Forrester: ‘End of Music Industry as We Know It’

February 25, 2008

This article is included in these additional categories:

Media & Entertainment | Radio | Retail & E-Commerce | Technology | Videogames

Half of all music sold in the US will be digital in 2011 and sales of digitally downloaded music will surpass physical CD sales in 2012, according to a Forrester Research report, “The End Of The Music Industry As We Know It.”

Digital music sales will grow at a compound annual growth rate of 23% over the next five years, reaching $4.8 billion in revenue by 2012, but will fail to make up for the continuing steady decline in CD sales, Forrester said. In 2012, CD sales will be reduced to just $3.8 billion, according to its forecast.

Furthermore, subscription music services will show modest growth, reaching just $459 million in revenue in 2012, and experiments in ad-supported downloads will be silenced by the powerful combination of DRM-free music and on-demand music streaming on sites like imeem.com, Forrester projected.

Meanwhile, at present, radio and CD listening remain the most common ways of listening to music, while PC-based listening is third, Forrester found:

forrester-music-audio-vehicles-people-using-2007.jpg

Moreover, radio accounts for 43% of listening minutes, whereas 12% are spent on PC-based listening.

“Ironically, the rise of digital audio is fed by the declining CD. To date, most of the digital audio files people have on their PCs or MP3 players come from CDs,” according to the report. Nearly 60% of digital audio files are from CDs:

forrester-music-digital-collection-sources-2007.jpg

Nevertheless, digital downloads are the logistical mass market for the future, satisfying all the needs that people have when it comes to music – easy to find, easy to buy, and easy to listen to, regardless of the device, Forrester said.

“[T]he device poised to upset the [radio] cart is the MP3 player,” Forrester’s report predicts. Those who have MP3 players still listen to the radio, but the proportion of minutes spent among the group is 25% rather than the 43% average overall. Moreover, half their listening minutes are spent on digital audio:

forrester-music-mp3-player-use-effect-on-listening.jpg

“The industry has to redefine what its product is,” said Forrester Research Vice-President and Principal Analyst James L. McQuivey. “Music executives have spent years tracking CD sales. But the artist is the product – not just the source of it. New forms of revenue will come from unexpected sources.”

“For example, the industry has failed to capitalize on the growing popularity of video games such as Guitar Hero and Rock Band. In a market where musicians are happy to sell a million copies of a CD, a video game market where titles can sell five million copies is enough to motivate even the most depressed music executive.”

Among the drivers of Forrester’s five-year forecast for music sales:

  • MP3 player adoption. The average MP3 player is only 57% full, suggesting that the devices are underutilized, while more of the devices are being bought by households with more than one MP3 player. Moving forward, a majority of MP3 players will be sold to households that already have one.
  • DRM-free music. With the four big music labels now committed to eliminating digital rights management (DRM), DRM-free music will extend beyond pioneer Amazon.com to Apple iTunes and the other major online music sites.
  • Social networks. DRM-free music enables every profile page on MySpace.com or Facebook to immediately become a music store where friends sell friends their favorite tracks.

About the study: The Forrester report, “The End Of The Music Industry As We Know It,” is based in part on a survey of more than 5,000 consumers in the US and Canada.

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