The compact disc is a huge success. One in five households has a CD player. Sales figures exceed the wildest expectations since the introduction of the CD player in 1982. More than twice as many CD records have been sold than expected. As a result, record prices will go down significantly for the first time in April. Record dealers breathe a sigh of relief. Thanks to the compact disc, they are keeping their heads above water.
The impetuous advance of the compact disc appears to be the salvation of a large number of record stores. For the first time in ages, sales in this industry have increased again increased, according to a report published last week by the Economic Institute for Small and Medium-sized Enterprises (EIM).
About 3.5 million CDs crossed the counter in 1986. Not only the small record dealers, but the entire record industry breathes a sigh of relief. "Without the CD we would be very sad right now," says Pieter Strooker, international coordinator of record company Polygram in Baarn. "About five years or so ago, doom prevailed: LP sales had declined from 600 million to 450 million a year around the world. The product was suffering from fatigue symptoms. Pessimists predicted that the entire music industry would lose out to other forms of entertainment, such as video. Thanks to the CD, the trend was reversed."
"We succeeded" says Hans Gout, marketing director of Philips and Du Pont Optical (PDO) in Nieuwegein, the world's largest producer of CD records satisfied. "It was a big gamble and cost us a lot of money. Fortunately, we were able to orchestrate the introduction around the world. We can now say we succeeded."
The two Philips subsidiaries have been leaders in working the market. Polygram, 90 percent owned by Philips, as the record company; Philips and Du Pont Optical, a joint venture (50-50%) between Philips and the Du Pont chemical group, as the manufacturer of the silver-colored discs. CD sales exceeded the wildest expectations that were written down when the CD system was introduced in 1982.
"Even then we thought it would be very nice to be at a production of 25 million records by 1988. In 1986 we were already making 53 million," says Gout of PDO. Philips and Du Pont Optical is currently the absolute market leader with sales of more than $150 million. Worldwide, a total of about 100 million slides were sold last year.
Pioneering work Polygram, the pioneer in the CD market, is also currently sitting pretty. Its pioneering work resulted in a 30 percent market share and several hundred million guilders in profits flowed from Polygram to Philips last year. In fact, according to the latest Philips corporate figures, Polygram is the only division making a profit.
Now that the introduction of the new product has been successful, the pioneering role of Polygram and PDO is over. The initially hesitant competition will enter the market this year. The record companies CBS, RCA and EMI will now claim a significant share of the market. Consumers will benefit. After last year the price for the simplest CD player dropped to 400 guilders, this year for the first time the price of records will go down substantially.
Due to the success of the CD, production by the four major record companies (Polygram, CBS, RCA, EMI) is now expanding significantly. An estimated 15 new factories will come on line this year. Production will be increased in the current 23 factories. The scarcity is over: CD prices can be reduced by almost a third. CDs of 45 guilders will then cost 30 guilders.
Of course, we can no longer keep asking the same high price," says Gout of PDO. "That is the consequence of a growing number of competitors. Of course we ourselves are losing ground this year. But that has been taken into account. We were the leaders in the industry, we had the highest costs when others didn't believe in this rise so much. As a result, plates have been scarce until now, and then prices remain high. Those are the laws of supply and demand. Now, a hard economic condition is that the pioneer recovers his high investment."
"We at Polygram have never been the ones to set the price of the record exorbitantly high," Strooker says somewhat apologetically. LOn the contrary: in the beginning we deliberately kept the price low, too low even. We felt it was our duty to introduce the system properly to consumers. We had thought that our competitors would support us in this introduction and also come to the market with a low price. We even offered them part of our scarce production capacity when we were the only one in the world with our own factory. But the competition waited and when it started to take off, they themselves came with a higher price. After that, prices rose slightly across the board."
Price drop In defense of market share, Polygram will be the first with a price drop this year. One hundred new titles will be launched in April and will cost around thirty guilders. Strooker speaks of a mid-price line: "In general it is about older repertoire; well-known artists and compilations of orchestras. Of course we are not going to release the new Dire Straits so cheaply. New hits are always higher priced, that will remain so. But with the mid price line we do hope for a breakthrough. We expect the competition to follow us with the price drop. After all, it's all about giving even more people a boost and persuading them to buy such a player."
So starting this year, everything will be different. The exceptional position of PDO and Polygram will come to an end, scarcity will be eliminated, prices will fall and the two "pioneering Philips subsidiaries will have to give up ground to the competition. Yet neither Strooker nor Gout is particularly sad about that. "We are happy that up to this point we have been able to orchestrate the whole introduction so well," says Gout of PDO. "In retrospect it all seems so easy," says Strooker of Polygram, "but when we started, there was great doubt in the rest of the record industry. We had to build our own CD factory, for example. Those were investments that are highly unusual by size in this industry. Record companies invest in artists, not factories. Our fabrick in Hannover cost roughly 70 million guilders. For a while we were the only manufacturer. When Philips formed DPO with Du Pont last year, we turned that factory over to them. Manufacturing is not our business; it was far too big a risk."
Was Philips behind the whole orchestration? . "We were fortunate that our largest shareholder had money to spare for this," says Polygram's Strooker diplomatically. "We had to make agreements with the whole industry around the world," says Gout, who switched from Polygram to PDO last year. He recalls the whole history.
"What a time it was. In August 1982, we started our plant in Hanover. In October the Japanese wanted to introduce the first devices at the Audiofair in Tokyo. For Philips, that was on the early side. And there were no records yet. We then made the following agreement with the Japanese: they could get all our plates on the condition that they would still stay away from Europe. That worked out. In 500 working days we got the entire plate factory in Hanover up and running.
"Then it was Europe's turn. Philips was able to market the first players here six months later. The production of players and discs got off to a slow start. So a very selective introduction was needed. In working groups of Philips and Polygram, we then drew up a plan together for each country. We investigated how many CD player stores we could supply. Dealers were designated for each city. In France, for example, this was Paris. Toulouse had to wait. Near every audio store a record store was supplied with the first CDs. Everything went according to schedule, there was a plan for everything. The biggest problem was that we did not yet have enough players and not enough records.'
Miss One miss was made. Gout: "On the American market we appeared too early. We couldn't handle that. So the result was disappointing. The boom there failed to materialize. In the US, the advance of the CD took off over a year later, in 1984 only. The fault lay with us. We simply could not deliver. For the acceptance of a product such a thing can be fatal."
"In terms of marketing, of course, the record industry is also not at all used to the introduction of a new product. There the law of the golden ear applies. A small number of people set the trend for certain muzick and that's how the market is created. For an entirely new product like the CD, you have to win over the customer. That works very differently. I myself originally came from Unilever. I sold soap there. There I had already learned to focus on the customer before anything else. Gout gives an example: "First they wanted to package the picture in a paper sleeve. I then said: if you want to present this product as something with eternal value, as something that you will keep for the rest of your life, then that must radiate from the packaging. Twenty people worked on the packaging for six months. The current box is the result. Technically it is very special. A special construction allows the CD to hang freely inside it. The development of the box has been quite costly, but the packaging contributes greatly to the sales success. The consumer now has something he can easily store and say: I have something beautiful. In the US, CDs were still sold in cardboard for a while. That was a big flop." PDO grants its competitors free production rights to the patented box. They are now the standard.
For the inconveniences of the hard-plastic box (difficult to open), Gout has no ear. "The philosophy of the box was representative of the approach to the whole product," he continues. "Qualitatively, the CD is better than any other audio product. The consumer sees that from it." "It was a giant tour. But it worked," Gout concludes.
"In the history of consumer electronics, no product has become a success as quickly as the CD. Not the color television, not the cassette recorder. The CDis even introduced twice as fast as the video. Marketing-wise a bull's eye.
Nevertheless, the CD industry is already preparing for the next threat: that of the digital cassette recorder. This apparatus reproduces music of the same quality as a compact disc, but also offers the possibility of making your own digital recordings. "If the digital cassette becomes the main sound carrier, the record industry will be finished," says Strooker of Polygram. "Then every new music release will be taped by people at home in no time. With the conventional cassette recorder, that danger was much less. It usually did not offer the same sound quality as the gramophone."
Around the world, record companies, united in the International Federation of Gramophone and Video Producers (IFPI), are trying to delay the introduction of the digital recorder. The federation finds Philips on its side. President Cor van der Klugt personally urged the Japanese electronics conglomerates to wait with the digital recorder until CD players were past their sales peak. It was a vain attempt: Japanese electronics manufacturers Aiwa and Toshiba recently launched the first recorders in Japan. Those familiar with the market believe that the advance of the digital cassette recorder is unstoppable.
The competition is working frantically behind the scenes to mount a counteroffensive. Philips, PDO and Polygram will bring a new product to market this year that should increase the attractiveness of the CD system before the digital recorder hijacks the market. "This year we are coming out with the CD video single," says Gout of PDO. "That's a CD with a playing time of up to 20 minutes that gives five minutes of video footage. Philips is marketing the combination player for this purpose. "The CD-video single will be the single version of the CD with some extras: sound with images" says Strooker of Polygram. "Singles are an excellent promotional tool for Ip's, but in the CD field we didn't have anything for that yet.
If the digital cassette recorder stays white for so long that we have time to market this combo player, we may succeed in completing the CD system. In that case, the threat of the recorder will already be reduced. After all, our goal is to provide the consumer with as complete a system as possible, picture and sound, but for that we must have time."
But surely the system is not complete until there are also digital recording capabilities? Strooker laughs delicately, "Surely you can't expect us to introduce something that could be our downfall. That is not our interest."