CDs Help Shelter Record Industry From Oil Crunch

Thanks to the 7-year-old compact disc format, the record industry--whose sales plummeted during the oil shocks of the mid-1970s and early 1980s--is singing a more optimistic tune in the face of today’s rising oil prices and looming economic downturn.

Although analysts expect little or no increase in domestic music sales this year because of the economic slowdown, the lower petroleum content and higher profit margins of compact discs, compared to vinyl LPs, are expected to help the industry better weather a repeat of the kind of turmoil that it encountered in the recessions of 1973-74 and the early 1980s.

“Before the (recent) oil shock, we were predicting 2% or 3% growth” for the record industry, said Tom McIntyre, chief financial officer of Bertelsmann Music Group, the West German music and publishing concern that owns the RCA and Arista record labels. The year may turn out flat, he added, “but I don’t see the potential for a three-year sales decline or cost squeeze like we suffered in the recessions of the early 1980s.” Compact discs, he said, have helped make the record industry “recession-resistant.”

Industry officials are upbeat even though next month many chemical suppliers plan to increase prices for polycarbonate, the material used to make compact discs.

Earlier this month, David Fine, president and chief executive of Polygram NV, the Dutch music firm that last year acquired A&M; Records and Island Records, told analysts in New York that his company expects “very satisfactory increases in net sales” for the year, despite the looming U.S. recession. Fine cited Polygram’s dominance in Europe in making his prediction.

But on Monday, Dow Chemical, a major supplier of plastics, will boost the price of polycarbonate for CDs to about $2.20 a pound from $2, said Scott Sanderrude, Dow’s market manager of consumer electronics in Midland, Mich. (Polystyrene, a material that’s used to make the so-called jewel boxes that contain compact discs as well as cassette tapes, will remain at roughly 53 cents to 60 cents a pound.)

However, at just five inches in diameter, the compact disc contains only about 17 grams of petroleum-based product, compared to the 115 grams of polyvinyl chloride required to make a 12-inch LP, said Jim Frische, the former head of RCA Records’ manufacturing operation who is now president of Sony Corp.’s CD manufacturing unit, Digital Audio Disc Corp. In addition, a compact disc retails for 13 to 16 times its $1-a-unit manufacturing cost, while an LP 15 years ago sold for about 10 to 11 times its 55-cent-a-unit manufacturing cost, experts say.

And experts say polystyrene production capacity could expand significantly early next year, making it difficult for suppliers’ October price hikes to stick.

The chemical subsidiary of Chevron Corp. is expected to expand its styrene capacity by December, and Arco Chemical Co., 83% owned by Atlantic Richfield Co., may restart a styrene plant idled by an explosion in July. The additional manufacturing capability would lift styrene capacity in the United States by about 25%.

That’s in stark contrast to what occured with vinyl supplies during the 1973-74 oil embargo. Not only did the price of the material jump nearly 20%, but shortages developed. In response, labels such as RCA were forced to increase prices, buy more efficient manufacturing equipment and press thinner albums to conserve vinyl, Frische recalled. Still, the cost cutting couldn’t contain the effects of the recession.