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Digital Music Sales “Collapsing?”

December 13, 2006

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A recent report, from Forrester Research analyst Josh Bernoff, showed that sales at the leading DRM digital download service, Apple’s iTunes music store, dropped this year.

Secretive Apple doesn’t break out revenues from iTunes, but Forrester conducted an analysis of credit card transactions over a 27-month period. And this year’s numbers aren’t good.

While the iTunes service saw healthy growth for much of the period, since January the monthly revenue has fallen by 65 per cent, with the average transaction size falling 17 per cent. The previous spring’s rebound wasn’t repeated this year.

And it isn’t just Apple‘s problem. Nielsen Soundscan has grimmer news for prospective digital download services, indicating three consecutive quarters of flat or declining revenues for the sector as a whole.

Even though the figures don’t include gifts redeemed via the iTunes Store and Apple can argue this does not reflect the volume of transactions taking place, it gives a more accurate picture of what customers are actually prepared to pay for. His research shows that people who buy an iPod go on to purchase only about 20 to 23 songs at Apple’s online music store.

Yet the iTunes store is successful, selling more than 1.5 billion songs since its inception in 2003, making it the fourth largest music retailer in the country, said Natalie Kerris, a spokesperson for Apple. She added that nearly 70 million iPods have sold worldwide to date.

Aside from the issue of iTunes’ sales trend, Bernoff’s research spotlights a significant shift in how people are buying music online: they want singles more than albums. That trend is putting further pressure on overall music sales, which continue to drop steadily year after year.

He explained that with CD players, consumers continue to buy new CDs year after year. The expectation was when consumers bought an iPod they would continue to buy digital music at the same pace at iTunes. “That’s not happening.’’

The first-of-its-kind analysis of iTunes, by far the leading retailer of legal music downloads, shows that it “is not the engine that will restore the music business,’’ Bernoff said in an interview Tuesday. “There’s a problem here. CD sales have fallen 20 per cent over five years. The message here is not that CD sales are coming back, the ability to obtain pirated music is now so widespread the DRM looks to consumers more like a problem than a benefit. iTunes sales are not cutting into CD sales,” he added “they’re an incremental purchase at best.”

Bob Merlis, a long-time executive with Warner Bros. Records and now a Los Angeles-based music industry consultant, said the iTunes phenomenon of purchasing individual songs “is not healthy for the music industry.

“It doesn’t address something that albums and full CDs did, which is having a body of work from an artist,’’ he said. “It’s like going back to the ‘50s and ‘60s, before the album’’ gained traction, he said.

“It’s so fragmented now. You get the song you like but you don’t get to know the artist anymore. It encourages this rapid turnover,’’ he added, pointing out that a band like U2 achieved its popularity because fans came to know them through a substantial body of work.

“If U2 came along right now, would they have the staying power? It would be very difficult to maintain that ongoing interest,’’ Merlis said.

Nonetheless, despite overall declines in sales, digital music is a bright spot.

“This is a marketplace that went from nothing three years ago to already this year surpassing a billion dollars in retail value revenue,’’ Jonathan Lamy, senior vice president of communications at the RIAA, said in an e-mail. “That’s encouraging and will only continue to grow in the future.’’

At EMI Group, whose artists include newcomer James Blunt and R&B diva Beyonce, digital music sales grew by 68 percent for the first half of 2006, according to company figures. Digital revenues accounted for 8.5 percent of all sales, up from 5.4 percent a year ago.

Furthermore, 10 percent of sales for Coldplay’s “X&Y’’ album have been in the digital format. Of those sales, 35 percent have been by track and 65 percent were in album format. EMI called it good evidence that people do want full albums in digital formats.

On the other hand, 70 percent of digital sales for Gorillaz — another popular EMI artist — have been in track format and 30 percent in the album format. The information didn’t mention specific Gorillaz’ albums or songs.

Merlis said one way to get more from digital downloads is to offer more value for the consumer.

“In the album era, and with CDs, you get lyrics and nice packaging,’’ he said. “More value equals more consciousness by the audience that this is good. If it’s just a song, it’s not that compelling.’’

To that end, he noted that many digital downloads will start coming with lyrics, thanks to new agreements with record labels.

Gracenotes, which provides data such as song titles to digital download services including iTunes, will launch its lyric service early next year. The company has agreements with each major record label.

And one can always wonder: do the comparatively modest iTunes numbers suggest that consumers are still spending the bulk of their music budget $14-at-a-time on CDs?

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