Record labels scramble as digital sales stall

Adam Satariano, Bloomberg Businessweek
Tuesday, July 6, 2010

After learning to live with less profitable digital sales in the post-CD era, the music industry is getting hit again.

Downloads of songs to iPods, computers and other devices have stalled, researcher Nielsen SoundScan reports, growing just 0.3 percent this year.

Even worse for music companies, an earlier digital moneymaker, ringtones, peaked in 2007 at $714 million and have since fallen 24 percent, according to the latest data from researcher SNL Kagan.

"Digital downloads are clearly becoming a mature part of the business," says Howard Bass, a senior partner at Ernst & Young who advises entertainment companies. "The question is how quickly the music industry can adopt a new digital strategy."

The number of music enthusiasts using iTunes, Amazon.com, and other digital music stores has leveled off at about 40 million people, market researcher NPD Group reports. Audiences increasingly are turning to ad-supported streaming sites such as Oakland-based Internet radio site Pandora.

While growth in downloads may pick up this year, PricewaterhouseCoopers says, it won't be enough to keep the overall industry from shrinking.

U.S. sales of all kinds of recorded music - CDs, downloads and other formats - will fall to $7 billion in 2012, or a bit more than half their level in 2005, before climbing slowly, according to PricewaterhouseCoopers.

"The days when people were building their digital collections or might hear a song and buy digitally are diminishing," says Russ Crupnick, an analyst at NPD.

The major labels are scrambling to come up with alternatives.

The industry's leaders, Universal Music and Sony Music Entertainment, are among the backers of Vevo, an ad-supported streaming Web site. Warner Music Group wants new acts to sign what the industry calls "360 deals," which generate revenue from music, merchandise and concert sales.

All the big labels have licensed songs to subscription services such as Rhapsody and Rdio, which is headquartered in San Francisco. The problem is those services are far less profitable than sales of individual tracks.

"It could take 200 streams to make up for a single download," says Robb McDaniels, chief executive officer of San Francisco-based INgrooves, which distributes music online.

To squeeze more money from downloads, the big labels last year persuaded Apple to raise prices from 99 cents to $1.29 for the newest hit tunes. Warner in February said the higher price may have contributed to slower growth in downloads last year, though its overall digital music revenue grew by 12 percent in the quarter ended in March.

Universal says revenue for its stable of artists such as U2, Justin Bieber and Lady Gaga fell by 1.7 percent in the quarter ended March 31, largely a result of weak ringtone sales.

One area that continues to grow at a troubling rate is pirated music.

"This isn't a mature market, it is a market that's getting pirated," contends Strauss Zelnick, former chairman of Columbia Music Entertainment.

Still, Zelnick concedes that value-minded consumers who might have spent money to download their tunes have gone elsewhere.

"When disposable income is tight," he says, "a lot of them would rather spend for things like video games that can't be pirated."

Of course it's all due to piracy, not the economy or a lack of lossless options being offered.........

... or crap music being offered.

You make a solid point, Geff. I wish my personal economic situation was better, so I could buy the same amount of CD's as I've bought in the past. It makes me feel partially responsible (guilty) for the sales decline. Silly, huh?

Jim

Or people buying/replacing what they wanted and then moving on.

Alan

Economy, music I'm not interested in buying, reissues that I want to happen that aren't...but then I'm not their target demographic any longer I'm sure.

If the music industry doesn't stop playing demographic games and start recognizing their market as individuals, they will continue to assure their own decline.

The days when the entire country would swoon over the Beatles or some other up-and-coming band are a half century in the past.

‎"When Roadrunner releases an album by DREAM THEATER, OPETH or PORCUPINE TREE, digital sales are very poor. Fans of these bands want to own something tangible." ~~Mark Palmer, Managing Director, Roadrunner Records.

True when it comes to the Tree. Even Steve Wilson admited that last month when we saw him. He felt packaging is what makes CDs special.

Y'know, the record companies have insisted for years that CD buyers don't own their music, that all they are getting is a licence to play it on the physical CD sold. I think a lot of consumers want SOMETHING for their money, and they get it in the form of artwork and packaging. With downloads, it's like paying for radio. It's a big reason I'm just not interested in downloads.

Didn't used to be that way. In the late 90's, US law gave what you're describing to the software companies, & the RIAA/MPAA has been jealous ever since.

I've switched to Pandora / Last.fm almost exclusively and have quit buying MP3s.