Chairman’s Address ERA Annual General Meeting Delivered by Paul Quirk on 14 September 2011

Good morning and welcome to the 22nd ERA AGM.

On the basis that they say a picture is worth a thousand words I want to start today with a couple of pictures

     

 What all these pictures have in common are crowds of people. Hundreds of people, in fact, all queuing up and crowding into record shops.

Each one of these pictures is a challenge and an answer to all of those who say that physical entertainment stores don't have a future.

As you have all no doubt guessed, these pictures were all taken on Saturday April 16, one of the undoubted highlights of the past 12 months - Record Store Day.

And although Record Store Day represents only one segment of our membership - independents - and one of our three market sectors, music, I believe its success tells us much about what we need right across the entertainment business.

Record Store Day 2011 was a truly extraordinary day. One hundred and eighty stores selling two hundred and fifty exclusives with over 200 live performances.

Watching people rushing into stores and then grabbing and literally caressing some of those exclusives on sale was a real reminder of how attractive physical formats can be.

Record Store Day showed that if we can provide our customers with the product and the experience they crave, they will respond - and in significant numbers.

But that, I'm afraid, is one of the few bits of positive news I am able to report today.

The ERA AGM 2011 warrants, I think, a far more sombre tone.

Make no mistake there is good news in entertainment retailing. Our digital members continue to thrive. The home delivery sector has had a great year.

But in truth over the past few years we have become a bit too good at finding silver linings.

So it was that when it came to deliver the first half sales figures at the end of June, we didn't issue a press release about declining DVD sales, about declining games sales or declining CD sales.

We put out an announcement about vinyl sales being up 55%. It was true, but maybe it didn't tell the whole story.

Today is about the big picture. Today is about where we are and what needs to happen.

Today is about asking our suppliers in games and video and music to decide whether they want a mass market physical retail offer for entertainment or not. Because if they don't do something about it soon, they may not have the choice.

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As I said earlier, there are some parts of the ERA membership who are doing comparatively well. Digital is doing well. Home delivery is doing well. And even independents who at one point we feared might be wiped out are doing relatively well with 2010 marking the first increase in the number of independent stores in the UK for a decade.

The bit which is really hurting unfortunately is the biggest bit: mass market physical retailing through specialist chains, multiples and supermarkets.

And what is significant is that this is the sector of the market which ultimately delivers the biggest hits. Without those specialist chains, multiples and supermarkets - Adele would not have sold 3m copies of 21, Harry Potter & the Deathly Hallows wouldn't have done 2.1m copies and L.A. Noire wouldn't have done over 600,000 units.

One of the proud boasts of the UK entertainment business has been that Britain buys more packaged entertainment per head than any country on earth. Certainly in music we are undisputed champions.

One of the key reasons for that has been the scale and success of UK entertainment retailers.

But we have lost Woolies, we have lost Zavvi, we have lost Music Zone, we lost Andys and we have lost hundred's of independents. Our suppliers should realise that retailing cannot continue to work wonders if we lose any more. Those still on the high street have survived by offering the right product at the right price and by continuous innovation - they deserve massive support.

To give you an illustration of the problem, I compared our latest full year figures for 2010 with those from 2005.

In 2005 there were around 6,600 physical outlets selling video and producing sales of one-point-eight billion pounds. Do a rough average - obviously that includes both large and small stores - and that was around £271,000 per outlet. The equivalent number for 2010 was just over £200,000.

In music the figures are even more dramatic. The average physical music outlet in 2005 generated sales of £256,000. By 2010 that was down to just over £98,000. That is a significant drop.

My message today is that those kinds of declines cannot continue indefinitely. Retailers are doing what they can to make the most of the opportunities which are out there. We need the commitment of our suppliers to do their bit too.

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So what do we want?

Well, a good start might be to recognise the seriousness of the problem.

The evidence is all around. When major entertainment retailers start reallocating space to entirely different product categories, rather than blaming the retailer, maybe that should be a wake-up call to suppliers that something is wrong in the world of entertainment.

What about the product, for instance?

With the obvious notable exceptions the release schedules across our three categories have been somewhat lacklustre in the first half of 2010. We all understand that suppliers want to maximise sales in the fourth quarter, but there is very little sense in retailers racking entertainment 52 weeks of the year when most of the hit product is concentrated in the final quarter.

Then there's those physical formats themselves.

In terms of creating attractive physical product, I don't think it's an exaggeration to say the music business and to a lesser extent the video business is in danger of losing it.

These are meant to be creative industries and yet we're seeing virtually no creativity put into the physical appeal of what we're selling. Yes there are box sets and anniversary editions but these are a niche part of retail sales. There are also some excellent limited editions which create excitement amongst collectors but there is an obvious demand for added value to be part of the standard offering in all our stores.

The CD is nearly 30 years old and yet we're still expecting it to excite consumers in the same way it did 30 years ago. The DVD is 12 years old and yet we're still expecting it to excite consumers in the same way it did 12 years ago.

Contrast this with the performance of a supposedly uncreative industry - soap powder.

Here's just a few of the formats in which Persil appears

Powder, Tablets, Capsules, Small & Mighty, Bio, Non-bio, Handwash & Colourcare

None of these innovations are strictly necessary. I'm not sure a capsule washes any better than a plain old powder, but new ideas like these keep consumers interested.

If Persil can create that amount of variety and interest with something as boring as soap powder, shouldn't we expect something better than just another CD or DVD or standardly-packaged game from something as compelling and exciting as the entertainment business.

ERA has consistently lobbied suppliers over the past five years for more innovation in the products they offer us. Sadly we've seen little change.

Yet the evidence from the market, month after month, year after year is that innovation sells.

In video, with DVD clearly having now peaked, the one bright spot is Blu-ray - up nearly 70% last year. In games it is the newer platforms which are prospering rather than the more established. And in music it is of course the newer digital formats which have been doing better than the physical.

My concern is that suppliers appear to have almost given up on the physical music market.

In a strange twist on the old 80-20 rule, while physical still accounts for around three quarters of the album market, in terms of the debate within the music industry, physical is rarely mentioned.

There is plenty to say about digital and I will share some thoughts in a moment. But it seems to me madness that little or no attention seems to be being paid to maximising the physical music market.

No one is questioning the fact that on the balance of probability physical's share of the entertainment market will decline. The question is whether we simply sit there and watch it happen to us or whether together we try and maximise physical sales for as long as possible.  Adding a free download code to each CD would be an obvious starting point

We need to ensure that in the rush to digital we do not disenfranchise millions of consumers and make the same mistake that was made in the singles market - that in many cases people who have no interest in digital and would happily pay £3.99  for a physical single no longer have that option.

That doesn't sound too much to ask.

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Which brings me to the question of attitude. I have already mentioned the disproportionate attention given to digital in the debate about the future of music.

What is even more disturbing is that when these issues are raised by retail, and I've seen it happen a number of times this year, the response is often grudging, even resentful.

There needs to be an understanding from suppliers that the only reason we raise these issues is because we want to sell their product. We're not the enemy. We are the way they make money. And if we don't make money we won't be able to make  money for them.

Which brings us to digital.

Contrary to what you might think from my remarks today, in general terms I tend to be an optimist, and there are clearly lots of positives in the digital market.

The fact that according to the BPI there are now over 60 digital services in the UK seems on the face of it a positive indication of a competitive market in action.

Look at the market shares of those services, however, and it is clear that right now it is a one-horse or at best a two-horse race.

This is not healthy for retail and ultimately it will not be healthy for consumers or for the music business.

The number one reason for that is pricing. When you have a dominant player that is loss-leading on content because they're really only interested in selling MP3 players or tablets or laptops, that clearly makes it difficult for anybody else either to invest in a competitive service or to make money from it.

Maybe that's one of the reasons that the music industry is having to downgrade its earlier optimistic forecasts of how big digital will become.

As PRS's highly-regarded economist Will Page put it recently "Global digital revenues are not going to be the '$30 billion dollar baby' people talked about five years ago. Indeed they may stabilise at around $5bn over the medium term."

If digital is really to achieve its potential, there is a huge education job to be done and a good place to start may be to explore hybrid formats which bring together physical, digital and online content.

Certainly one of the more forward-looking initiatives I've come across recently is the work being done on just this issue by a group of retailers and the BPI.

***

As you've probably detected over the past ten minutes or so, I do feel a certain frustration with where we are right now.

That frustration above all derives from the failure of various parties to recognise the seriousness of the situation we are in.

It's a frustration not just at suppliers, but at some of their industry bodies like PRS and PPL who still pursue record stores for licence fees in order to play music, promote music and ultimately to sell music. These licence fees imposed on record stores are iniquitous & in my view should be abolished

And it's a frustration particularly at the funereal pace of the Government's strategy against internet piracy.

The Digital Economy Act which was meant to sort all this out came into effect on the 8 June last year. So far nothing has happened.

In the 14 months since the DEA went into law. The combined album and video markets have declined on an annualised basis by about £250m.

No one is saying that entire decline is down to piracy, but a substantial part of it certainly is and every further day of delay will only make those losses greater.

We need action on internet piracy -  and we need it now.

I warned you at the outset that my comments today would have a sombre tone.

These are truly difficult times.    But fundamentally I remain optimistic.

To return to where we started 

If we can only find a way to harness the enthusiasm and delight and sense of occasion that made Record Store Day into such a success and bring that into the rest of our business, then I think we can turn it round.

The public hasn't fallen out of love with entertainment. Our suppliers are still coming up with great product. And British entertainment retailers, though we may have our challenges, are still the best in the world. I truly believe this and hope we can all work together to guarantee all our futures.

Thank you.

 

ENDS