Music industry welcomes back the sweet sound of sales

DSN Retailing Today, August 16, 2004 by Doug Desjardins

Music retailers have grown accustomed to bad news ever since Napster heralded in an era of free downloads and file sharing that scuttled the industry. But after three years of abysmal CD sales, retailers are finally starting to see light at the end of the tunnel.

The outlook on music sales brightened last month when SoundScan announced that sales increased 7% during the first six months of 2004 compared to the same period last year; it was the first six-month increase since 2001. Retailers and industry analysts attribute the resurrection to several factors. They include a strong slate of new albums, lower CD prices and a new revenue stream from what was once the scourge of the music industry: digital downloads.

That's why retailers and record labels gathering at the National Association of Recording Merchandiser's (NARM) 46th Annual Convention in San Diego Aug. 21 to 24 will have something good to talk about for a change after several years of gloom and doom.

"The last time we had our convention in the winter of 2003, the atmosphere was different and it was a much more challenging time," said James Donio, acting president of NARM. "But now that we have momentum and sales are continuing to build, people are a lot more optimistic,"

Though the increase in sales was a surprise to people outside the industry, it didn't come as a shock to music retailers who saw signs of a recovery developing last year. "We began seeing a turnaround last fall, and that was mainly due to a strong new release slate that included albums from the Dave Matthews Band, Outkast and Limp Bizkit," said Lon Lindeland, business team leader for music at Best Buy.

Musicland Stores are reporting a similar bump in sales this year, and executives there agree that strong new titles have been a key to bringing customers back into stores.

"Sales at our Sam Goody and Media Play stores have improved dramatically over a year ago," said Scott Burtness, vp of music merchandising for Musicland. "We experienced a positive trend similar to the overall industry numbers and attribute that to a number of factors, including a strong list of new releases from acts like Usher, Twista and Norah Jones that have sustained sales for many weeks."

During that same period, industry giant Universal Music Group launched its Project Jumpstart initiative that lowered CD prices, giving retailers something they had been asking for since 2001.

"Having our largest supplier [Universal] drop its prices was really a key," said Lindeland. "Because that allowed us to meet one of the demands our customers had been making for a long time." That demand showed up in a 2003 NPD survey in which 49% of consumers cited high prices as the No. 1 reason for making fewer CD buys.

The decision to lower prices set off a ripple effect in the industry that's still being felt. According to the NPD Group, the average price of a CD in the U.S. is now only $13.29 compared to $13.79 at this time last year. The average CD price could fall below $13 by the end of the year.

"The retail landscape has changed and consumers are increasingly exposed to everyday low prices or terrific discount offers," noted Russ Crupnick, president of NPD Music, in a June 3 report on CD prices. "Everyone also recognizes increasing competition for entertainment dollars as DVD and video game sales are growing at double-digit rates. These are situational factors that are forcing the industry to rethink pricing."

During the past four years, the music industry had to rethink a lot of things as the Internet and digital downloads caught them by surprise. The first warning signs popped up in 2000, when NARM reported a slight drop in CD sales for the first time in close to a decade. Then Napster and MP3 players arrived on the scene and retailers suddenly found themselves "trying to compete against free." That's when CD sales began to plummet and dropped an average of 10% per year from 2001 to 2003.

The biggest surprise in the revival of music retail is digital downloading. Steve Jobs' experiment with iTunes in 2003 proved people would pay to download songs from a legitimate source, and since then, retailers like Wal-Mart, Best Buy and even Starbucks have jumped on the wagon.

The fact that Best Buy now encourages its customers to experiment with digital downloads through a partnership with Napster shows how much the industry has changed. "Digital downloads are just another way for consumers to get their content, and we see it as just another revenue stream," said Lindeland.

A Jupiter Research July report estimates that digital downloads are going to grow exponentially during the next five years. The report predicts online music stores will generate $270 million in sales in 2004--more than double the take of 2003--and become a $1.7 billion business by 2009. The report also predicts that downloads will not take the place of in-store CD sales.