The NPD Group: Legal Music Downloads Were Fastest Growing Digital Music Category in 2006

Business Wire, March 14, 2007

Legal download rates gain on peer-to-peer file sharing in 2006, but industry challenges from piracy remain

PORT WASHINGTON, N.Y. -- According to The NPD Group, a leading consumer and retail information company, 2006 offered the music industry positive and negative news. The recording industry registered solid growth of digital music sales from services like iTunes, but they continue to fight against serious challenges from music piracy in the form of peer-to-peer (P2P) file sharing.

"Legal a la carte downloads were the fastest growing digital music category in 2006, and it is likely that the annual number of legal users will surpass P2P users in 2007," said Russ Crupnick, vice president and entertainment industry analyst for The NPD Group. "Unfortunately for music labels, the volume of music files purchased legally is swamped by the sheer volume of files being traded illegally, whether on P2P or burned CDs sourced from borrowed files."

By the end of 2006, there were 47 million "digital music households" in the U.S. -- i.e., households with a member who downloaded, ripped, burned, played, or uploaded digital music. Among those households, 15 million actively downloaded at least one music file from a P2P site in 2006 - an 8 percent increase over 2005, but still a slower growth rate than was noted in prior years. While P2P user growth rates slowed, the average P2P user downloaded many more files in 2006 (5 billion files) than the previous year, which represents a 47 percent increase in P2P downloading compared to 2005 (3.4 billion files).

"The slowdown in the growth rate in the number P2P users is somewhat remarkable given the growth in digital music users overall, the emergence of digital video, and the expanded consumer exposure to broadband," Crupnick noted. "Even so, five billion files downloaded illegally clearly affect prospects for both CD sales and sales of digital song tracks online."

While in 2005 NPD noted a two to one difference between the P2P and pay-to-download populations, in 2006 there were nearly 13 million households using a paid digital music download services - almost three times more than NPD reported in 2004. Overall, the number of music files purchased in 2006 exceeded 500 million, which is a 56 percent increase from the previous year. "Paid usage is gaining on P2P; however P2P users tend to download many more files per user, than do those consumers who pay for music downloads," Crupnick noted.

"More anti-piracy initiatives need to be crafted, if there's any hope of reducing the amount of P2P file sharing and other piracy," said Crupnick. "Most of all, the recording industry should continue to nurture and support those who pay to download music, in order to reinforce repeat usage and continue to build on take rates."

About The NPD Group, Inc.

The NPD Group is the leading provider of reliable and comprehensive consumer and retail information for a wide range of industries. Today, more than 1,600 companies rely on NPD to help them drive critical business decisions. NPD helps our clients to identify new business opportunities and guide product development, marketing, sales, merchandising, and other functions. Information is available for the following industry sectors: automotive, beauty, commercial technology, consumer technology, entertainment, fashion, food and beverage, foodservice, home, office supplies, software, sports, toys, and wireless. For more information, visit http://www.npd.com/.>

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