Online sales grew by more than 30% in the fourth quarter, but store sales slid by 6.1% year over year.
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Some question whether consumers will subscribe to music in big numbers. U.S. subscription sales will total only about $596 million by 2012, while downloads will rise to $2.8 billion, Jupiter predicts. Jupiter adds in its report that subscription services seem most appealing to niche audiences and specialty music retailers.
Giveaway game plan
Selling music at any price may be a challenge when some consumers, especially younger ones, are accustomed to downloading music, movies and TV shows for free from peer-to-peer file-sharing web sites. These sites enable one consumer to upload a file, which can then be downloaded by others.
It’s illegal to distribute copyrighted material this way. And some of the peer-to-peer pioneers, such as Napster, have gone legit, charging for music and paying royalties to the music labels.
Still, Jupiter estimates 21% of U.S. adult web users are music “freeloaders” who either stream or download free music, rip or burn CDs, or create music collections on their PCs regularly. They also spend on average less than $50 on music in a three-month period, Jupiter says.
To find a revenue stream while still serving consumers reluctant to pay for digital music, a smattering of free and legal ad-supported sites have popped up. These include Internet radio station Pandora and streaming music service Last.fm.
Another site called SpiralFrog offers 800,000 songs that consumers can download to their hard drives for free. Users can transfer the tracks to most MP3 players that use Windows Media Player, but the songs aren’t compatible with iPods or Microsoft’s Zune, says SpiralFrog’s vice president of marketing Matthew Stern.
The catch? The songs, like Apple’s iTunes, are DRM-protected and won’t play if a user doesn’t come back to the site and view more ads. After 30 days, users must re-register before downloading more songs. After 60 days, they can no longer listen to the songs they have downloaded.
Stern says SpiralFrog is going after younger music aficionados-listeners likely already getting much of their music for free, but illegally. SpiralFrog is giving away music, but legally and in a way that pays the artists, publishers and record labels, Stern says.
Musicians get into the act
Retailers aren’t the only ones noticing the shift in consumer behavior. Artists are starting to use their songs more as marketing tools and less as revenue generators.
Small or new bands are giving their music away online via their web sites or MySpace pages to create buzz, and big-name artists from Coldplay to Radiohead have toyed with offering free music as a way to promote their work.
Concert promoter Live Nation has responded to declining CD sales by offering musicians alternative ways to profit from their work. Last year, the company started signing what it calls 360 Deals with megastars, paying them hefty sums up front-often over $100 million-in exchange for a cut of the profits from nearly all aspects of their careers, including touring, merchandise and recordings. The company has signed deals with such big names as Madonna and Jay-Z.
While it’s clear music is going digital, not much else is settled. CD sales are declining, but it’s unclear how bands, retailers and record labels can make up the lost revenue. Apple is the digital music leader for now, but its market share is coveted by fierce competitors. Free music is available online, but it’s uncertain if it will keep consumers from buying music that costs less than a buck.
“The thing to remember is that the changes aren’t over yet,” Napster’s Allen says. “We are about 10 years into a 20-year industry transition.”