Music Industry Rebounding?

The recorded music industry may be emerging from the gloomiest period in its history. US disc sales have picked up for the first time in more than four years, and the global market for legal downloads is up by a factor of 10 from a year ago.

Through December 26, 2004, album sales in the US totaled 665.5 million units, a gain of 1.4% over 2003, according to figures compiled by research firm Nielsen SoundScan. The gain was a refreshing change for industry marketing executives, but was still something of a disappointment compared to the approximately 8% improvement in sales posted in the first nine months of the year. Music sales in the US actually slowed in the fourth quarter of the year, an anomaly given that the winter holiday season is typically a brisk one for retailers, even during otherwise slow economic periods.

Music executives quoted in the financial press blamed the slowdown on a slew of weak releases that generated little buzz among music fans. Retailers, however, pointed out the direct competition from DVDs, which continue to gobble a large part of a market once owned by audio-only formats. Consumers perceive DVDs as offering much more entertainment value than CDs, especially at deeply discounted prices. A-list titles on DVD can be found for as little as $12 each at mass merchandisers like Wal-Mart and Best Buy, while new CD releases are still in the $18 range at stores like Tower Records and Barnes & Noble. The music industry still hasn't gotten a handle on the fact that its pricing structure is a major roadblock to improved sales, despite evidence from consumer surveys that clearly indicate that many music fans feel that CDs are poor values. Some retailers predict that DVDs could exceed CDs as a percentage of revenue in the near future.

The picture may still be a tad murky for recorded music as a physical commodity, but it's stunningly clear for music as digital downloads. While still an insignificant fraction of the overall sales total, legal downloads in the US and Europe grew by a factor of 10 last year, according to figures released January 19 by the London-based International Federation of the Phonographic Industry (IFPI). In 2004, more than 200 million paid-for music tracks were downloaded, compared to 20 million in 2003. The bulk of the legal downloads was in the US—according to Nielsen SoundScan, 131 million downloads took place in the States in 2004, versus 19.2 million in 2003. Five million individual tracks were downloaded in the US during the week of December 19–26, researchers reported.

The US and UK are the most active countries for legal downloads, with Canada, Australia, Germany, and Japan coming up fast. The music industry saw a six-fold increase in revenue from its 10-fold growth in digital downloads, as competitive pressure drove down prices. Some analysts predict that within five years, the music industry could be deriving as much as 25% of its revenue from digital sales.

The second annual IFPI Digital Music Report noted that there are now more than 230 industry-authorized music download sites, four times the number in operation in 2003. Jupiter Research estimated that revenue from digital downloads would total approximately $330 million for 2004, and could approach $700 million in 2005. That prediction is supported not only by the growing number of music sites, but also by the increase in available titles, now estimated at one million.

It's also supported by stepped-up prosecution of illegal trade. Last year, 61,000 illegal file-sharing sites were put out of business, with legal action taken against more than 7000 alleged violators in eight countries, according to IFPI chairman and CEO John Kennedy. "We're feeling very upbeat," Kennedy said at a music industry conference in Cannes, France. "I don't think our problems are over, but we're in much better shape than we were a year ago." Despite the optimism, the IFPI reports that there were still 870 million illegal music files available online in the month of January.

Much of the industry's turnaround can be attributed to Apple Computer, which has sold more than 10 million iPods since October 2001. Apple owns between 65% and 85% of the market in hard-drive–based portable music players—the figure varies depending on which report is quoted—and recently made waves with the launch of its flash-memory–based iPod Shuffle. The pioneering iTunes music service is part of a greater trend for consumers to shop online. Internet sales rose 29% during the recent holiday season, according to figures quoted in a January 21 Wall Street Journal report on the long-term prospects for online giant Amazon.com.

In other music industry news, on January 21, Bertelsmann AG agreed to pay $50,000 to settle a copyright infringement lawsuit brought by Southfield, MI—based Bridgeport Music, Inc. over the German media conglomerate's investment in Napster, Inc., now a legitimate file-sharing service but then an outlaw startup. The lawsuit claimed that Bertelsmann was aware of Napster users' unauthorized sharing of music but still loaned the operation $85 million in cash between 2000 and 2001. The settlement covers Bridgeport's legal fees, according to the company's attorney Richard Busch.

Also on January 21, Universal Music Group (UMG) announced the establishment of Universal Music Mobile US, to provide "all types of mobile content, not just music," according to a press release. The mobile market includes cell phones and personal digital assistants. The music industry believes that selling content—including ring tones—into this market could be a huge business in coming years. "The future growth of the mobile market will be very much dependent on the creative merchandising and effective presentation of content," vice president and general manager Rio Caraeff said. "No one is better positioned to take full advantage of the many opportunities unfolding than Universal." Likely of greater interest to audiophiles was the almost simultaneous announcement from UMG that it would soon revive the Verve Forecast label, which was a showcase for new talent in the 1960s. Acts to be signed to the label include New York–based quartet Brazilian Girls, singer-songwriter Jackie Greene of Sacramento, CA, singer Rhett Miller, singer-guitarist Susan Tedeschi, and English singer-songwriter Teddy Thompson.

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