Wal-Mart Plays the Pied Piper
By George Anderson
Record industry executives in Los Angeles, New York and Nashville, et al, are a little more than nervous about Wal-Mart’s success with the Garth Brook’s CD/DVD boxed set this past holiday season. You see, Mr. Brooks’ deal with Wal-Mart cut them out and then promptly sold one million copies in its first 15 days on the shelf.
“The middleman’s cost that was eliminated was also eliminated for the people,” the country singer told the Los Angeles Times. “To get a box out like that for $25 just shows me that these guys are not just eliminating the middleman and keeping the middleman’s money – that makes me feel very good.”
Neal Spielberg, a former exec with Warner Bros. Records, said, “There’s a huge concern that someone like Faith Hill will do a deal directly with Wal-Mart.”
Gary Borman, who manages Ms. Hill, said the music industry is in a period of transition. As to the retailer’s role in that, he said, “Wal-Mart has the might if they put their minds to it. And because the labels need them so much, they have a lot of power to demand whatever they want.”
In another move into the music business, the world’s largest middleman eliminator has launched Wal-Mart Soundcheck, exclusive musical performances and behind the scenes interviews with popular performers at studio sessions broadcast on the company’s web site and on its in-store television network.
David Porter, Wal-Mart’s vice president for movie and music merchandise, said, “I wake up and put my head on a pillow every night looking for opportunity in the music and movie worlds. We are interested in growing sales; these are important areas to our stores, and we are a growth company.”
Moderator’s Comment: Where is the retail entertainment business headed? How will companies such as Wal-Mart, Starbucks, etc. change it?
Three items related to this story.
- It’s interesting to note that, if you are a Mac user, you are out of luck with downloading tunes from Wal-Mart. What makes it especially interesting
for us is the knowledge that with the Disney/Pixar deal, Steve Jobs will now become not only a director on the Disney board but also the largest shareholder in the company.
Stay tuned. - In a separate but not entirely unrelated note, Wal-Mart rival Tesco has set aside a separate Apple Computer section in one of its stores as a test. According
to Retail Week, it is the first time Tesco has done this for a non-food brand. - Nice move by Gillette and its Fusion brand, which is clearly identified as the sponsor of Wal-Mart’s Soundcheck.
This should come as no surprise to the record labels. Their brands have absolutely no value to the consumer when it comes to music, in particular. Best Buy has made similar attempts, although not quite as bold, in the past by signing artists to its own record label, etc.
Additionally, this is not limited to the record industry. I am sure everyone is aware that Wal-Mart has the best selling dog food in the US as well. Consumer goods, clothing, electronics, entertainment – they all are facing the same problem, the distribution of their products is primarily controlled by a handful of retailers who now have the resources to build a respectable brand and source quality product.
For over 100 years Barnes and Noble has been retailing books and also publishing books. Barnes and Noble also purchased Sterling, a nonfiction publisher. Conventional book publishers have been concerned for years that Barnes and Noble can cut them out as unnecessary middlemen. To an extent, Barnes and Noble has already. Some of the Barnes and Noble titles are sold at bargain prices and some aren’t, depending on the estimated price elasticity. There’s no reason Costco, Wal-Mart, Starbucks, Victoria’s Secret, Safeway, or The Gap can’t publish books or CD’s or movies. They could even license the material from the conventional sources, who’d be happy to create exclusives.
The leverage music companies have is to withhold shipping other CDs to Wal-Mart. If enough of them do this, Wal-Mart will quickly come around to putting the middle man back in.
Performers are the same as everyone else. They want to be paid for their talents, that’s how they make a living. If I get a better deal, i.e., I make more money, I’m in. If I have to tame the lyrics down, well that’s part of the deal. No one should be surprised.
What Wal-Mart and Starbucks are doing in the music business, Amazon can certainly do in the book business. How many people who purchase a book purchase one based on the publisher? Few, if any. It is the author that matters. Imagine a well-known author who signs a deal with Amazon, and is willing to split the revenue with Amazon for every book sold. Amazon can publish the book, with print on demand technology, and with its “huge” database of readers, market the book to only those individuals who meet the proper profile. Publishers, whether they be book or music, need to be worried about their distribution systems as technology continues to evolve. Interestingly enough, two weeks ago Starbucks announced they were entering the retail book business, and don’t be surprised if they become a book publisher on the heels of their Grammy nominated Ray Charles music CD compilation. Imagine Starbucks finding up-and-coming authors, publishing and printing the books, and retailing them as well. The comments stated earlier are very important to note: It is all about who owns the customer!
Music Distribution in the USA is a system in need of change and Wal-Mart is late to the party. If you want to credit someone for initiating change, credit Napster. Even though this service was ruled illegal (billion dollar industry and their lawyers sue small web site) I suspect that it was the prospect of millions and millions in legal fees to support Napster’s position that really decided this case. In any case Napster changed the face of music distribution. Wal-Mart and Garth bypassed a distribution system that usually absorbs 90 cents of every sales dollar and split the proceeds between themselves. They did not sell the Brooks anthology at a bargain basement price. They could probably have sold it for $4.99 and exceeded their usual per CD profit. At $19.99, each party made over $9 million each in the first 30 days. This is the real story here – Wal-Mart and Garth combined to cost the Music Distributon Industry over 50 million dollars in sales.
Three key points. First, and most obviously, Wal-Mart is the country’s most efficient and effective distribution system for consumer products. While obvious, it needs to be stated and understood. Not without exception, but certainly very often, when Wal-Mart enters a private label market, their brand approaches or becomes the #1 market share brand. This is particularly true when the national brand messages have very little sustaining part in the purchase decision.
Second, as has been pointed out, music labels, as brands, are very unimportant. I know of no consumer segment of any size which chooses its music purchase because of the recording label. (Note: fringe categories exist where this is not true)
Third, the performers are the brand. Garth Brooks, and others, are brands with lifestyle and demographic identifications which align extremely well with the Wal-Mart customer base. Ray Charles and Billy Joel are brands that align extremely well with the Starbucks customer base. The open secret to this is to put merchandise in your stores which aligns with your customer base. Green Day would not be well advised to do a direct distribution deal with Wal-Mart. Faith Hill would be.
Last point, is that by eliminating the label, Wal-Mart can offer the real brand, the performer, a higher per unit profit participation. Even if, over the life of the CD release fewer total units will be sold, the profit will be higher.
Specific labels with specific artists should be very, very, very concerned. As a business model, the label needs to address the value add that they deliver to the subcontractors (performers).
Other entertainers will want to capitalize on this as well. With Wal-Mart being the biggest, entertainers will determine their success by being able to have an exclusive at Wal-Mart. Maybe some American Idol rejects can an exclusive deal with Kmart? And they can package their CDs with some Martha Stewart products. Just imagine if Martha Stewart had hooked up with Wal-Mart instead of Kmart?
What is happening with the record labels is similar to what is and will be happening in every industry – whoever knows the consumer the best and offers them what they wants wins. Wal-Mart does analyze customer sales data and knows what its most valuable consumers purchase. Offering the customers what they want at a price they want, even in an exclusive form, continues to be a smart strategy!! Finding the best channels to get the desired products to consumers at reasonable prices is the formula for success. Wal-Mart’s strategy with the Garth Brooks CD set should not be a surprise and other brand manufacturers should be ready for more surprises.
It’s quite interesting to see a case where “manufacturers” (i.e., the artists) look to Wal-Mart as a savior instead of the usual view of Wal-Mart as a 900-pound downstream gorilla.
This might be exactly the right kind of kick in the butt that the music industry needs in order to finally move into the 21st century. They’ve been complacently hiding behind lawsuits and terrible legislation because they haven’t faced direct pressure from any formidable businesses. There’s no way their bullying tactics are going to work on Wal-Mart!
I hope many other artists try this approach in the next few months. Wal-Mart might be tough to work with, but they’re surely the lesser of two evils in this case.
Brands have the right to exist as long as they create value for the customer. This is typically in the form of innovation – features and benefits that only a given brand can exclusively create. While I’m not familiar with the movie and recording industries, it appears that in the case of Garth Books, the record label had nothing to offer in the value chain, at least from a tactical standpoint. If this practice continues and grows, does it damage the flow of new talent (value) that record labels create by discovering, signing and promoting new artists? Maybe newer artists becomes “premium” brands while proven artists become “store brands”?
These retailers are forcing a restructuring of the entertainment industry — CDs, DVDs and who knows what else. Tesco in the UK is getting into its own mobile phone service. I mention this because advances in technology enable consumers to use their cell phones as entertainment centers.
Wal-Mart’s entry into the market should drastically reduce prices of CDs and DVDs which have been far higher than they should be. The disturbing part of this is that Wal-Mart could use it’s power to censor artists directly. They’ve already requested sanitized versions of CDs from record companies and refuse to carry certain types of “objectionable” music. We know they will impact prices. How will their new business impact content?
Here is an important business principle that is slowly but surely working its way through the marketplace: He who owns the “customer,” owns the business. This is what has driven the steady encroachment of retailers onto the brands’ turf, and directing it to the music, or other, entertainment business is a no-brainer.
Bear in mind that when P&G’s stock was low, there was serious concern that Wal-Mart would buy them, lock, stock and barrel. Heretofore, brands have partially protected themselves by attempting to “own” their customers through mass media advertising. That is so OVER! Now, many billions of advertising dollars (“buying the customers”) will move into the stores.
Retailers do have the potential to “own” customers through the internet. Amazon is trying to own various brands’ customers through that means, and the arm wrestling continues. For the CPG brands, the customers’ perceived cost of delivery and lack of the in-store experience will keep their customers in the store for a very long time. But look to UPS and FedEx to get into the “owning” the customer business – sometime in the next 10 years. Remember, he who owns the customer owns the business. And the person delivering the goods has a pretty good claim on that ownership.
The big question here is, who should make the stuff?
Traditionally, brands made the stuff while retailers just sold the stuff. Now, retailers are making the stuff AND selling the stuff, leaving brands out in the cold.
But are retailers good at making stuff? It wasn’t their job when the business began. To be a store, your work began when the stuff came through your doors.
As more and more products get copied as store brands, i.e., as retailers get better at making the stuff, the shopper has less and less of a reason to pick Iams dog food over Wal-Mart dog food. “Who cares who made the stuff,” they say, “the ingredients are the same and this one’s cheaper.”
So the brands have a choice. They can either a) make better stuff, or b) start selling the stuff they make.