Alternative Revenue Does Not Capture TSL Value

Read this report on music purchasing and downloading from the NPD group.

The annual declines in CD purchasing continue at really mind boggling rates. CD sales will be completely gone in a few years.

The CD used to be a proxy for TSL to recorded music since it was, for all intents and purposes, the only way to access recorded music.

The health of the music industry depends on monetizing TSL to recorded music. Despite the quote from Crupnick in the NPD report, alternative revenue sources will provide only enough nourishment to maintain the industry as a sickly skeletion of its former self.

The digital file is now becoming the proxy for TSL. The industry must extract the TSL value inherent in every downloaded digital file and ad-support is the only way to do that.

The NPD Group: Decline in U.S. CD Sales Drives Down Overall Music Demand by 2 Percent in Third Quarter of 2008

Paid downloading gains traction and music-related games are evolving into an important source for music discovery

PORT WASHINGTON, N.Y., December 18, 2008 – According to The NPD Group, the leader in market research for the entertainment industry, year-over-year consumer demand for music among Internet users in the U.S. fell 2 percent in the third quarter (Q3) of 2008. This overall decline in music acquisition includes purchased CDs, purchased digital music downloads, files obtained on peer-to-peer (P2P) file sharing Web sites, and borrowing music files to rip to a computer or burn to a CD.

The proportion of U.S. Internet users, age 13 and older, purchasing a CD in the prior month fell from 25 percent in Q3 2007 to 22 percent this year. NPD estimates that the volume of CDs purchased declined by 19 percent in Q3 compared to last year. The most dramatic declines in CD sales volume were among teens (down 34 percent) and among adults age 26 to 35 (down 36 percent). CD purchases by adults age 36 and older showed a more moderate decline of 10 percent.

Paid digital downloads experienced growth in the number of buyers, and the volume of tracks sold in Q3. Fifteen percent of Internet users purchased music from online music stores, such as iTunes and AmazonMP3, which is an increase of 2 percentage points over last year and equates to approximately 2.8 million additional music-download customers. Legal music download volumes increased by 29 percent in Q3 with positive numbers seen for all age groups except the 50-and-older segment, which represents a small portion of buyers.

“The continued growth in the customer base for paid digital downloads is positive, particularly for teens, but it’s counteracted by deepening softness in CD trends,” said Russ Crupnick, entertainment industry analyst for NPD. “Alternative distribution deals in mobile and social networking are important ways for the music industry to fill the gap left by the decline in traditional revenue streams.”

The number of Internet users sharing music on peer-to-peer (P2P) sites held steady at 14 percent in Q3 2008; however the volume of music shared via P2P sites rose by 23 percent, as P2P users reported downloading more files. Teens purchased 34 percent more paid digital downloads compared with year-ago, however growth in P2P file downloading was acute among 13- to 17-year-olds -- up 46 percent. NPD noted that the practice of sharing files for the purpose of burning to a CD fell 25 percent among teens, which suggests an increased preference for having the files in a digital-only format.

“The industry has managed to constrain the number of people who are file sharing, but the expanded use of services such as Bit Torrent enable entrenched P2P users to download a growing number of files,” said Crupnick.

Video gaming also appears to have positive effects for the music industry. Twenty-two percent of music buyers (CDs, digital or mobile) overall – and 35 percent of consumers under the age of 35 -- reported playing a music-based video game, such as Rock Band or Guitar Hero, in the prior three months. Many of these music gamers reported that the gaming experience had a positive outcome, such as creating music discovery or triggering a digital-music or CD purchase.

"Year-to-date through November, the music and dance genre was the best-selling genre in video games, representing 16 percent of total software sales for the year,” according to Anita Frazier, NPD’s video games analyst.

“Even though gaming competes with music for the consumer’s entertainment wallet share, music-related games are evolving into an important source for music discovery that can have positive revenue implications for the recording industry,” Crupnick said.