manufacturing business in the U.S. especially is challenged at the moment, but I don't think it's structurally flawed," says Zelnick, who is currently the chairman of Japanese music company Nippon Columbia and head of his own New York City-based venture firm, ZelnickMedia.

Zelnick will give the keynote address here Friday (7) at the annual marketing summit sponsored by the International Recording Media Assn.‚ the trade group for recorded-media manufacturers, replicators, duplicators, packagers, suppliers, and copyright holders.

The manufacturing business is at a crossroads. The CD format, now a mature business, is no longer a growth engine for the industry. The music business in general is suffering from a lack of hits, due to the absence of a new break-out genre. File-sharing and CD-burning have become largely mainstream activities. New and alternative formats like DVD-Audio, Dataplay, and Sony Memory Stick are proliferating and vying for consumer attention. And the major labels are involved in negotiations to consolidate their manufacturing and distribution facilities in the U.S.

Still, Zelnick contends the state of the business is not as bad for manufacturers as it may appear at first glance; nor, he says, is the future as bleak as some may believe. "The truth is [that] at its core, [it] is a healthy business, and people are still buying CDs," he says. "Music sales aren't growing, but they're hardly declining."

Much of the conference, which is being held at the Grand Hyatt New York hotel, will center around the rise of new formats. It's a crowded field. The amount of potential new formats that aim to play either the role of successor to the CD or replacement for the audio cassette numbers more than a half-dozen.


Zelnick says manufacturers expect to see a boost from a new digital-music-related format in the next five years. "There will be a standardized digital format that doesn't spin that will be introduced in the next four to five years," he says. "And that will, once again, provide an opportunity for manufacturers, because both blanks and prerecorded material will have to be manufactured."

While the emergence of a digital music format may open the door to new manufacturing rivals, Zelnick says his advice to current music manufacturers is, "Don't worry about a new format eating your lunch.

"It will be a different machine, but I'm not sure it will be a different skill set," he says. "I think you either know how to be a manufacturer and you know how to service recorded music company clients, or you don't."

More challenging for manufacturers will be finding the right new format, or formats, to support.

"I think DVD-Audio can be an important format," Zelnick observes. "Obviously, it's been structurally challenged by a lack of focus and standardization."

The same roadblocks are also hampering the development of a digital format as well. "A new format needs to standardize," he says. "The truth of any consumer electronics business is it never takes off without standardization. The smartest thing the industry could do is get together and create a standard sooner rather than later and recognize it's better to have a big pie and get a smaller piece of it than have the whole pie and have it be very small."

Meanwhile, the major labels and a number of third parties are rolling out a series of new Internet-only digital music-subscription services. But Zelnick says it is unlikely that such offerings are going to sound the death knell for physical formats.

"The business isn't going away. People like to buy packaged goods," he points out. Zelnick argues that hits will not only be distributed as one-off downloads. "That's a very inefficient way to distribute product. The nature of hits is that they are distributed in volume. And I think that will always be a centrally pressed and shipped business or encoded and shipped, not a one-off business."

What's more, Zelnick says, digital services are going to need some kind of storage medium, which implies a blanks business for manufacturers, at least.

"I actually think the success of some of these digital distribution alternatives will yield some enhancements of physical product shipments and sales," he says. "When you give people the opportunity to consume product in their home in a convenient way, as the VCR did and as digital distribution will, they tend to consume more of the product."