A story about the current state of the music industry might begin, ‘It was the best of times and the worst of times…’ On the one hand, technological innovation has made it possible to create, record and distribute music just about anywhere that’s wired. On the other hand, few seem to want to pay for the music available on-line, and record companies have been crying the blues over the billions of dollars lost to illegal file-sharing and downloading. But while the adult record industry grapples with creating new revenue-generating models, some players in the licensed kids music biz are poised to thrive in this rapidly changing landscape.

Granted, the children’s music market makes up a small percentage of the wider global industry. But in the U.S., for example, stats compiled by the Recording Industry Association of America show that it brought in an estimated US$71 million in 2003 and has maintained steady sales in tough times. (By comparison, RIAA measurements of the overall market indicate that sales have fallen from a high of US$14.5 billion in 1999 to US$11.8 billion in 2003.)

In Australia, Grahame Grassby, GM of the ABC’s Consumer Publishing and Content Sales divisions, says he’s seen a 40% spike in sales of the pubcaster’s licensed kids music CDs this year, while adult contemporary and classical categories were down 20%. The key for kids sales, he’s found, is moving product through a local video distributor that’s selling into mass retail, as opposed to relying on traditional record store channels.

But what’s got Grassby most excited are ABC’s new CD formats and the innovative methods of distribution that are on the horizon. ABC Consumer Publishing currently churns out four genres of licensed kids music. The first is from live performers, the most popular by far being The Wiggles, whose CDs have sold 1.4 million copies in Australia alone since 1991. Next are soundtrack CDs that spin straight off of TV programming such as Bananas in Pyjamas. Then there are generic educational CDs for preschoolers, and finally, compilation projects branded under the ABC’s kids magazines Funtime with Friends and Rollercoaster. All are getting a makeover through digital distribution and the development of video-enhanced CDs.

In October, the ABC is launching an on-line music downloading site, offering its licensed tunes for about US$0.90 per track and between US$10 and US$13 for an entire album. Grassby says there’s no real downside to the setup because you achieve worldwide distribution quickly, without dealing with third-party distributors and the hassle of physically shipping product. Plus, he adds, the cost of digitizing the music data for upload is nominal.

And while preschoolers may not be downloading maniacs themselves, Grassby expects parents to glom onto downloading to wireless devices such as mobile phones to keep their kids entertained. ‘Just as the video player was the child-minder of the ’90s, the mobile phone is going to become the outdoor child-minder of the next 20 years.’

In the meantime, ABC’s music division has been piling added-value features onto its kids CDs to keep price-points from falling further as it competes with generic children’s CDs, which can sometimes be priced as low as US$1.50. The Wiggles: Top of the Tots and The Wiggles: Cold Spaghetti Western, for example, have bonus video clips featuring the band that are playable on a PC, while Play School: Hip Hip Hooray comes with a CD-ROM containing games and a link to the Play School website. Grassby sees these features eventually expanding to include read-a-long stories and episodes of the property’s TV show, and he’s aiming to maintain a mass retail price of around US$11.

Price-point is just as big a concern for Mike Heap, CEO of London, England’s Entertainment Rights. He says the days of the US$25 CD are dead and gone, and licensors/record producers will have to adjust their pricing and packaging models to accommodate the new market, perhaps by offering gift packs or two CDs for the price of one. That said, he still sees CDs as viable brand extensions and is currently executive-producing one for the new Postman Pat series that will hit shelves in spring 2005. For 2006, Heap is looking at creating CDs based on recently acquired properties He-Man and She-Ra that will contain updated theme songs and music written and performed by up-and-coming bands (he’s still scouting).

Both ABC Kids and Entertainment Rights often act as executive-producers on their music projects, outlining song requirements and commissioning songwriters, musicians and studio producers. Even though technology has now made it possible to turn out an album for US$9,000 (as opposed to US$27,000 15 years ago), venturing into the studio is still a costly enough venture. Grassby says it’s difficult to put together a decent recording for less than US$13,000 and – the burgeoning downloading business excluded – estimates that this type of investment would require unit sales of at least 20,000 to break even.

Fortunately for North American licensors looking to get into music without the capital outlay, two veteran kids music companies have entered the licensed kids music fray in the last two years. Solana Beach, California’s Genius Products (the creator of the Baby Genius video franchise) and Montreal, Canada-based Madacy Kids are actively seeking licenses to expand their kids music businesses. They both operate on a more straightforward licensing model, paying the licensor a per-unit royalty rate (10% for Genius) and then covering the cost of production, manufacturing and marketing themselves.

Genius would like its licensed music business to contribute 25% of its projected 2004 revenues of US$20 million, and the company has picked up a whack of licenses to make it happen, including Spot the Dog, Guess How Much I Love You, Peter Rabbit, Little Tykes, Tonka and My Little Pony. The all-important price-point is the backbone of Genius’s strategy. The company specializes in putting together three-CD packages that retail for US$9.99, and it has sold these three-packs into mass retailers including Wal-Mart and Target.

Madacy Kids produced its first licensed CD two years ago in the form of a Crayola-branded disk featuring classic kids songs packaged with crayons and a coloring book. This fall, the company has another Crayola-inspired CD and several Care Bear SKUs slated for rollout – including Care Bears Holiday Hugs, the soundtrack to direct-to-video release Journey to Joke-a-lot and a karaoke disk called Care Bears Sing Like a Star. Like ABC Kids, Madacy is focusing on added-value features to maintain its pocket-friendly price-points that range between US$5.98 and US$7.98. On the Journey to Joke-a-Lot CD, for example, the company has included PC wallpaper, 3-D Funshine Bear stickers and a movie trailer that will play on PCs.

The company’s VP of sales and marketing, Sandy Gardner, says licenses have made it easier for her team to land mass retail distribution. (According to parent company Madacy Entertainment’s website, its divisions rack up roughly US$260 million annually in CD and DVD sales.) And she would like to acquire more licenses, but like ABC, she’s looking outside of traditional distribution models.

Madacy Kids’ parent company has just launched an on-line downloading site (www.ez-tracks.com) where music is a premium provided by a sponsoring company. Consumers receive a numbered card that permits them to download a limited number of free songs. The children’s business will be rolled into the site in late 2005, and Gardner sees a number of branded partnership possibilities involving kids licensed music. For example, a diaper manufacturer could put an access card on its packaging, letting moms download 10 free children’s songs. Then they could choose to buy the entire album for a set price.