Blockbuster Blues… Last Rounds In DVD Battle

On paper, the plan did not look like a threat to the enduring power of the big six record labels.

Viacom, the hottest global media company – but lacking real music muscle – would enter the lucrative distribution business in a cheap, revolutionary way. It would begin stamping CDs on-site at some of its Blockbuster division’s nearly 600 music retail outlets, allowing consumers to create tailor-made compact discs in their local record stores.

But Viacom, a $9.6 billion-in-revenues titan, found out what many an aspiring recording artist has long known: You’re nobody unless a major label says so.

Media giants IBM and Viacom’s Blockbuster, which partnered to bring the stamping process into stores, learned just how tough a nut the music industry is to crack. Just 18 months after the formation of New Leaf Entertainment, as the CD joint venture was dubbed, the giants have abandoned the plan.

Record companies feared they could be cut out of the lucrative distribution loop by the new process, and they circled their wagons to prevent the venture from taking off.

“If we went along with it,” said Al Teller, chairman/CEO of MCA Music Entertainment Group, “we would have empowered (New Leaf) to become our distributor.”

The joint venture proposed to send the recordings over telephone wires to retailers with the receiving equipment who could then produce CDs on demand.

Teller, one of the handful of label execs who are well-versed in technology, believes that some sort of electronic distribution process is inevitable. But he has been the most vocal of record label chiefs in asserting that such a process should be developed and implemented through a cooperative effort by the major record companies.

The advantages of the Blockbuster process were twofold: It would have allowed consumers to select their favorite songs and create compilations of their favorite artists on CD. Also, retailers would be able to carry an extensive selection of artists’ works in on-site databanks without the expense and difficulty of maintaining a large inventory.

Many of the record companies opposed the plan almost from the day it was announced, fretting over copyrights and artists’ royalties. But their chief beef was manufacturing.

Because most labels have invested heavily in manufacturing plants to press and distribute CDs, the New Leaf venture would add another player to the lucrative business of making and distribbing the discs.

While the retail sales of recorded music add to the labels’ coffers, the manufacturing fees are where the labels and their parents make the lion’s share of their money. A typical CD wholesales for $10.70, and retails for $16.98, but the manufacturing cost often is less than $1 per disc.

“The IBM/Blockbuster deal was doomed from the start,” said Irving Azoff, owner of Giant Records. “The failure was letting the consumer come in and make their own tapes.”

Azoff believes that there would have been a substantial artist backlash if the plan had gotten a greenlight from the record distribs.

Indeed, the move also was thwarted by opposition from recording artists and music publishers concerned over copyright issues.

But record industry insiders note that unless a system for electronic delivery is established by the big six, another upstart is likely to surface. And it might be one that gains widespread acceptance.

“Talks among the labels about creating a system needs to move to the front burner,” said a label chief, who notes that the labels have been distracted by developing a competitor to MTV and other issues. “A system will ultimately surface, and we must be a part of it. Our long-term survival depends on it.”

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