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Is the Physical CD Still A Viable Market?
March 15, 2006
Thomas Mennecke
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It doesn’t take a PhD in marketing and socio-economics to realize the physical CD market is in serious decline. Since its peak sales year in 1999, there has been a steady deterioration in the number of physical CDs sold and shipped. The most immediate blame is typically placed on piracy, however over the course of the last six years this has proven superficial to reasons of more substance.

Physical CD sales began their long trek into mediocrity in 1999, and continue to do so today. Transparently, online piracy has been directly blamed – the logic being those participating on P2P networks would rather steal a few songs because of the convenience and disregard for intellectual property rights. Over time however, this notion has been largely dismissed. P2P, file-sharing and piracy is not the direct cause of decline of CD sales. Rather, it’s a small step in a much larger and shifting marketplace.

The time period represented by the decline of Physical CD sales are and continue to be years of transition. During this time frame, the method in which information is transferred over the internet was revolutionized. IRC, Napster, FastTrack, Gnutella and BitTorrent became mainstream acquisition methods for searching, downloading and listening to music.

So it would seem P2P and file-sharing are the very reasons CD sales are in decline. But let’s dig a bit deeper. It was not decided in one day that tens of millions of people would randomly commit copyright infringement and online piracy. Several avenues were put into place that would help foster this remarkable transition.

During the turn of the millennium, portable CD players fell into decline while MP3 players became the dominant music listening device. Of course in order to make a CD player a viable device, you need CDs – and a lot of them. In pedestrian cities like New York, the limitations of the physical CD are apparent. An individual is either forced to carry only the CD the player can handle, or lug around a small collection. And carrying much of anything in New York isn’t always the brightest idea.

The MP3 player resolves this issue. Small, sleek and compact, virtually any MP3 player – even low end models – are capable of holding dozens of albums and thousands of songs. The situation then becomes, how does one fill their MP3 player.

For many consumers, there are only two options. Download music files from a P2P/file-sharing network, or rip and copy from a CD – both of which are frowned upon by the music industry. But the decision to engage in these activities is not driven by a desire to steal or commit copyright infringement – rather the music industry provided no alternative to the limitations of the physical CD. This inflexibility to meet the demands of a rapidly shifting music market has cost the music industry valuable time and allowed the P2P/file-sharing market to flourish.

Only within the last year has the music industry been able to make some kind of headway into the digital music market. The effort has been at times lackluster, at others showing hints of promise. Yet the underlying facts remain – iTunes managed to sell only 1 billion tracks over the course of the last 3 years; while only marginally offsetting the decline in physical CD sales.

Whether from iTunes or FrostWire, the question becomes, “Why should I buy a $15.00 album from Tower Records when I can buy just the song I want for $.99 – or – download the entire album at not cost?”

It’s a perplexing question, and the music industry’s handling of the Sony-BMG rootkit fiasco has made the morality argument difficult to adhere. NARM, or National Association of Recording Merchandisers, recently hired The NPD group to explore the reasons and possible solutions to the plague of declining CD sales. NARM is a trade organization that represents the interests of major music retailers such as Virgin Megastores, Tower Records, and BestBuy.

Typically when The NPD Group, a research organization based in Long Island, New York, chimes in on the digital music market their conclusions tend to reflect something other than reality. This time however, their research conducted for NARM is more realistic. The primary goal of NARM is to “encourage the sustained health and vitality of the industry – and especially of our core retain/wholesaler constituency-primarily via preserving the value, highlighting the benefits, and promoting the sales of physical music and entertainment products.”

Highlight benefits? Promote sales of physical music? Preserve the value? Is such a notion possible in a rapidly digitizing world? The conclusion of the NPD Group: maybe.

Despite the over 30% drop in shipments, the music industry still managed to ship over 750 million CDs in 2005. It’s dilapidated, true enough, but the industry is still bringing in billions of dollars in revenue each year. The NPD Group feels there is enough internal strength left in the physical CD market and perhaps regain the prosperity witnessed in the late 1990’s.

The NPD Group also concluded that while physical sales are down, music consumption is up over 12% since 1999. The age group queried in the survey determined the method in which music was acquired. Those in the 18-24 age group primarily used P2P and ripping methods to obtain music, while those in the 45 and older group obtained music from store purchased CDs. Over all, over 50% of all acquisition methods were related to P2P or ripping, while only 43% obtained music via physical CD. This is a drop from 51% in 2004.

In addition, the NPD Group found the average number of shared files is actually on the rise. The NPD Group found the average file-trader shared about 33 songs in August of 2003 (about two months after the RIAA announced the beginning of the lawsuit campaign.) This average has risen to 55 files per user in December of 2005. Interestingly, the NPD Group also found the authorized digital music has stagnated at around 40-50 tracks per household throughout the year 2005.

To sum up, the NPD Group iterated all the ghastly problems facing the physical market – the ubiquitous nature of P2P, a ho-hum authorized digital music market, and the allure of ripping and burning. Now let’s get people back in the music store, shall we?

As part of the NPD Group’s conclusions, they claim it’s possible to reverse the current downslide and actually promote a 6%-8% increase in physical sales. Contrary to the music industry’s claim, the younger age demographic actually spends more on CDs than any other age group. In fact, the 13-18 age group has show marginal increases in physical CD spending habits. The culprit, the NPD Group claims, is the older generation.

With money to burn and the internet at their fingertips, the incentive for the older demographic to purchase physical CDs is in rapid decline. For established adults, spending $0.99 for an iTunes download is a mere drop in the bucket.

The study almost seems to suggest the younger demographic is already a cause lost to the annals of free music, whether by ripping or P2P/file-sharing. Instead, the study suggests the music industry shift their attention from this demographic and market towards those who are already purchasing physical CDs.

By revolutionizing their marketing by appealing to established music buyers or the older demographic, which may require as little as just one more trip to the music store each year, the NPD Group estimates sales could improve 6%-8%. This marketing requires creativity, an integration of “brick & mortar” with digital services (such as create your own CD kiosks) and more discounts.

There’s a lot of good statistical information, colorful graphs and other idiosyncrasies that made the latest NPD Group effort border on insightful. It presented a realistic evaluation of the music scene, but serious considerations still remain. Namely, the flexibility offered by digital services – whether by iTunes or P2P – are simply more compatible with realities of portable MP3 players. The serious likelihood that physical retailers may become a relic rather than a viable option is a consideration NARM is probably fully aware of. Whether they can adapt in enough time will be decided in the coming years.

This story is filed in these Slyck News categories
File-Sharing/P2P Related :: Statistics/Analysis
File-Sharing/P2P Related :: Studies/Research

You can read the study here (PDF format.)

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