The first half of 2005 was characterized by a large percentage increase in paid music download purchases. Specifically, paid download levels in the US increased by 170 percent when compared to the first half of 2004. But will that be enough to sustain an industry? Analysts at Fulcrum Global Partners LLC recently raised some concerns. "Despite the improvement in digital, the RIAA data indicates that the dollar value of manufacturer shipments (physical and digital units combined) declined about 3 percent," the analysts noted, pointing to a sagging pre-recorded CD sector. "We expect physical music sales to continue to decline as retailers – particularly big box retailers such as Best Buy and Circuit City – scale back floor space devoted to music and/or begin to pressure wholesale pricing, particularly as they are capturing less and less market share from music specialty stores."

Clearly CD sales are in trouble, though the larger question is whether digital revenues can eventually replace a declining physical market. The Fulcrum analysts remained bearish on the prospects. "While we are intrigued that consumers who felt music was too expensive or too hard to find are coming back into the music buying population, we are increasingly concerned that the ability to buy individual songs (vs. albums) combined with the ease of theft…will result in digital sales not offsetting physical declines."

Meanwhile, the analysis also pointed to softer-than-expected digital sales in the third quarter. The group noted that paid downloads for the most recent quarter are only 12 percent above Q1 sales, and 3 percent above Q2 returns. "We are surprised that weekly digital downloads have not increased rapidly throughout 2005, given how early the industry is within its digital migration," the report states. Currently, physical sales account for 94 percent of overall industry revenues, while rapidly expanding digital sales now account for 6 percent of the pie.

From Digital Music News

See also iTunes Scam

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