CDs : COMPACT DISKS ARE MUSIC TO THE EARS OF RECORD INDUSTRY

In May, 1983, GRP Records, a fledgling, jazz-oriented label based in New York, made a deal with a Japanese firm to have its first album manufactured on compact disk, then a brand new recording configuration not yet available on the U.S. market.

At the time, most of the large American and European record companies viewed the CD--a palm-size, wafer-thin disk of polycarbonate that stores music as numbers in millions of microscopic pits that are then read by a low-powered laser beam--as a remarkable achievement in sound technology that would appeal mostly to the limited “audiophile” audience.

However, GRP’s founders--composer David Grusin and sound engineer Larry Rosen--felt that the CD’s crystal-clear sound reproduction and its virtual indestructibility would have a broad-based appeal.

So when the first Sony compact disk player was introduced in the United States in late 1983, GRP’s re-recording of Glenn Miller and his orchestra--”In the Digital Mood”--was right there beside it in stereo stores. And GRP has reaped the rewards of that foresight.

To date, “In the Digital Mood” has sold more than 300,000 copies (at a retail price of $13 to $15), according to Rosen. With 40 other jazz CDs currently in the stores, GRP’s sales have risen to more than $10 million in 1986 from less than $1 million in 1984. “We’ve gone from a two-man operation to 28 employees,” Rosen said. “A lot of people have been talking to us about going public.”

The GRP experience has echoed across the recording industry in the last two years as the compact disk has caught on with consumers beyond all predictions.

According to industry estimates, about 50 million CDs were sold in this country last year, up from about 800,000 in 1983.

“It’s just been explosive, the most revolutionary change in the industry since the advent of the LP,” said Bob Krasnow, chairman of Elektra/Asylum/Nonesuch Records.

In fact, the success of the CD is being credited with hastening the decline of the venerable long-play album, whose 30-year popularity helped build the record business into a $4-billion-a-year industry.

In the first half of 1986, LP sales declined 25% while CD sales rose by about 150%, according to the Recording Industry Assn. of America.

Since cassette sales went up 2% during the same period, it seems clear that the compact disk is stealing from LP sales. Some experts have predicted that the LP may disappear by 1990. However, most record executives say the black vinyl LP will probably be around for another 10 to 15 years.

Recent figures released by the RIAA indicate that the CD may have been the difference between a so-so year and a bad one for the record industry in 1986.

The RIAA reported that unit shipments of recordings--LPs, cassettes and CDs--actually declined 7% in the first half of the year. But thanks in part to the higher price of disks, the dollar value of those shipments rose by 1%.

“The CD has pumped life back into this industry, which many people thought was dead back in 1980 and 1981,” said Roger Holdredge, vice president of CBS Masterworks, CBS’ classical music division. “And it’s put fun back in the business, too.”

There is one dark cloud on the horizon, however. Japanese hardware manufacturers are getting ready to introduce a new technology known as digital audio tape, which is the cassette equivalent of the CD.

Fear Lost Sales

The idea horrifies the big record companies. They worry that the introduction of DAT so soon in the CD boom will serve only to confuse consumers.

Worse, they fear that digital tape’s ability to perfectly reproduce the sound quality of the CD will result in millions of dollars in sales that will be lost to counterfeiters, bootleggers and home tapers.

A recent meeting between the Electronic Industry Assn. of Japan and executives of European and U.S. record companies in Vancouver, Canada, broke up with all the acrimony of the U.S.-Soviet summit meeting in Reykjavik, Iceland, with manufacturers of tape players flatly rejecting the record companies’ proposal that a “copyright protection chip” be placed in the new machines to prevent the copying of CDs.

Historically, the big record companies have responded cautiously to new recording technologies. Most of them were caught flat-footed in the face of consumers’ swift acceptance of the CD, and they’ve been scrambling to catch up with the demand.

Until recently, only CBS Records had disk production capability in the United States, through a joint-venture plant with Sony Corp. in Terre Haute, Ind.

This year, 15 new compact disk manufacturing plants are expected to open in the United States, each representing a capital investment of $10 million to $25 million. With the new production capability, experts predict that CD supply will begin to meet demand by mid-1987.

For now, however, “None of us can get all the (disk) production we need,” said Geffen Records Chairman David Geffen.

“Sometimes it’s like Murphy’s law,” said David Steffen, vice president of sales for A&M; Records. “You’re dealing with plants in Japan and Germany--shipping the master tape there to be transferred to disk, shipping the disks back, going through customs, getting it all packaged. There can be a 45- to 60-day turnaround.”

Complain of Shortages

As a result, retailers complain of product shortages across the board. The rock group Dire Straits’ album, “Brothers in Arms,” on Warner Bros. Records, was ranked as the best-selling CD in 1986 by Billboard magazine.

“You can’t buy it, the production is sold out, I haven’t had it for 30 to 40 days,” said Ed Dempsey, president of Compact Disc Warehouse in Huntington Beach.

The unfulfilled demand has produced scenes of “feeding frenzies,” some retailers report, with customers snapping up new releases before they’re out of the shipping boxes.

When CBS Records released Bruce Springsteen’s “Live: 1975-1985” recording in December, customers were lined up outside some stores before they opened.

Capitol Industries-EMI Inc. announced this week the impending release of the first four of the long-awaited Beatles albums on compact disk. Retailers believe that the Beatles catalog may have the biggest sales potential of all.

The initial shipment of 1.5 million copies included 300,000 three-disk sets, which caused CBS’ competitors to marvel at its ability to manufacture and distribute 900,000 disks in so short a time.

“There are people buying disks who don’t even own a disk player,” said Emiel Petrone, senior vice president of Polygram Records’ compact disk division.

Among the major record companies, Polygram is considered the leader in the compact disk derby. It was the first to have its own manufacturing facility--opened in 1983, in Hanover, West Germany.

In 1986, the Hanover plant manufactured about 40 million disks for Polygram as well as other companies, according to Petrone.

Polygram currently has about 1,000 CD titles in the marketplace--more than any other company--and its “order-fill” of about 85% was rated as the best by retailers interviewed by The Times.

“From the beginning our sales projections were very aggressive and, consequently, we had product available,” said Petrone, who is regarded as the industry’s chief advocate of the compact disk.

Petrone credits consumer acceptance of the CD to several factors. “The main thing is the quality of the sound reproduction,” he said. “For the first time in history people can hear music the way the artist created it in the studio.”

He also believes that the careful, controlled way the new technology was introduced into the marketplace helped the consumer grasp its potential.

Beginning in late 1983, Petrone served as chairman of the Compact Disk Group, a consortium of about 40 manufacturers of players and disks in Japan, Europe and the United States.

The companies agreed to uniform technical specifications and disk size, thereby avoiding the kind of consumer confusion that resulted when the videocassette was introduced in two competing configurations, Beta and VHS. “Our focus was not to compete internally but to educate the consumer,” he said.

As it turns out, disk sales have increased in direct proportion to the falling price of the players, which started out at about $1,000 but now average $200, with some priced below $100.

“Buyers with discretionary income who had been spending in other areas, such as personal computers and videocassette recorders, suddenly found another high-tech toy to attract them; it got people to listening to music in their homes again,” said Jack Renner, co-founder of Cleveland-based Telarc International Corp., a classical-oriented record label whose sales have skyrocketed along with the CD.

One of the first classical labels to put its recordings on compact disk in 1983, Telarc quickly captured 15% of the classical music market from giants CBS Masterworks and Polygram, which owns the Deutsche Grammophon, Philips and London labels.

According to Billboard magazine, Telarc released nine of the 25 top-selling classical CDs in 1986--to Polygram’s eight and CBS’ six.

Sharp Contrast

By way of comparison, Telarc had no releases on Billboard’s list of top-selling classical LPs, Polygram had four and CBS had five. According to Renner, about 97% Telarc’s sales comes from disks.

“The marketplace for someone like us is 25- to 34-year-olds, the baby boomers who grew up on rock but whose tastes are now changing to classical and jazz,” Renner said.

Those changing tastes, coupled with the popularity of the CD, have nearly doubled the classical and jazz markets, according to industry experts. Classical music now represents about 8% of total music sales, up from about 4% a few years ago, and jazz has jumped to 15% from 8%.

Record executives and retailers agree that the CD is bringing back into the stores older consumers that the industry feared had been lost forever.

“It’s not 15-year-old kids buying the new Cyndi Lauper album for $5.99, it’s 30-year-olds who haven’t bought a record since the last Eagles album and who are standing in line with an American Express card to buy $100 worth of disks,” GRP’s Rosen said.

That’s the audience that the Welk Record Group is counting on to buy its reissue of folk recordings by the Weavers, Joan Baez, Pete Seeger and Ian & Sylvia.

Last year, Santa Monica-based Welk--owned by band leader Lawrence Welk--purchased the old Vanguard Records catalogue “because we saw tremendous potential in releasing it on CD,” said Kent Crawford, Welk’s vice president of sales and marketing.

According to Crawford: “On our first 10 CD releases, we have as much on initial orders as Vanguard sold in its last 2 1/2 years on album and cassette.”

The success of the small independent companies with the CD may spell trouble for the major companies in their fight to keep digital audio tape off the market.

While the Record Industry Assn. is lobbying Congress for legislative protection and encouraging its members not to license their music for the new tape format, companies such as GRP and Telarc are already quietly making plans to have their music available whenever the first DAT players appear in the marketplace.

“We already have a deal with JVC,” Rosen said. “We see the introduction of DAT as inevitable; this is the age of the digital storage medium.

“Why they don’t want it has nothing to do with home copying, nothing to do with intellectual property rights,” Rosen said. “It has to do with the fact that they haven’t got the CD fully in place and don’t want to have another configuration in as yet. They want to amortize the costs of their new factories first.”

Privately, many major record company executives agree with Rosen that DAT is inevitable and will coexist in the marketplace with the CD.

“I think we’re putting our head in the sand again,” said one executive, who asked not to be identified. “I think digital eventually will be another profit center for all of us, but right now CD is the buzzword, and it’s against company policy to say anything in favor of DAT.”