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Wary Christmas looms for music retailers

By Ed Christman

NEW YORK (Billboard) - Retailers expect music sales to be better during the Christmas shopping season than the rest of this year, but most anticipate a case of the holiday blues.

"Last year was such a bad Christmas for music sales that if we can't top that, then we've got a serious problem on our hands," says a purchasing executive at a retail chain who asked to remain anonymous because he isn't authorized to speak about sales projections.

The executive expects year-end sales to be up from last year, which would be the first time since 2003 that fourth-quarter U.S. recorded-music sales haven't posted a year-on-year decline.

But that's one of the more optimistic forecasts. Others say they assume that year-end recorded-music sales will slide in line with the rest of 2009, when year-to-date sales have dropped 14.5 percent from the same period last year, according to Nielsen SoundScan.

A strong release schedule could help slow the decline. High-profile releases expected this fall include albums by Jay-Z, 50 Cent, T-Pain, Leona Lewis and Shakira. But merchants and distribution executives say it's too early to assess the impact of this year's slate.

"Overall, (U.S. CD sales) are down about 20 percent this year," says Universal Music Group Distribution president/CEO Jim Urie. "It may get better due to a strong release schedule, but it won't provide a major improvement."

SPENDING ON HOLD

Most industry executives say the distressed economy, weak CD profit margins and the increasing displacement of physical music product in brick-and-mortar stores by other entertainment products will make it difficult for holiday sales to remain steady over last year, much less show an upswing.

The CFO at a leading retail chain says that while he expects some U.S. economic indicators to show improvement in the fall, "it will be 2011 before we see any serious spending out of consumers, and it won't be at previous levels."

The wild card is U.S. monetary policy, according to the executive. "If they don't focus on strengthening the dollar, I worry that hyper-inflation will kick in," he says, adding that hopes for a near-term economic recovery will be dim "if the dollar is not strong and foreign investors start pulling out."

Bruce Ogilvie, co-owner of music and video distributor Super D, says he doesn't expect the current rate of decline in U.S. physical music sales to accelerate during the rest of the year, after a 21.2 percent fall in CD sales during the first six months of the year from the same period of 2008. "If the economy got better, it would help things," Ogilvie says.

But making matters worse are this year's significantly slowed DVD sales, retail executives say. They're divided, however, on whether the poor sales have been the result of a weak release schedule and tough economic conditions or a decline in the DVD format's popularity among consumers, many of whom have already stopped buying CDs.

PRICE WARS

Whatever the answer, DVDs have supplanted music at the front of most home entertainment superstores, thanks to aggressive marketing by film studios. This year, studios are being just as aggressive with DVD catalog, merchants say. But they may be backing off from releasing big DVD titles close to Thanksgiving weekend, out of fear of a possible price war, says a Wall Street analyst who follows movie studios. The analyst notes that intensive promotional pricing last year led to a pricing battle, triggered by pressure from big-box retailers on the studios to provide them with unusually large promotional budgets.

Alan Tuchman, president of independent distributor Alliance Entertainment, says he assumes that floor space dedicated to music will continue to dwindle right through the holiday shopping season. "The labels have made it very clear to me that they want to manage the CD down ... because they fear it is cannibalizing potential digital sales," he says. "The labels see it as a declining business and will no longer invest in it" beyond the big-box merchants.

But Tuchman says labels should view the CD as a different business from digital downloads, and one that targets a different demographic. If the labels look at it from that perspective, and cut prices and invest in other music merchandisers, then the CD can be incremental business for them, he says.

"Christmas depends on how much real estate we have left," Tuchman says. "We don't see much of a change in pricing from the label side ... so we think music will continue to fade. By Christmas merchants will have a much smaller music section, so I am not bullish."

(Editing by SheriLinden at Reuters)

(please visit our entertainment blog via www.reuters.com or on http://blogs.reuters.com/fanfare/)

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