Attrition in the CD Replication Industry

Jan 29, 1997 The past few months have seen some major changes in the CD manufacturing industry. Several companies have closed, or been sold, including the first and largest CD manufacturer in the United States, DMI (Disc Manufacturing, Inc.) Cinram, a replication company based in Toronto, Canada, is expected to close their purchase of DMI by the end of February 1997. Pilz, of Concordville, PA has also changed hands recently. Two other plants, one owned by Technidisc and the other by Astral Tech, have sold their equipment and closed the doors, all within the last three or four months.

Death knell? Not Hardly

Some observers from outside the industry have said that these closures signal the beginning of the end of Compact Disc, that competing technologies (including online applications) are taking their toll. My opinion is that instead it marks a transition point, but not necessarily between the "good old days" and a decline, but to better times ahead. Some of these facilities had older, less efficient plants in a time when great strides are being made in designs for smaller, faster, more versatile equipment.

At the same time, margins are dropping precipitously as more newcomers jump into the action, fighting for their share of the market by undercutting competitors, even to the point of taking an occassional loss. Simultaneously, demand for less technically demanding audio discs has decreased recently, while the customers for more difficult but smaller sized and less profitable CD-ROM jobs are demanding lower prices. Then there's DVD... Gearing up for the next year or two while this new technology is implemented is expensive and risky. But this is not as negative as it sounds.

Step Back to Leap Forward

The lifecycle of businesses and entire industries are curious in the way they seem to happen in spurts. Things seem to run along pretty smoothly for awhile, then suddenly clusters of changes happen all at once. It's not unlike a child's growth pattern -- months of steady, slow changes, or no perceptible changes at all, then they shoot up in what seems like a matter of weeks. Just like the gawky teenager, an industry might start to look lean when in fact it is growing, but in a different direction from its expected trends.

The CD manufacturing business is changing, but it is also getting ready for another big growth spurt. The previously dominant audio business is flattening out, but CD-ROM and soon DVD will take up the slack and then some.

More, Faster, Better

Have you noticed how many free CDs you've gotten recently? Everyone from online services and software producers to magazine publishers and catalog vendors is putting their pitch on a disc. In many cases the actual product is delivered on yet another CD-ROM, or even on the same one, activated by keying in a password or serial number. CD-ROM drives are selling in record numbers, and hardly any new desktop computers are sold without one anymore. CD-Recordable systems and applications are also booming. Does this sound like a dying technology?

To produce all those little silvery platters, many of which are very time-sensitive for marketing purposes, CD manufacturers have been hard pressed (bad pun, sorry) to deliver short runs of discs on a fast turnaround. And since many of them are give-aways, replication customers don't want to pay much for them.

For years they've been told how inexpensive it is to deliver large data sets by CD, and typically they expect ever-decreasing prices, even when the manufacturers are losing the cushion of huge audio jobs to slip the little CD-ROM titles in between. Companies who expected this prepared by investing in new technology: the faster, cheaper, more efficient new machines. Those who did not have the foresight or capital to change up as the trend progresses are paying the price, and will continue to do so until they either catch up or cash in.

Ironically, it is the pioneers like DMI who have been in the worst position during this shift to a new phase. They invested heavily in research and development, working with equipment makers to develop custom machines to meet their innovative needs, and working with developers to produce the new formats they demanded.

Now, newcomers and smaller companies who are not so heavily burdened by existing infrastructure (and a few older ones who have deep pockets) are taking advantage of the investment made by the older ones. Unfair? Perhaps, but what's that got to do with business? (I should point out that getting $80,000,000 USD is not the same as going belly-up. DMI shareholders are not expected to cry much).

Coming Events

There may be more closures, but as more investors become aware of the continuing potential of compact disc as a data delivery medium, more replicators will continue to come on line. The fact that CD pressing plants can also (with considerably more investment and effort) produce CD-R media or DVDs is attractive to many who perceive that this industry is here to stay for the foreseeable future. The next best thing just hasn't been developed yet.

In fact, the next metamorphasis of compact disc (DVD) is just now reaching the stores. As inexpensive and versatile as compact discs can be, it may be quite awhile before something better comes around. In the meantime, those with the know-how and capitalization and energy to keep up with the merry-go-round can at least have a good ride. Yee-ha!


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