Up, Down, All Around

May 1, 2003 12:00 PM, BY RON FRANKLIN

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The theory goes like this: If people buy fewer CDs, then record company budgets shrink and recording studios make less money. This means that studios don't buy as much new equipment, so the technology companies that build those wonderful audio toys experience a drop in business. Well, maybe. There is an equally compelling argument that independent CD releases and the democratization of recording capabilities through studio-in-a-box software and less-expensive equipment mean better sales to a larger mass audience. There may be smaller budgets for major releases, but there is just as much music — and audio — being produced.

Pro audio is no longer a cottage industry that's immune to economic factors of the global market. The growth in affordable digital technologies means that professional audio is now part of a larger media system. And when political and economic uncertainty strike, our little industry feels the ripples.

So what's really going on with pro audio technology and manufacturing companies? Between the advent of digital processing, computer-based production, Internet marketing and a changing recording industry, what must pro audio manufacturers do to stay competitive and relevant? Are only big-ticket hardware companies affected? Are software companies being decimated by piracy? Have we reached the crossroads where existing business models have permanently changed?

HOW'S BUSINESS?

The first issue to be addressed is overall sales trends. Are markets up, down or flat? Computers play a major role in contemporary audio production, so companies with an emphasis on computer-based products seem to be faring well. M-Audio designs and manufactures audio and MIDI interfaces, keyboards, speakers and microphones. The company also distributes Ableton, Propellerhead and Arkaos software, so it has staked its claim firmly in the computer audio and music arena. According to M-Audio marketing director Adam Castillo, “Computer-based music production is the healthiest segment of our industry, and that's where we see all of the success stories.” As a result, according to year-end financials, M-Audio sales were up by 74% in 2002.

Even companies traditionally associated with hardware electronics find that having a hand in the computer arena helps even out the product mix. Universal Audio president Matt Ward says, “For a small company, we are very diverse. We have analog hardware and software plug-in systems for virtually every computer-based audio system out there. Universal Audio sells to three overlapping markets: We sell hand-built analog mic preamps and compressors primarily to high-end recording users; Mackie sells our UAD-1 DSP card with Powered Plug-Ins to the native workstation/desktop music market; and we sell TDM plug-ins to users of Digidesign's Pro Tools Mix 24 and Pro Tools|HD systems.” According to Ward, sales are up and the company is looking to double the amount of space it now occupies.

Another company that is strong in computer-based audio products is TC Works, a division of TC Electronic. According to Ralf Schluenzen, CEO of TC Works, the company's Powercore product has fueled the company's market success: “Our key product is Powercore: doing approximately 60 to 70 percent of our turnover and still rising. We were quite fortunate with Powercore, bringing such a relevant product to market that was accepted much faster than we anticipated.

“It is always a concern to have such strong product dominating sales so much,” Schluenzen admits. “However, in this case, we are talking about a platform; i.e., the products are the software products utilizing it — like Assimilator, the included plug-ins and so on. Obviously, there will be more. Also, in May we are launching a FireWire version of Powercore, expanding the platform. In other words, a car manufacturer makes the most money selling cars, so I would like to compare Powercore more to a category than a product.”

Having a hardware component involved is significant and seems to be a common theme with many of the companies interviewed. Schluenzen notes that, “the software products alone would not be able to fund this business.” One of the most successful companies at combining computer-based hardware and software into systems solutions is Digidesign. Not surprisingly, Digidesign has been able to maintain business growth. General manager Dave Lebolt says, “Our business experienced healthy revenue growth in 2002, and our fundamentals have remained strong during the worldwide economic downturn. Key drivers included new products like Pro Tools|HD, Digi 002 and the Mbox.” These products cater to the high-end, mid-segment and lower-end users, offering diversification to different markets and providing Digidesign with more financial stability.

Yamaha is the world's largest manufacturer of audio products and musical instruments. According to Larry Italia, general manager of the Commercial Audio Systems division of the Yamaha Corporation of America, “Sales have been up significantly for us in the commercial audio area; by ‘commercial audio,’ we mean all markets except MI. I think our business is unusual in this regard and see most of the major competitors trending downward.”

INDUSTRY FEAR FACTORS

This last comment — “We're okay, but our competitors are having problems” — was echoed by several companies. We wanted to know what factors are seen as most responsible for this.

The obvious place to start is the recent slump in the record business. Whatever the reasons given — song-swapping services, piracy from home CD burning, the high price of CDs, etc. — it's clear that less revenue in the pipeline that eventually leads back to artists and studios can affect equipment purchases. Several executives saw this as a potential problem. Lebolt of Digidesign says, “Declining sales for the majors can hurt our overall sales as [tighter] recording budgets affect both larger recording facilities and artists' personal studios. Less money in the industry hurts everyone.”

Yamaha's Italia points out that the effect goes beyond the recording studio and into the concert hall. “The drop in record sales is obviously a negative,” he says. “It affects not only our recording products business, but touring sound, as well.”

“The drop in record sales is a dangerous trend,” adds Schluenzen. “The major labels have their own share of blame in this situation, as they were too slow to react to the dramatic market changes. At the same time, we're in a situation where a lot of things are changing — all at the same time and extremely fast due to the Web and technological advances in general.”

ON THE PLUS SIDE

The counter-trend, then, is the growing power that technology has put within reach of independent musicians with modest resources. This applies to both the supply side (the recording process itself) and to the distribution side, with the growth of alternate music-distribution avenues.

Several independent factors are at work here:

  • The recording studio focus has shifted from large facilities to home/project studio production;

  • the use of computer software for audio processing has increased; and

  • independent music-distribution channels have grown.

Nearly everyone sees a business benefit in these developments.

“While the record industry is in a state of flux,” Lebolt says, “there has been an explosion in terms of smaller indie labels, artist self-promotion using the Net and grassroots interaction. Our gear has been part of the trend toward democratization and ‘bedroom creation’ that makes this possible, so our business is generally positively affected.”

M-Audio's Castillo likewise sees benefits: “The increase in the power and capabilities of CPUs and software have enabled a ‘democratization’ of music production. The ‘Everyman’ can now accomplish what amounts to commercially viable music production with a relatively modest investment. Today, we're seeing more and more ‘non-musicians’ getting into content creation. Thanks to programs like Reason, coupled with MP3 distribution, the barrier of entry into this arena has been greatly lowered.”

Although the benefits of software-based production are clear, a note of caution was given by several companies: As products become more software-centric, piracy becomes more of an economic issue for manufacturers, to the point that most build it into their business plan.

“Native processing sales are quite disappointing, piracy being the main reason,” admits Schluenzen. “In my opinion, this is only a symptom of the general lack of a truly working business model for intellectual property in the increasingly networked digital world.” For more on piracy, see the sidebar on page 114.

WHERE TO SELL?

Most manufacturers depend on a network of resellers to bring their products to the masses. These distribution channels for pro audio and music gear have also gone through a lot of recent changes. For many years, it was the pro audio specialty shop that afforded the only outlet for high-end audio components and systems. As more and more capabilities became available at lower price points, the line between pro audio and MI stores began to blur. Boutique pro audio dealers are still an attractive way to go for many professionals looking to outfit a studio. They provide a systems approach to building integrated packages, have knowledgeable sales staffs and provide personalized service.

But for many buyers, the large retail chains such as Guitar Center, Sam Ash and others provide a convenient way to find all but the most esoteric and expensive gear. Of course, business fundamentals still count in the age of superstores, as proven by the October 2002 liquidation of the Mars Music chain. Mars once boasted as many as 50 retail outlets, but its demise left a number of manufacturers with uncollected receivables and a lot of orphaned customers.

A company that took a different approach to retail is proving that pro audio and music gear can be sold without depending on a “brick-and-mortar” location. Sweetwater Sound Inc. has grown dramatically since its inception in 1979 as a recording studio in Fort Wayne, Ind., to its present status as one of the largest pro audio and music distributors.

Sweetwater has gone far beyond the old “mail order” mentality to provide knowledgeable service and support from a staff who knows the equipment and the business. The company has three in-house studios so that they can keep a finger on the pulse of how the gear they sell is used in the real world. According to Jeff Radke, VP of sales at Sweetwater, this approach has paid off: “We've worked very hard and have been fortunate to experience nice, consistent growth, even in 2002.”

Radke sees the trend toward project studio production as just part of the overall puzzle and believes that there will always be a place for larger studio facilities in the overall production chain. “We operate a studio facility here with three rooms so it's a trend we're very aware of,” he says. “However, this isn't necessarily a new trend at all…it all really started in a big way back in the early '80s. The fact remains that while wonderful recordings can be made at home, unless you have the right room, the expertise and the complete complement of gear, it's very difficult to get the same quality of sound you'll get recording in a serious studio. One trend we've seen is projects being largely tracked at home and then refined, polished and mastered at a larger facility.”

WHAT WOULD YOU BID?

The successful use of the Internet, telephone and mail-order catalog sales is not exclusive to Sweetwater, of course. Guitar Center owns Musician's Friend, a popular Web destination for audio buyers; Sam Ash has a robust e-commerce site; sites such as Zzounds.com and several others prove that there are plenty of shopping options on the Web. Another reseller category is represented by auction sites such as Digibid.com and the mother of them all, eBay.

eBay has grown to be one of the few enduring success stories to come out of the dotcom boom-bust era of the late '90s. Although known originally for auction-style trading, eBay also offers trading in a fixed-price format. Many manufacturers and importers find it to be an efficient way to find a home for inventory close-outs and specials.

According to Giles Cassels, the general manager for music instruments, “eBay is the number one online marketplace for musical instruments, with over $340 million in musical instrument sales in 2002. The category is a first-destination marketplace for a wide variety of musicians, studio professionals and DJs, with a strong demographic of music professionals and advanced amateurs. eBay offers everything from the hottest new products from the most respected brands to the hard-to-find vintage components that are the holy grail for the serious collector.”

As a distribution channel, eBay has proven wildly successful, with results that would be considered astounding for any pro audio or music outlet. Cassels says, “Simply put, business is phenomenal. The musical instruments category on eBay grew by 39 percent last year in an industry of fairly low growth. In the pro audio category, our 2002 revenues grew by 98 percent over 2001.

“Our musical instruments category is so strong right now that an item successfully sells every 11 seconds,” he continues. “A pro audio component sells every 1.5 minutes; that's over 350,000 items in the course of a year! We also have a very loyal buyer base, with the average buyer purchasing approximately 12 items within the category over the course of a year.”

It seems Internet distribution is a force that will continue to exert an influence on pro audio sales and close the feedback loop between manufacturers and consumers. According to Cassels, eBay acknowledges the difference between the musical instrument and pro audio categories and will be taking steps to recognize this on the site: “Within the musical instruments category, we are developing a discrete, new marketplace portal exclusively for pro audio. This portal will include all of the pro audio inventory available on the site, special merchandising and promotions, product reviews and comparisons, and ‘how-to-buy’ content and FAQs. This portal is scheduled to launch toward the end of the second quarter.”

Of course, not all manufacturers see eBay as a legitimate means to distribute their products, because it could interfere with their other sales channels. Ward of Universal Audio says, “We don't allow our dealers to sell on eBay, and we've been cracking down on people who use our copyrighted text and pictures for eBay auctions. Given that we require our dealers to stock our gear and encourage them to maintain demo stock for customers, we can't have them competing with 15 year olds running a pro audio shop from mom's computer.”

KEYS TO FUTURE SUCCESS

Finally, we asked about the outlook for the future of the pro audio equipment industry and, in particular, what these audio executives believe they and their peers must do to maintain the health of their companies. Everyone recognizes that we have come a very long way in bringing superior quality and functionality within reach of the masses. This is a trend that is bound to continue. Ward says, “Companies need to take a long hard look at the value they provide. When I started in this business, the difference in the quality of a final recording produced by a demo studio and a professional studio was huge. Today, people are recording great-sounding stuff on less than $5k worth of gear. To be successful in this environment, companies must honestly evaluate how their products improve the quality of their customers' final recordings and to be certain they are worth the money.”

This sentiment was echoed by Cassels of eBay: “There are trends that are very specific to the industry that cannot be ignored. One trend that will continue to have a profound impact is the continuation of the ‘digital revolution,’ which is placing what used to be very specialized, complicated and expensive tools directly in the hands of individual consumers.”

Another key theme is the continued expansion of software-centric approaches to audio processing. Castillo of M-Audio notes, “Computers are going to increasingly become the center of all audio production. Most importantly, in the next five years, we are likely to see the demise of many ‘dinosaur’ companies that continue to only sell traditional hardware: keyboards, recorders, etc.”

Finally, Schluenzen of TC Works points out that it is not enough to just build great products; manufacturers should consider how to educate and develop the next generation of customers. “We need to all take action as an industry,” he says, “and make sure we support the creation of a new generation of users: a new market to sell to in the future. This involves a lot of work with other parties outside of our direct neighborhood, ranging from computer manufacturers to schools and universities, as well as the record industry.”

The conclusion? Build better professional audio gear, of course, but at the same time, develop more and better customers. Make the process of creating music and audio so ubiquitous that we can all share in this wonderful and most human of activities.


Visit Ron Franklin at www.atiramedia.com and www.ronfranklin.net.

The Price of Piracy

One of the scourges of the computer-based studio economy is software piracy. If software companies can't profit from their investment, then users will be left without new features, upgrades and proper support. We spoke to Bob Ellison, president of Syntrillium, manufacturer of Cool Edit Pro, about the issues involved.

Is software piracy an issue for Syntrillium? How important is it?

Software piracy is a fact of life. In some markets — like Central and South Americas, parts of Asia and Eastern Europe — Cool Edit is very widely used, despite the fact that almost no sales have been recorded there. A Mexican systems integrator once told me that pirated copies of Cool Edit Pro are in use at virtually every radio station in that country.

What steps does Syntrillium take to prevent software piracy? How do you feel about using software keys or dongles?

We make it difficult for unsophisticated computer users to pirate our software, but our anti-piracy measures are pretty mild. Our goal is to discourage the “casual pirate” — someone who might pirate the software if it's easy and convenient, but who otherwise is willing to pay — but to not waste our efforts deterring dedicated hackers.

Dongles represent what we think is wrong with extreme anti-piracy measures. Everyone dislikes having to use dongles: They add to the price of the software, they create sales fulfillment and technical support problems, and they mean treating every user with a basic level of distrust.

How does software piracy affect your company? Can you quantify the financial impact?

We cannot quantify the financial impact, and we do not play the false game of some other software companies that like to count every pirated use as money out of their pockets. What hurts us most is when those who can afford the software choose instead to pirate it, and when the attitude that it's okay to pirate software becomes common.

One area in which piracy has a more calculable financial impact is in service and support. People call and e-mail Syntrillium every day for technical support for pirated versions of our software. We do what we can to efficiently weed out this deadweight cost, but it still consumes manpower and money that would otherwise be dedicated to serving paying customers.

How does it affect the audio industry as a whole?

Software piracy is probably more prevalent in the audio niche than in most other software niches, because while musicians and recording engineers invest deeply in their interests, their monies are commonly strained, and software piracy represents a simple way to save money. Piracy takes a lot away from the revenues that audio software developers could otherwise realize, and therefore inhibits new development and investment. So, fewer products are developed, and the software consumers are hurt as much as the developers.

What would you say to musicians who feel software is too expensive?

I would ask, “What does that mean?” It's a ridiculous statement. Software development is hugely expensive, and software companies price their wares the same way companies in other industries price theirs: according to what they think the market will bear. Unless a software product is free, someone will think it is overpriced. Like any elective product, we say about our software: If you think it costs too much, don't buy it.

What can be done by the industry to bring software piracy under control?

We must appeal to people's sense of fair play. Musicians want to be paid for their work and their intellectual property: music, lyrics and performances. So do software companies. All of our products are available as free downloads for fully functional use and evaluation. Because of this, we are especially — grimly — amused when people claim to have pirated our software only because they want to try it before paying.
Ran Franklin






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