Format Shift Deja Vu

November 16, 2007 by

The technology shift is on in the jukebox business. And the growing pains we’re currently experiencing are similar to those experienced by hifi companies in the mid to late 90’s. Enco Systems not only supplies compact disc technology to the jukebox industry, we have also worked closely with some of the top hifi companies on their CD designs. This experience gives us a unique perspective on today’s technology shift in the jukebox market.

With the introduction of CD technology in the mid 80’s, boutique hifi companies immediately began designing distinctive, high-performance CD gear. However, these companies were never satisfied with the 16 bit, 44.1 kHz sampling rate resolution of the CD format. Designers clamored for a higher resolution version that packed a higher density of information onto the disc. When DVD was announced in the mid 90’s, just the buzz surrounding this yet-to-be-delivered technology caused sales of hifi gear to fall off dramatically. Audiophiles were convinced that DVD would be the Holy Grail for high-resolution audio and no one wanted to get caught on the wrong side of another format war. Many of us remember the battle between VHS and Beta video equipment. Some may also remember competing digital formats such as DAT (digital audio tape), Philips’s DCC (digital compact cassette) and Sony’s Minidisc.

Well, a funny thing happened while audiophiles awaited the arrival of the Holy Grail; they decided to stick with their CD rigs. After ten years of mastering experience, the sound quality of CD’s had improved markedly from the first strident, harsh, irritating and thin sounding discs the labels had foisted upon music lovers. Sound quality on CD improved to the point where, to this day, “CD quality audio” is a description for the very best sound. Savvy hifi companies like Madrigal Audio Labs (now a part of the Harman Specialty Group) recognized that audiophiles were retrenching and sticking with CD. Madrigal took the decision at the end of the 20th century to make the most of a supposedly marginalized technology. Over the eight-year period from 1999 to 2006 they enjoyed better than expected sales of their standard two-channel CD players and transports. And to date, the new high-resolution formats, such as SACD and DVD-A, have still not achieved a foothold in the market. The point is that in the face of format uncertainty, audiophiles stuck with what they knew to be a solid performer and waited for the manufacturers to fight the format battle amongst themselves.

We face a similar situation in the jukebox business today. There is much uncertainty in the market about the current offering of digital downloading machines. Everything from sound quality to the business model is in a state of flux. And there are serious questions as to whether the technology being so aggressively marketed right now will even be the long-term format winner. It also seems unlikely in an environment of shifting technology and cut-throat competition that all the current players can survive. As more deals are made, music providers’ margins erode. And in the next round of licensing negotiations, the record labels are certain to demand a bigger piece of the per-play pie.

The bottom line, as it always is in this space, is that operators can still do well if they stick with compact disc. Let the manufacturers beat each other up as this transition period plays out. Certainly operators themselves tell us that they are experiencing increased revenue in their best locations with digital machines. But they should also be careful of the terms to which they agree in contracts, and they should keep the duration of those contracts short. So consider going digital on your “A” locations, but keep more of what you earn with CD on the rest of your route.

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