Jim Donio

Jim Donio has been at NARM for over 20 years so has certainly experienced the highs and lows of the music business. Over the past few years no one could blame him for wondering if the decline in music sales would ever stop, but out of the blue, sales has risen year - so far. Here, Donio explains how NARM has weathered the storm and whether there's finally a light at the end of music retail's tunnel.

What were you doing before you joined NARM?

Before NARM, I worked for a professional society in office systems space. Those were the days when office systems were changing; it was a migration not unlike what happened to the music industry. Offices went from word processing to PCs. Our organization would provide professional development for people who worked as secretaries and administrative assistants and trained them to become information and office systems experts.

To say the least, the music industry's migration was anything but smooth sailing.

You can look back to 1999, the advent of Napster. We were on the threshold of a new millennium, when there was a confluence of events that happened simultaneously. It was the high point of boy bands and Britney Spears. CD sales were going through the roof and then Napster flicked the digital switch.

It was a watershed development that was really a challenge not just for NARM, but for the entertainment industries as a whole, and obviously for a lot of trade groups. Here at NARM, we pulled our members together and worked quickly to assemble the most influential thought leaders, work groups and committees to look at what was going to happen with e-commerce. We developed and advocated for some baseline principles written from the retailers' perspective. A new dimension of business came together; we dealt with issues such as consumers' privacy and interoperability, making it simple to transfer content from one device to another.

It was a highly different retail base at the time. Tower Records and other more traditional music retailers rightly saw themselves as leaders and wanted to explore how to migrate to be a player in digital business. However, for a variety of reasons, not the least of which was the retail sales decline, it was too much for many companies to bear. So, by the time we reached 2011, companies like Tower, Circuit City, Virgin, Musicland and others didn't exist anymore

While NARM still represented the big companies that survived, we had to reach out to attract other entities in the retail world. Today, NARM's membership is probably about 45% digital and 55% physical in terms of retail platform. We're almost mirroring the marketplace itself. Although some music genres are much more heavily distributed in physical formats than digital, it's pretty close to 50/50 in lot of cases.

Twelve years ago, our Board of Directors was exclusively physical retail; now it is a little more than half digital or hybrid companies such as Amazon, iTunes, eMusic, Rhapsody, Microsoft, Nokia, immergent and Verizon. All but one of them was not even members 12 years ago. We also have the largest physical entities, such as Target, Anderson, Baker and Taylor and AEC, as well as independents J&R Music & Computer World and Homers. In no way shape or form have we abandoned or pulled back from the support or representation of the physical marketplace; our membership accurately reflects the current retail landscape in the U.S.

Just a few weeks ago, we announced digitalmusic.org, a new website that's a virtual home for all of NARM's digital initiatives to come together. We have six working groups, a lot of momentum and excitement around a laundry list of things we're doing to help advance the digital marketplace and expand the options we offer our members.

For example, this past spring we launched the Music Startup Academy for the newest companies that are entering the digital space -- app developers, game designers ... you name it - to help them understand the music business. We're embracing and nurturing that community because no one in that trade space is doing that. We want to help sell and make more money for the music business as a whole, whether it's a small start-up or the biggest physical company. NARM is the only organization that's the nexus of commerce and content.

How do the new retail interests such as Pandora, Google, Spotify and Facebook's music service fit in with NARM's physical retailers?

We're certainly having conversations with lots of new entities on becoming a part of NARM -- specifically, digital music services such as Spotify, Google, Facebook and Pandora. We're certainly engaging all of those companies. Any company that is going to be involved in the commerce side of moving the business forward should be a member of NARM. We will engage any and all of those companies to give them a seat at the table and add their voice to how we can advance this business in the future.

When the digital boom created the retail CD crash and major chains started closing, did you at NARM ever wonder if anyone would survive?

It was an almost unprecedented transformation of an industry, although we're now seeing it impact film, TV, books, and especially newspapers and magazines, too. It's been widely said that for over a decade, the music business was the digital canary in a coalmine. It was and is an unprecedented transformation that's far different than a natural evolution or progression.

The elephant in the room here, what caused this, was the fact that people could take a product without paying for it. Look, all the new technology is great; it has opened up incredible opportunities for discovering media. Unfortunately, it also gave a huge amount of people the power to just decide that intellectual property didn't mean anything - and because they were able to could take it for free, they did. They didn't walk into a shoe store and simply take shoes without paying for them. And they didn't walk into record stores and try to take CDs off the rack without paying for them. Whether delivered on CDs or digitally, songs, like shoes, are products made by creative people whose livelihood is determined by their sales.

You can always be a Monday morning quarterback with 20/20 hindsight and say that the industry could have reacted to this differently. But you can't be sure that a different choice of action would have made any difference. And that kind of retroactive thinking won't change the current situation.

There were different business models that were poised to take flight, but we had to deal with a lot of other issues in the face of that piracy and property theft -- first to defend the basic principles of copyright, and then to establish licensing, royalties, reporting and content delivery formats -- that gave some companies pause. Adapting to a rapidly changing business model is not a simple thing to do. There is no easy or seamless way to get an enterprise's new model up and running quickly.

What's NARM's official position on certain major retailers offering CD release exclusives?

Our position historically has been that what's best for the consumer is best for the marketplace. In general, we prefer releases to come out the same day in all forms and with as many retail platforms as possible. Exclusives or offering special CD packages at individual retail chain stores or sites can create consumer confusion, especially if the release they want to purchase is not available in the place they prefer to shop -- or if the product on sale at their favorite retail outlet is different from what's available somewhere else.

I know that has become a reality of the business; certainly NARM has members who hold different views on this topic. But we have maintained the point of view that the ultimate issue here is what's best for the consumer -- and creating a chaotic situation that confuses consumers may lead to missed sales.

Does NARM do anything in terms of fostering promotional relationships between retail and radio?

NARM does a lot of things with an extremely small staff of just seven people -- and radio is not an area we've been able to focus on. We are already very busy setting up our 2012 convention, as well as conducting research that will be useful for everyone in the industry. We will be releasing a study next month on music discovery. How do people now discover their music? What different ways do they discover music - and once they discover it, what provides them with the impetus to buy? We feel that this study will help our membership reach more consumers and turn them on to more artists.

Isn't it hard for the music industry - both the label and retailers - when sales of individual tracks are rising while sales of albums are falling?

Remember, the music business was built on singles. It was a hit song business when it started in the '50s, when music was being sold in discount stores, department and drug stores. NARM got started in the late '50s - and it was a song-based business for decades after that. The entry point for young people to start buying music was the physical single.

Now, it did reach a point in the late '90s/early '00s when there was a concern that single sales was not just an entry point, but that they were cannibalizing full album sales. The traditional retail business model was forever changed in 2003 when iTunes came onto the scene, but it was just giving music fans what they had historically wanted - an opportunity to sample music by the song before committing to the album. The far bigger problem was the rampant global piracy.

We've done consumer research for many years on this - and one thing we found in almost every study was that consumers were growing frustrated by purchasing albums that only had one or two songs they liked. They wanted to like at least four to five songs before they decided to buy the album.

Now not only do you have iTunes, but many other services have that sell tracks and albums as well as the various subscription models. It doesn't take a brilliant person to realize that the main question this raises is if we're replacing the purchase of full albums to individual tracks or subscriptions, what should the new value proposition and business model be? It's become a different music business and over the course of the past seven years, overall sales have been down as we have adapted to the changes.

But now we find ourselves in a positive sales position for the first time in seven years, with CD sales up 3% -- and when you add in track-equivalent albums, sales are up even more ... 5%. A year ago, track-equivalent sales were barely up 1%, now it's 11%. Catalog sales are up; vinyl, which is a niche market, continues to do well; and there's a burgeoning non-traditional business with standard and deluxe music products being sold at a wide range of establishments.

Last but not least, the sales of physical CDs are not in as steep a decline this year. Over the past five years or so at this time of year, I would inevitably get a call from a reporter who would ask, "Is this going to be the last CD Christmas?" Because CD sales kept declining, they assumed the end was near. But we're heading into this holiday season and we're not even close to 2011 being the last CD Christmas. Looking at the stats, a year ago CDs sales were down 20%; now they're down just about 3%.

It really depends on the music fan. There are certain kinds of fans who still have an appetite for a physical manifestation of music -- some for collecting reasons, others to support their favorite artists. A lot of people still enjoy a tactile experience with liner notes and album art - which is not to say you can't get all that online, but it's not a one-size-fits-all proposition.

But there's a certain thrill for some people with getting a new CD and opening it. A lot of 'tweens or pre-teens still buy CDs or ask for them as gifts, as do the "60-is-the-new-40" boomers. We've seen studies that found as many as 70% of those groups are exclusively buying physical music product.

What has evolved for NARM, its members, and the business as a whole is that we should represent a wide spectrum of choices for the consumer. This is not a top-down business, but a horizon where at one end are those who are exclusively physical CD purchasers, the other end are those who are exclusively digital purchasers - and at different points between them are those who download, stream and purchase physical CDs.

For the foreseeable future, you're not going see an industry that offers fewer choices, but more choices. The consumer is driving this, so it's incumbent that all our members be innovative, collaborative and forward thinking, to meet the consumer demand and preserve the legacy aspects of the business. We're not going to sleep on this and let it pass us by. We're going to make sure we're progressive enough to capture the "lightning in a bottle" for new music fans

Do you really think you can turn CD sales around to make it a growth segment of the business again?

Have CD sales reached the bottom yet? No one predicted the current sales turnaround, but here it is. At the same time, I'm not one of those who believe we're eventually going to 100% digital with 0% physical sales. There are significant genres of music that attract a majority of physical sales.

This year has surprised a lot of us; it'll be interesting to see how this it all ends up. We're heading into 2012 and for the first time in seven or eight years, we'll be comparing the New Year to a positive one, so we'll see.

Does that make you a cautious optimist for the music industry in 2012?

There's definitely a more optimistic climate across the board, but people are really cautious because we've had a really difficult seven years. I'll put it this way: I'd much rather be heading into the fourth quarter with sales up than down as they have been for so many years. This is the biggest selling season of the year -- and to be heading into it up makes me hopeful that the year could end positively.

But anything can happen. There are economic winds surrounding us that we have no control over. Events can happen at the drop of a hat and have dramatic effects on our business. Who would ever imagine that Michael Jackson would die suddenly, which was so tragic but in reality had a positive effect on sales? And then you have a phenomenon like Susan Boyle who can come out of nowhere -- from a foreign talent show, no less -- and sell millions of albums. Those things can happen at any time, so you never really know.

On the other hand, the world is in a tough spot economically right now - and that could influence how much people will spend on discretionary entertainment like music. We're always mindful of that, but as we head into the fourth quarter, I can say that, yes, I feel hopeful.