The Day the Music Sales Died

by Brannon Boswell

"Is this CD any good?" the sales clerk at Target asked me as she scanned my purchases the other day. "I don't buy a CD unless it has more than two songs I like. Otherwise, I just download the song on my computer."
It's no wonder music retailers are in a downward spiral when even the folks selling CDs are touting the benefits of Internet piracy to their customers. File sharing software such as the now-defunct Napster and upstarts Limewire and Proteus offer computer owners the chance to download music files from other people's computers for free. In 2002, 6 percent of Americans downloaded music from the Internet in lieu of purchasing a CD or cassette, according to a survey conducted by Somerville, N.J.-based Edison Media Research.

And why shouldn't they? Consumers can save thousands by investing in a $150 CD burner. Music files downloaded from the Internet can be burned onto a CD and played on any modern piece of stereo equipment. Portable digital music players are also gaining in popularity. It may be illegal to copy these songs without permission, but downloaders have little fear of legal ramifications.

And music retailers are paying the price. Global CD sales declined 5.1 percent in 2002 and Forrester Research says the music industry will suffer an additional 6 percent decline in sales in 2003, dropping to $10.7 billion. Nielsen SoundScan reported album sales for December 2002 fell 10.7 percent from the previous year. Last week, Los Angeles-based Wherehouse Entertainment filed for Chapter 11 protection and announced it will close 120 of its 370 stores. Same-store sales at the company's Wherehouse Music stores dropped 15 percent in third quarter 2002 from the previous year. A company press release blamed the rising popularity of CD burning and illegal downloading. Sacramento, Calif.-based Tower Records is also slimming down, closing four of its 98 U.S. stores and pulling out of the United Kingdom entirely.

Eden Prairie, Minn.-based Best Buy is also closing 90 of its Sam Goody stores after its Musicland division reported a 15 percent drop in comp store sales for December 2002. Musicland sales were down 7.9 percent for the whole year.

Some might argue the revenue lost to downloaders is simply karma coming back to bite the retailers. After all, these are the same companies accused of price fixing CDs between the years of 1995 and 2000. A lawsuit had alleged that major record labels conspired with retailers Trans World Entertainment, Tower Records and Musicland to set music prices at a minimum level, raising the price consumers had to pay for CDs. In September, the companies agreed to pay $143 million in cash to as many as 8 million consumers who purchased CDs during that period.

Now, music retailers are fighting back. According to a press release, Best Buy, Hastings Entertainment, Tower, Trans World, Virgin Entertainment and Wherehouse have formed a consortium to "effectively compete in the digital marketplace." Specifics of the strategy were not detailed, but the companies say they will get licenses to deliver digital music and products in their stores under their own brands. The consortium is also investing in Echo, a former filesharing website that signed a deal with Warner Music Group in 2001 to launch a music subscription service.

But similar subscription download services launched by record labels in 2002, including Pressplay and MusicNet, have attracted only 100,000 paying customers, bringing in a mere $15 million in revenue for 2002, according to a Forrester Research study. Forrester predicts that by 2007, mainstream penetration of high-speed Internet access will drive growth of subscription downloads to $2.1 billion in sales.

Is it too little too late? The existing pay-to-download services don't offer half of the selection of songs available on illegal sites. Consumers have become so used to getting their digital downloads for free, why are they going to start paying for them now?

I think that the fact that unemployment is still at a record six percent high and that the economy is still as slow as a snail are also contributing factors. When money is tight people still want the things they could have when it was abundant. File sharing programs provide them with this opportunity. The music industry, if it wants to succeed in the future, will need to find a way to integrate this current disruptive technology into its future plan.

An intelligent music company would buy the software companies creating the possibility of file sharing, then find a way to integrate the software and file sharing itself into its current business plan. Keep in mind that more have popped up since they shut down the first company that created file sharing opportunities. As long as technology and the Internet are mainstream, this technology isn't going to go away.



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