I compared the cashbox economics of CD jukeboxes versus digital in July’s post, and on the surface the numbers seem to quite convincingly favor the digital machine. But a fairly strong case for the continued viability of CD jukes also emerged from those same calculations. So what do operators think? After all, these are the guys who make or break this industry. Operators have been slow to adopt digital, despite the often-gaudy gross revenue increases that reportedly accompany that technology.
First of all, let’s look at the acceptance numbers. Taking the manufacturers at their word, Touchtunes is the leader claiming 25,000 digital machines on the street, eCast is second claiming over 10,000 and Rowe/AMI has probably less then 10,000 to date. So let’s be generous and say there are 50,000 digital machines on the street. Based on the number of Philips CD players sold for new jukebox manufacturing, I estimate that there are approximately 300,000 jukebox locations in North America. My number is pretty reliable, as Enco sold all those CD players. But a percentage of those players went into service, so let’s be conservative and say there are 250,000 jukebox locations. After over 10 years of selling, digital has still only captured 25% of the available market. This is significant, but surprisingly low based on the stories I hear about increased gross revenue with digital.
I hear from a lot of operators, and the primary reason for their reluctant acceptance of digital is still the business model — Operators don’t want what they refer to as “a third partner.” These folks are an independent lot by nature and they already partner with the owners of the locations where they place their equipment. They’re not keen on giving up an additional 16-20% of gross revenue to the digital music provider. Further, they are even less keen on that third partner knowing exactly what’s going on in the cashbox of their machines.
The intimate knowledge that music providers have of digital locations is a big concern to operators. They remember the early days of digital when there was talk of direct-to-location sales. There were also well-publicised recent rumblings about selling jukes direct. Operators’ strong relationships and knowledge of their locations has always thwarted such attempts at a direct sales revolution. However, as operators are required to surrender more and more precious data about their accounts, they fear they are putting themselves at risk of being eliminated from the deal entirely.
Operators also say that being under a 3-5 year contract with a music provider threatens their independence. They feel they have less freedom to manage their accounts as they see fit. Plus, new competition from a superior technology or business model could be looming on the horizon. Additionally, operators wonder if music providers have equivalent contracts with the record labels. Some guys have expressed concern that their music provider’s contract with the labels will expire during the term of their agreement with the provider. They wonder what the implications of that will be, and about the legality of such contracts.
Another interesting objection that operators mention is that the economic advantages of digital evaporate as they move down the location hierarchy into so-called “B” and “C” locations. Operators tell me that there are $75-a-week locations or $50-a-week locations, no matter what kind of jukebox they put in. If there’s no gross revenue spike with digital at a $50-a-week location, it’s not difficult to do the math. The music provider takes as much as 20% of the gross, and the operator has to pay for a broad-band connection to the tune of $50-75 a month. When they add in the cost of the new equipment, it makes common sense to stick with a CD juke at these lower echelon locations.
There is a veritable laundry list of additional concerns that operators express about digital music. They don’t want to pay for the location’s broad-band connections. They don’t like the fact that a digital machine has no resale value once it is taken off location. They complain that the user interface of digital machines turns off patrons in some locations. Some even feel that the aesthetics of digital machines are wrong for their routes.
Operators’ objections to the technology and business model are strong. After ten plus years, jukebox patrons are certainly more comfortable with the concept of computer music, but it’s required steep discounting of equipment and music and very aggressive financing options to convince operators to switch to the new technology. And still they haven’t gone much beyond the high-producing “A” locations. The true test of the digital music business model will be whether or not operators adopt the technology for their flatter, lower-producing locations.
Most operators got into this business to call their own shots and they appear willing to fight to defend their independence and their livelihood. For a majority of operators, CD jukeboxes remain the best way to maximize revenue by keeping more of what they earn.