kazaa affecting sales of cd's

Check out this article... hopefully bras and DVD's do better than CD's, seems there is no way to combat pirates:

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AOL, Vivendi, EMI Are Losing the Battle Against CD Pirates
By Cecile Daurat


London, March 21 (Bloomberg) -- Iain Titterington, a 36-year- old pop video director, pays for about one in four songs he listens to. He downloads the rest from Kazaa, an Internet service that enables users to share their music.

Since November, ``I made five purchases because I couldn't find what I was looking for on Kazaa,'' Titterington said.

AOL Time Warner Inc., Vivendi Universal SA, EMI Group Plc and other record companies are losing the battle against piracy. The illegal manufacturing of compact discs is costing them more than $4 billion in lost revenue annually, according to industry estimates. And the unauthorized copying of songs from 500 million files on Web services, such as Kazaa, is further eroding sales.

``The pirates will always beat the music companies,'' said Patrick Wollenberg, who helps manage securities worth 13 billion euros ($13.8 billion) at Robeco Groep, and refuses to invest in music companies. ``People are increasingly unwilling to pay for music because they feel ripped off.''

The shares of EMI, the world's third-largest record company, this month dropped below 1 pound for the first time, from a peak of 8 pounds three years ago, reflecting investors' pessimism about music sales. Global CD sales this year will probably fall below $30 billion, the lowest since 1992, analysts said.

There's more to the slump than piracy. Consumer spending is waning in the U.S. and Europe, fourth-quarter gross domestic product figures show. And a growing number of singers, from Natalie Merchant to Prince, are selling music direct to fans on the Internet, cutting out the middle men: the record companies.

EMI Slumps

EMI is one of the best gauges of the music industry because, unlike larger rivals Vivendi Universal and Sony Corp., it hasn't diversified into other areas of entertainment, such as films. EMI shares have plunged more than 85 percent in three years, wiping about 5.5 billion pounds ($8.6 billion) from the company's value.

The London-based company will probably be at the center of industry consolidation that analysts say may be essential to reduce costs. Bertelsmann AG Chief Financial Officer Siegfried Luther said last month that he is ``thinking'' about combining the German company's BMG unit, the world's fifth-largest record company, with EMI or another partner. BMG and EMI called off a merger plan in 2001.

Alain Levy, who heads EMI's recorded music unit, may attempt to combine EMI with AOL's Warner Music unit, analysts said. The two companies dropped a merger plan in 2000, after European Union regulators said they were concerned the combined business would dominate the rights to such songs as Frank Sinatra's ``New York, New York'' and the soundtrack to the ``Wizard of Oz.''

EMI spokeswoman Amanda Conroy and AOL spokeswoman Mia Carbonell declined to comment on any merger talks.

Cost Savings

With CD sales at the lowest in more than a decade, EU regulators may now be more sympathetic to an EMI-Warner merger. Such a combination would save about $250 million in costs by cutting manufacturing and Internet-investment expenses, according to Michael Nathanson, an analyst at Sanford C. Bernstein & Co.

Consolidation in the industry will be driven by the lack of further internal cost-cutting options, Nathanson said. Levy has eliminated 1,900 jobs since he joined EMI 1 1/2 years ago. Sony Music has also cut jobs and closed factories.

``Ownership change is likely,'' said Jeff Currington, who helps manage 3 billion pounds of securities, including EMI shares, at Pictet Asset Management in London.

The music industry boomed in the late 1980s and early 1990s after the introduction of CDs led consumers to buy music they already owned on tapes or records. Superstars such as Michael Jackson and Madonna also drove sales. Jackson sold 26 million ``Thriller'' albums, making it the second-best-selling U.S. album after the Eagles' ``Their Greatest Hits 1971-75.''

Sales Decline

Now, record companies are battling to stem a slide in revenue. Sony's music unit reported a 3.3 percent fall in fourth- quarter sales, compared with a drop of 2 percent at Vivendi. At EMI, which traces its roots to the invention of the gramophone in 1887, recorded music sales fell 12 percent in the six months to Sept. 30, according to the latest results available.

The industry successfully pushed for the closure last year of Napster Inc., which was used by 45 million people to download music for free. Music companies have filed copyright-infringement lawsuits against Sharman Networks Ltd., owner of Kazaa, and other file-sharing services such as Morpheus and Grokster. Taking individuals using the services to court is also ``an option on the table,'' said Cary Sherman, president of the Recording Industry Association of America, or RIAA.

``It's very important to have legal battles about online music downloading to create awareness that this is illegal,'' Martin Schaefer, a lawyer for BMG Europe, said in an interview.

Downloading Music

Record companies are also trying to use the Web to their advantage. Sony and Vivendi in 2000 set up Pressplay, allowing users to download songs from a library that includes 250,000 hits for $9.95 a month, or a pay-per-song fee.

``Chaos and upheaval caused by file sharing led all of us to examine business models closer,'' Pressplay Chief Executive Michael Bebel said in an interview. As for market share, ``we intend to capture a significant portion by offering high quality to consumers now accustomed to file sharing.''

Last month, Sony invested in a rival service called MusicNet, which is partly owned by EMI, Warner Music and Bertelsmann. Since December, EMI has let consumers buy songs from singers such as Kylie Minogue on Web sites including Yahoo! Inc.

``We will see the impact of these measures over the next year,'' John Rose, vice president at EMI, said in an interview. ``If the industry moves aggressively on prevention and providing legitimate music over the Web, and if governments address the piracy problem, there is quite a lot of growth left in the recorded music business.''

Not Convinced

Many musicians and investors aren't convinced. Piracy is ``great,'' singer Robbie Williams said in January at a music industry conference in Cannes, France. ``There is nothing anyone can do about it.''

For artists such as Williams, 29, the broader the reach of his music, the more money there is to be made from concert tickets, DVDs, T-shirts and other products sold on his Web site.

``The economics of the business will change and the nature of the deals between artists and labels will change,'' Sherman, president of the RIAA, said in an interview. ``It will be a painful transition.''

The battle against the physical piracy -- the illegal manufacturing of CDs -- may be even harder. Organized crime groups in Malaysia, the former Soviet Union and Paraguay are pirating music, movies and video games, and selling them in the U.S. and other countries, John Malcolm, a deputy assistant attorney general, told the U.S congress on March 13.

Chinese Piracy

The International Federation of the Phonographic Industry, which represents the music industry outside of the U.S., has pushed countries such as Bulgaria to shut down illegal CD plants. Russia, Mexico and Taiwan will be the priorities this year, IFPI Chairman Jay Berman said in an interview.

The industry is hoping the entry of China into the World Trade Organization will help crack down on piracy in a nation where IFPI estimates 90 percent of the market is illicit. Some 1.9 billion illegal copies of music worldwide were made last year, or 40 percent of the total, according to IFPI.

As one plant closes, however, another opens elsewhere in the world, according to Stefan Krawczyk, IFPI's director for Eastern Europe. ``It's like a whack-a-mole game: Just as you knock one down, another one pops up.''