Getting the lowdown on downloads - Statistical Data Included

Discount Store News, Dec 13, 1999 by Robert Scally

If there were ever two merchandise categories poised for profound change as a result of the explosive growth in Internet commerce, they are music and software. By their very nature, the products in these categories are compatible with high-tech distribution, especially digital online delivery, a feature that is revolutionizing the industry's approach to packaging and shipping.

The arrival of a new channel of distribution couldn't have come sooner for the music business, which saw sales stagnate from 1994 through 1997, as consumers continued to change over their home music collections from cassettes and 12-inch vinyl records to audio CDs. However, the on-line channel's sudden growth spurt over the last two years has given a lift to the overall industry. In 1998, sales climbed to $13.7 billion, up 5.7% from $12.2 billion in 1997, according to the Recording Industry Association of America (RIAA). Furthermore, music sales are expected to grow about 7.7% from 1999 to 2001; and by 2004, 25% of all music will be sold on line, according to Forrester Research.

The most drastic change awaiting the industry may come from the direct digital downloading of music, rather than from the shift of sales of packaged music CDs from in store to on line.

The RIAA estimates that CD sales will peak in 1999 at 7.5 billion units and will fall to 7.4 billion units by 2002, thanks in part to the impact of digital downloading. "Music is probably the first consumer product that you're going to see delivered over the Internet in addition to being sold over the Internet," said Mara Lipacis, senior vp of Xceed Intelligence, the research arm of Xceed Inc., an Internet consulting firm.

E-commerce in the music industry soon will go beyond selling CDs over the Web, cross-promoting with bricks-and-mortar and offering on-line coupons or access to special events. The future lies in sophisticated production methods such as in-store kiosks that can make customized CDs.

Sites supplying music downloads, such as MP3.com, have set the music industry on its ear by allowing consumers to download music directly to their computers. The major record labels were initially opposed to the concept of digital downloading of music, in part because of legitimate fears about piracy. But that stance is changing, and during the past year numerous digital downloading deals have been signed within the music business, such as EMI's alliance with Musicmaker for customizable CDs ordered over the Internet, Universal's deal with AOL and MTV to create an Internet-based music label, and Sony's introduction of a Walkman-like device that will play back digital downloads. In fact, through its Launch.com Web site, Sony will debut a song from one of its major artists each week for the next year.

"Three out of the five major labels are being very active in cyberspace, and clearly that's going to create a lot of pressure down the line on retailers," Lipacis said.

In terms of the sales of packaged audio CDs on the Web, this is another category where Amazon.com dominates. Web music sales will climb to $3 billion in 2001, up from $200 million in 1998, and Amazon.com is leading the industry in music sales, followed by Barnesandnoble.com, Borders.com, CDNow.com and Towerrecords.com, according to the Gomez Advisors Internet Music Scorecard.

"Amazon has captured nearly 40% of the booming music market, and their closest competitor, CD-Now, owns nearly 20%," said Gomez Advisors analyst Martin DeBono. "In the on-line music marketplace, 95% of revenues are divided among the top 10 sites, making the competitive environment tightly concentrated among a few big players."

Wherehouse Music, which operates 560 stores, is an example of a bricks-and-mortar retailer that understands that the Internet is more of an opportunity than a threat to music retailing.

"They may not have done the best job implementing it yet, but I think they get it a little bit better than some of the bigger players," Lipacis said.

One example of Wherehouse's innovative use of the Web can be seen in its recent agreement to offer a customized holiday CD in conjunction with CustomDisc.com, the leading custom music marketing company. The agreement marked the first time a bricks-and-mortar retailer used its stores to promote an on-line custom music compilation at the retailer's Web site.

Although Internet sales of packaged and downloadable music are rising, more consumers will have to link to the Internet through high bandwidth connections before a significant portion of music sales shift to cyberspace. And the same holds true for computer software.

Sales of business and entertainment software in the United Sates totaled approximately $43 billion in 1998, up about 15% from 1997, according to the Software & Information Industry Association. On a unit basis, about 2% of the personal computer software sold in 1998 was sold on the Web, according to the market research firm PC Data.

"Software is one of the biggest categories on the Web because it is so easy to sell that way," said Anne Griffiths, director of research for the Software & Information Industry Association.