Digital Music Market More than Triples - 04 Oct 2005

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In the News
- Digital Music Market More than Triples

==== In the News ====
by Paul Thurrott, [email protected]

Digital Music Market More than Triples
The International Federation of the Phonographic Industry (IFPI) reported yesterday that the market for legally downloaded digital music has tripled since last year. This explosion of online music sales has helped offset CD sales, which continued its slow year-over-year decline during the same time period.

According to the report, digital music sales hit $790 million in the first half of 2005, compared with sales of $220 million in the same time period a year earlier. Most of those sales, of course, came from Apple Computer's hugely successful iTunes Music Store, which is used by Apple iPod owners and accounts for 82 percent of legal song downloads. Total digital music sales--which include sales of individual tracks and albums and subscription music service fees--now outsell CD-based song singles.

But don't feel bad for the recording industry yet. During the first half of 2005, overall recorded music sales fell a modest 1.9 percent but still accounted for a whopping $13.2 billion. (In the first half of 2004, music sales were $13.4 billion.) CD and other physical format sales were down 6.3 percent in the period to $12.4 billion. Some of that decline, however, is attributed to lower CD prices: Actual unit volume is down only 3.4 percent.

Despite Apple's successes, hurdles remain. The music piracy market is much, much bigger than Apple's sales, and the recording industry has been fairly aggressive in its pursuit of the world's biggest music pirates. In the past 2 years, the industry has sued almost 15,000 music pirates in the United States. And the music industry feels that it can resuscitate music sales by moving to a more common variable pricing model in which new songs would cost more than Apple's strict 99-cent cost, whereas older songs would cost less. Apple, thus far, has resisted this change, but its contracts with the record labels are expiring in early 2006, and the company might find it has no choice but to comply.

Microsoft Might Be Forced to Cancel Subscription Music Plans
A report in "The Wall Street Journal" states that Microsoft has broken off song licensing negotiations with four of the world's largest record labels, threatening the software giant's plans to launch a subscription music service through MSN Music. According to the report, Microsoft felt that EMI, SONY BMG, Vivendi Universal, and Warner Music Group (WMG) were demanding exorbitant royalty rates.

Today, Apple's iTunes Music Store, which offers only a la carte song and album downloads, dominates the online music business. But many analysts expect subscription music services to surpass song downloads in the near future. Today, companies such as Napster, RealNetworks, and Yahoo! Music offer subscription music services. Microsoft revealed its intention to move into subscription music last year when it launched MSN Music, which currently offers only a la carte downloads, albeit in a format that surpasses the quality offered by iTunes. "The Wall Street Journal" incorrectly notes that Microsoft hasn't announced plans for a subscription music service: The company has been talking about this service for more than a year.

According to the report, the record labels were demanding royalties that would have amounted to $6 to $8 per subscribed user per month. Because some of the current subscription music services cost as little as $5 a month, it's easy to see why Microsoft would find that rate unworkable. The report notes that Microsoft wants to offer consumers a price that is roughly comparable to the lowest-cost options that are currently available.

If Microsoft is forced to cancel plans for a subscription music service, it could have a chilling effect on online music sales. Combined with record label pressure on Apple to raise its a la carte pricing, it's clear now that the music industry still doesn't get digital technologies or, for that matter, a competitive market.

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