Big Giants and Little Mice Scurry After the CD Trade

The past month should have been considered quite good for the Israeli music market. But for the heads of the music companies, the past month wasn't so great. The music market suffers from so many problems that it needs at least a year to recover.

The past month should have been considered quite good for the Israeli music market. The relative calm in the security situation enabled people to leave their homes and even go to the malls, the summer vacation began and, like every year, collections of popular hits came out - tens of thousands of copies to sell to teens. But for the heads of the music companies, the past month wasn't so great. The music market suffers from so many problems that it needs at least a year to recover.

Recent years have seen many changes in the market, mostly in the form of greater centralism - a process that means little to most consumers, even though they are its main victims. Two years ago there were some 200 shops selling CDs, and most were independent, unaffiliated with any of the large chains. Half of them closed in the past year, including the flagship shop of the Super Zeus chain, at Dizengoff Center.

Now there are only about 100 music shops in Israel, and 40 belong to Tower Records, owned by the Ma'ariv Group, which also owns the Hed Artzi record company. Fifteen shops, mostly in the Sharon area, belong to the Reshet Tzlil franchise, owned by Helicon records, and 10 shops are owned by the Anak Havideo chain. The rest are independent, privately owned record stores.

Tower Records is the largest and influences everything in the market. Its bargain sales are the most prominent in the market, the selections it offers buyers to a large extent sets the priorities for all, and Tower's prices often set the prices for the entire market. Ma'ariv's ownership of Tower Records and Hed Artzi has serious implications for the market. The stores are a convenient platform for promoting Hed Artzi products. For example, a few months ago Hed Artzi announced a campaign selling three disks for NIS 100 - and it was played up in Tower Records shops. The sale was problematic for the other shops, which protested against the steep drop in prices in a market where profit margins are already very narrow, they say.

That sale highlighted the concentration of power in the market. Record companies have a different pricing policy for shops they own. The rest of the stores try their best to surprise the market, cut prices, and offer a good selection, but they have a difficult time surviving the competition against huge franchises backed by powerful record companies.

According to Hed Artzi CEO Danny Weiss, the company is trying to lower prices as much as possible to get people back into the shops - and compete with the counterfeit CD market. "Counterfeiting is the main problem in the market. If we can come up with an adequate response, we'll do it," he says. "In the last three years disks were too expensive so we're selling our most popular CDs and those we want to promote for NIS 60. But our ability to influence the price of CDs is minimal; every franchise has its own conditions for us." Indeed, Hed Artzi disks are priced differently from chain to chain.

Hed Artzi's system helps promote its artists' new albums as well as the albums it imports. The recommended price for David Broza's new album, "All or Nothing," is NIS 60. The company put up large posters in the shops announcing the price, thus managing to dictate the price to other shops. So far, in only a few weeks, the album has sold more than 20,000 copies, meaning it went gold. Shlomo Artzi's album, "Thirst," which came out a few months ago, used the same system to sell some 150,000 copies. The new Red Hot Chili Peppers album is on sale at Tower for NIS 69, and the Hitman collection is going for NIS 60.

Helicon and NMC are against Hed Artzi's drastic price reductions and promote their hits in other ways. "Even if the price of CDs drops, you can't compete with the price of the counterfeits," says Shmuel Zinger, marketing manager for Helicon. "Even a disk sold for NIS 50 costs three times the cost of a counterfeit disk. You don't have to compete in a criminal market - that only gives it legitimacy and doesn't help. The counterfeiting will stop only if punishments are much more severe. Nonetheless, obviously the disks can't be excessively expensive, because of the economic situation. In order to produce quality disks the price has to be profitable for both the artists and the company - NIS 70 per disk."

NMC CEO Ze'ev Shlick: "NMC tries to go beyond the competition in price, to offer quality that attracts the audience." For example, he cites Meir Banai's collection, which includes a second disk and is sold for the price of one.

Ehud Segal, CEO of Reshet Tzlil, which is generally considered the most expensive of the shops, says "the music market is not only about prices, because the margins are so narrow. The competition is over service, the quality of the product, the music itself, and the buying experience." Prices at Tzlil are expensive even for members of its buyers clubs. After paying NIS 40 for the privilege of belonging, they can buy disks for NIS 80 that in the larger chains the could find at NIS 60.

CD consumers usually don't pay much attention to the company that issues the disks, but the company's policies have an influence on the prices. Hed Artzi's albums are relatively cheap, while Helicon and NMC, which own extensive catalogs, are more expensive. Comparing prices at the shops confuses the picture: Reshet Tzlil, owned by Helicon, is the most expensive, but Hed Artzi's CDs are also sold at higher prices in the Reshet Tzlil chain. The owners of the independent shops, where the selection is often wider than in the chains, feel their shops can only survive if they cut their prices to lower than at Tower Records.

The prices at Tower are generally reasonable, and dictate prices in the market. An expensive disk at Tower will be expensive at the rest of the shops. When Tower Records is selling David Bowie's "Heathen" for NIS 90, why should the other shops sell it cheaper? Eshel Segal, manager of Tower Records, is aware of the chain's hegemony. "Our job is to reach the minimum price possible," he says.

But there are other ramifications to Tower's power in the market - it can sometimes be a weakness. When there are business differences between the chain and one of the record companies, as has happened in the past, buyers suddenly find it difficult to find that company's records in the shop. Sources at Hed Artzi and NMC say that is exactly what happened recently. Tower is on the verge of reaching a deal with NMC, but meanwhile NMC records are not showing up regularly on Tower shelves. Tower bought Now 7, a collection produced by Helicon and NMC, from a third party supplier, not from NMC, because NMC has put a cap on its distribution to the chain until the negotiations are over. The result is that shops in the Lev Hakrayot mall in Haifa and Malha in Jerusalem, don't have enough copies to sell, and the price is relatively high at the shops that do have it - NIS 76 in Tower's shop in the Opera Tower in Tel Aviv, compared to NIS 60 at Tav Hashmini in Jerusalem.

On Friday, NMC starts a new campaign in which it will discount music it issued in the 1980s. Tower apparently won't take part in the sale. Who'll be affected? The consumers, of course, but the entire music industry, as well.

The reasons for the reducing distribution to Tower Records highlights the problematics of the existence of such a large chain. According to a report issued in April, Tower Records lost NIS 16.7 million in 2001. Since the chain has been losing money for years, sometimes the record companies ask for guarantees before supplying CDs, in case the company collapses. That was an issue at stake in the last contract negotiations between Tower with NMC and Helicon, and it's at stake again in the negotiations between Tower and NMC. Most in the market say that Tower has to reduce its scale of operations to avoid collapse, which all agree would be disastrous for the market.

Meanwhile, the companies in the market are fighting each other and not uniting forces to invest in their real competition - the rising tide of counterfeit CDs, which eats away large portions of market share for all. CD buyers in Israel, happy with every new release by David Bowie, Red Hot Chili Peppers, Hemi Rudner or Aviv Gefen, should take price comparison seriously. It could save them dozens of shekels, and help the privately owned independent record shops that nowadays have a lot more to satisfy the customer than the major chains.