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CHICAGO - A new report on digital music sales casts doubt on the power of Apple Computer to reshape the music industry and turn around a long-term slump in music sales.
The report, from Forrester Research analyst Josh Bernoff, showed that sales at Apple’s iTunes music store dropped dramatically in the first six months of 2006. Since January, the number of monthly transactions declined 58 percent, while the number of songs purchased each time fell 17 percent, leading to a 65 percent overall drop in monthly iTunes revenue, according to Bernoff.
The first-of-its-kind analysis of iTunes, by far the leading retailer of legal music downloads, shows that it “is not the engine that will restore the music business,” Bernoff said in an interview Tuesday.
Yet the iTunes store is successful, selling more than 1.5 billion songs since its inception in 2003, making it the fourth largest music retailer in the country, said Natalie Kerris, a spokesperson for Apple. She added that nearly 70 million iPods have sold worldwide to date.
“The conclusion that iTunes sales are slowing is simply incorrect,” she said in reaction to the Forrester study. Sales at iTunes “account for 6 percent of all music sold in the U.S.” Kerris declined to disclose detailed sales data.
Aside from the issue of iTunes’ sales trend, Bernoff’s research spotlights a significant shift in how people are buying music online: they want singles more than albums. That trend is putting further pressure on overall music sales, which continue to drop steadily year after year.
Indeed, according to data released in October from the Recording Industry Association of America, sales of digital singles increased 71.3 percent in the first half of 2006, with 286.3 million singles sold. That’s up from 167.1 million digital singles during the first six months of 2005.
But sales of digital singles are not picking up the music market. According to the RIAA, the overall estimated retail value of the music industry - including both digital and physical sales - declined 6.1 percent in the first half of the year.
Overall shipments of CDs and music DVDs to retailers fell 15.7 percent in the first six months of 2006. That continues a free-fall of music sales that begin in 2000, when CD shipments reached 942 million. By 2005, CD shipments were only 705 million.
The shift in buying habits is only part of the problem for the music industry.
Accurate figures are hard to determine but piracy continues to plague the industry as people swap music at illegal file sharing sites and trade burned copies of new CDs with friends.
If the music industry hoped that Apple’s model of selling digital music would stop the current slide, Bernoff’s report appears to be is a cold splash of water in the face.
His research shows that people who buy an iPod go on to purchase only about 20 to 23 songs at Apple’s online music store. Bernoff’s conclusions came from credit card transactions, Apple press releases and Forrester consumer surveys.
At iTunes, “it’s mostly people buying one, two or three songs at a time,” he said. “It’s different than what people thought was going to happen when the iTunes store opened.”
He explained that with CD players, consumers continue to buy new CDs year after year. The expectation was when consumers bought an iPod they would continue to buy digital music at the same pace at iTunes. “That’s not happening.”
Bob Merlis, a long-time executive with Warner Bros. Records and now a Los Angeles-based music industry consultant, said the iTunes phenomenon of purchasing individual songs “is not healthy for the music industry.
“It doesn’t address something that albums and full CDs did, which is having a body of work from an artist,” he said. “It’s like going back to the ‘50s and ‘60s, before the album” gained traction, he said.
“It’s so fragmented now. You get the song you like but you don’t get to know the artist anymore. It encourages this rapid turnover,” he added, pointing out that a band like U2 achieved its popularity because fans came to know them through a substantial body of work.
“If U2 came along right now, would they have the staying power? It would be very difficult to maintain that ongoing interest,” Merlis said.
Nonetheless, despite overall declines in sales, digital music is a bright spot.
“This is a marketplace that went from nothing three years ago to already this year surpassing a billion dollars in retail value revenue,” Jonathan Lamy, senior vice president of communications at the RIAA, said in an e-mail. “That’s encouraging and will only continue to grow in the future.”
At EMI Group, whose artists include newcomer James Blunt and R&B diva Beyonce, digital music sales grew by 68 percent for the first half of 2006, according to company figures. Digital revenues accounted for 8.5 percent of all sales, up from 5.4 percent a year ago.
Furthermore, 10 percent of sales for Coldplay’s “X&Y” album have been in the digital format. Of those sales, 35 percent have been by track and 65 percent were in album format. EMI called it good evidence that people do want full albums in digital formats.
On the other hand, 70 percent of digital sales for Gorillaz - another popular EMI artist - have been in track format and 30 percent in the album format. The information didn’t mention specific Gorillaz’ albums or songs.
Merlis said one way to get more from digital downloads is to offer more value for the consumer.
“In the album era, and with CDs, you get lyrics and nice packaging,” he said. “More value equals more consciousness by the audience that this is good. If it’s just a song, it’s not that compelling.”
To that end, he noted that many digital downloads will start coming with lyrics, thanks to new agreements with record labels.
Gracenotes, which provides data such as song titles to digital download services including iTunes, will launch its lyric service early next year. The company has agreements with each major record label.
Roger Faxon, co-CEO of EMI Music Publishing, which agreed to work with Gracenotes last week, called it a “landmark deal” to open new digital opportunities.
