Richard Greenfield is at it again. In yesterday’s Pali Research report he said:

We had been assuming that US industry retail floor space devoted to CDs would contract over 20% in 2008, however, based on recent conversations with several music industry executives, we increasingly believe the reductions could be north of 30% with highly profitable catalog inventory likely to be dramatically reduced (only keeping high profile new releases as traffic drivers).

It’s very hard to sell CDs if there’s nowhere to buy them.

And most of the major labels’ sales comes from physical product, i.e. CDs.

So, we’re heading for utter disaster. If we’re not there already:

2007 Appears to be Ending Badly. The first four weeks of Q4 2007 have seen domestic physical CD sales down nearly 22%. While last week was only down 17%, the improvement occurred because of a change in the Soundscan/Billboard charts that allows albums released to only one retailer (in this case the Eagles went directly to Wal-Mart, without a label, and sold over 700K albums) to be included; however, excluding the album (as it did not help the labels), industry CD sales would have been down about 24%. Reported CD sales declines are accelerating coming out of Q3 ’07 (which was down 17%), whereas Q4 last year improved from Q3 ’06 (down 7% vs. down 11%).

Physical sales are not going to turn around. Digital, per track sales, are not picking up the slack. And rental revenue, so far, is a joke.

After the first of the year, that many more people will own iPods. Add in the shrinkage of sales space and you have another double-digit drop in revenue, just like after last Christmas.

We’re in a funny era. Unlike the mid-eighties, when the industry did its best to kill vinyl, to get people to acquire more profitable CDs, the industry is putting on the brakes here. Because it just hasn’t figure out how to make this new era profitable.

In the eighties, the labels gave up on a superior-sounding medium, i.e. vinyl, for the aurally-substandard CD, selling the CD’s ease of use, its lack of defects, its relative indestructibility. Now, the labels are saying the old medium, i.e. the CD, is superior, and convenience is secondary to sound quality. And you wonder why the public has lost faith in the labels…

And the profitability of CDs was based to a large extent on vinyl replacement, i.e. buying catalog product all over again. And this is what has historically driven P2P, the replacement of your favorite CD cuts with files.

The way out of this is to allow acquisition of catalog cheaply online.

But that’s all the major labels have. New product? How do you break new product? Who’s listening to the radio? We’re not even watching the same TV channels. If you’re not a fan of the Eagles, you haven’t heard "Long Road Out Of Eden". If you’re not a fan of Jay-Z, you haven’t heard "American Gangster". And chances are, you never will.

We used to believe ubiquity was just around the corner. That if a record was big enough, it would seep into the public consciousness. But you’d be surprised how many people have never heard Mariah Carey’s "We Belong Together", never mind Rihanna’s "Umbrella". You see these records trumpeted in trade publications, but unless you’re a fan of Top Forty music, and are addicted to the jive stations with twenty minutes of commercials per hour playing this stuff, it’s like it doesn’t even exist.

So, there are no more diamond albums. There’s no upside!

The business was built upon a few blockbusters making up for the misses. But now there are no more blockbusters. And everybody who created a blockbuster wants to go it alone. Like the aforementioned Eagles, never mind Radiohead and everybody whose contract is going to expire soon, like Madonna.

So the cash cow is dying.

And the labels have to scale back accordingly. Not only on personnel, but recording and marketing and promotion. And, if they cut back enough, why do you need them? What are they providing? Chances are you can outsource what they deliver from people who used to work for them, for a flat fee, and not only own your masters, but keep all the royalties.

So, soon their catalogs are going to be all the majors have left. They’re going to become licensing houses. Actually, Warner already kind of is. They’ve slashed overhead and costs to such a point that they have almost no albums in the Top 200. Why don’t they just fire everybody and change the name of the company to Rhino?

And once it is Rhino, a catalog operation, there needs to be more innovative selling. A lot of product for a low price. There needs to be convenience.

Or, the labels could continue to go 360. Only, if you pay your manager 15%, and your attorney 5%, and your business manager 3%, and your agent 10%, you can’t afford another revenue-sharer. You’re left with nothing! So, unless the majors suddenly become managers, they’re cost-prohibitive.

So, what are the labels to do in this death spiral?

License new methods of Net acquisition. Make everybody a customer of music. It’s their only hope. And, they’d better get moving on it, because soon everybody will expect music to be free and the labels’ revenue will drop through the floor.

The future isn’t mass market. The future is a zillion scenes. The majors haven’t wanted to play in this world, and entrepreneurs have moved in, who don’t want to sell out to the majors. It’s about your local scene, your online scene. Nurtured. Expanded slowly as opposed to jammed down the public’s throat. This is the opposite of major label culture. The opposite of what Lyor, Jimmy and Clive do. They create a storm and the public pays attention. But now the public is not paying attention, and if they do, they’re not buying product, and those who still wish to can’t find anywhere to lay their money down. And, if they’re going to settle for files… Why not get them from a friend, why not steal them?

Disaster is looming. You know it when the Wall Street analysts, who know nothing but cash, turn their backs on you. And that’s what Richard Greenfield has done. He’s lowering Warner’s target stock price to $5.00. GET OUT!