Cashbox Economics: CD Jukes vs Digital

July 17, 2007 by

It’s no secret that operators are struggling to make money on their routes these days. The oft-asked question is, “Where will the next Pac Man come from?” The reality is that music is still profitable, and digital downloading jukeboxes seem to be the closest thing to “the next Pac Man” that the industry has currently. But I argue that the CD jukebox is still a viable option for operators as well. Let’s compare the economics of music for CD jukes versus digital machines.

Since most digital music contracts are at least 3 years in duration, I’ll use that as the time frame. And for the sake of simplicity, I’ll use $150 per week as the average gross of a CD jukebox. At $15 per CD, it costs about $1500 to load a CD juke. And at approximately 3 disc changes per month, it costs about $540 per year to update that box. So, it costs about $3120 for music over a 3 year period. At $150 per week, the CD juke could be expected to gross about $23,400 in that time. That means that the cost of CD music in this example is about 13% of gross revenue. The bottom line is that this CD jukebox generates $20,280 in net revenue to the operator over 3 years.

Now, let’s say that a digital machine generates double the weekly revenue of a CD juke — $300 in this example. Digital music contracts range from 16-20% of gross revenue as the cost of music. I’ll use 18%. So the cost of music for a digital machine over a 3 year period is about $8500. At $300 per week, the digital box could be expected to gross about $46,800 in that time. The bottom line is $38,300 in net revenue to the operator over 3 years.

Since I hear of many cases in which digital jukeboxes generate considerably more than double the gross revenue of CD jukes the choice seems obvious and digital music’s “new Pac Man” status seems assured. However, don’t write off the old faithful CD jukebox just yet.

We must take into consideration that we’re comparing a new technology to an existing technology. The CD jukebox in this example is quite likely already paid for. Therefore, even given aggressive incentives and financing options for digital machines, the operator is still paying for this new equipment — financing as much as $5000 (more or less, depending on brand, model and incentives) over the course of the 3 year contract. Also, the CD jukebox in this example is likely already loaded with discs. And, after 20 years, operators often maintain large existing libraries of CDs for changes. So the operator’s cost of music would quite likely be considerably less than the figure quoted above.

If the operator were to load into a CD jukebox only discs that he currently owns, the gross revenue from the CD juke that he likely owns free-and-clear would be $23,400 over 3 years. If the operator were financing a new $5000 digital machine in 36 easy payments at 0%, his gross revenue is $33,300 over 3 years — if he doubles his weekly gross. If, instead of doubling, the weekly gross only increased to $250, the 3 year gross revenue of the digital machine would be slightly less than $27,000. Digital’s advantage becomes less obvious.

Accounting for many other factors makes a CD juke still more attractive. For example, the cost of maintaining the broad-band Internet connection required by the digital machine is the operator’s responsibility, and even with recent price reductions the cost of that service runs $50-75 per month per location. And don’t forget that the CD juke maintains a saleable value on the secondary home market where the digital machine has absolutely no secondary resale value.

The real bottom line is that, while this debate continues to rage in our industry, operators should keep their CD jukes on the street and keep on keeping more of what they earn. I believe that when they look closely and crunch the numbers, operators will see that CD jukeboxes continue to make sense on a lot more locations than they thought.

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